Closing Bell - Closing Bell Overtime: S&P 500 Can’t Quite Make It Nine In A Row; Fundstrat’s Tom Lee Calls For Huge Rally In Small Caps 8/20/24

Episode Date: August 20, 2024

The S&P 500 and Nasdaq snapped eight-day winning streaks. But Fundstrat’s Tom Lee says he sees 40% upside in small caps before the end of the year as the Fed is expected to cut rates. Ariel Investments’ Charlie Bobrinskoy and Vital Knowledge’s Adam Crisafulli break down the broader markets. NYU’s Dean of Valuations, Aswath Damodaran, on why he prefers Amazon to Nvidia right now, plus Barclays analyst Matt Miksic on a rough day for Dexcom after strong Eli Lilly obesity data was published. 

That bell marks the end of regulation. Projects with care ringing the closing bell at the New York Stock Exchange. ProFire Energy doing so at the NASDAQ and the NASDAQ and S&P 500 breaking their eight-day win streaks with some minor losses, while small caps saw a more notable pullback today. Energy was the biggest drag on the S&P. Consumer staples are actually up about a half a percent. That's the scorecard on Wall Street. But winners stay late. Welcome to Closing Bell Overtime. I'm John Ford. Morgan Brennan is off today.

Ahead on today's show, Funstrat's Tom Lee joins us with his latest thinking on the market, why he says the summer bottom is already in, plus new insights on the consumer and the real estate market when we get earnings results from Toll Brothers and beauty company Cody. And NYU's dean of valuation, Aswath Damodaran, tells us which of the MAG7 stocks he currently sees as most overvalued and which is the best bargain at these levels. But first, let's get to today's action with our market panel, Charlie Babrinskoy of Ariel Investments and Adam Krusefouli of Vital

Knowledge. Guys, good to see you. Adam, so was that broadening of the rally a few weeks ago, that rotation into small caps, a head fake, you think? You know, I think we've obviously had a big rebound led by tech. And so we'll kind of have to see if the data cooperates going forward. We've had some decent growth numbers last week with retail sales in the latest weekly claims. You know, we're going to get an important job division tomorrow. That will be very important just to get a sense of how the labor market unfolded over the last 12 months, over the last year or so. You know, but I do think that the rally going forward will continue to broaden out. It's just a little bit of a pullback, give back in small caps in the Russell as tech reasserts its leadership. But, you know, I don't think what we saw was a head fake so long as we continue along on the present trajectory of Goldilocks data,

Fed easing, and then resilient corporate earnings. Well, I know, Charlie, you are waiting for value to reassert itself after long being dormant. And then where do the Fed cuts that we are expecting fit into this? They matter for the yield curve, but you say the yield cuts that we are expecting fit into this? They matter for the yield curve, but you say the yield curve, we can put that to bed, doesn't matter as a recession indicator. Yeah, I think you have to understand that we've had a very strange yield curve. We've had short rates at 5.5 percent with 10-year rates down below 4, at 3.80. And that's very unusual. And that has a big impact

on an important part of the value universe, which is finance, banks, and investment banks. And banks and investment banks fundamentally borrow short and lend long. And they get hurt with inverted yield curves. And that has been a big headwind for value. We expect that to flatten out and return to a normal-shaped yield curve. And that's going to big headwind for value. We expect that to flatten out and return to a normal shaped yield curve. And that's going to be very good for banks, which will be good for value. And what do you expect the implications are? And I'm reading through value here, Charlie, for smaller cap stocks, which tend to operate more based on lending. No, that's right. The big Amazon and Google and Facebook and the like don't care about interest rates. They don't tend to borrow much at all. The traditional economy, manufacturing

and finance and banks do tend to have some leverage. And they have been hurt by this very strange, fastest, unprecedented increase in interest rates that we got over the last couple of years. So as that unwinds, that's going to disproportionately help smaller companies, which do have more leverage than larger companies. So, Adam, following through on that, we got Jackson Hole this week, next week, Nvidia earnings. Question for me out of both is whether smaller cap stocks can grab the microphone back from the mega caps after they've reasserted themselves over this period of time and how much Nvidia's results are going to matter for that question? Yeah, I think NVIDIA is crucial. I think it's probably going to be more important than Powell's speech this Friday at Jackson Hole, which will

probably be somewhat anticlimactic. Fed officials have been relatively clear that they're likely to cut 25 basis points next month. I think Powell kind of reinforced that notion where there's a little bit more doubt is on the mega cap tech front. Now, we've had some healthy earnings so far from the July end tech companies with Cisco and Palo Alto. But NVIDIA is going to be crucial as we get a sense of, you know, whether or not the very aggressive AI data center spending is going to continue in the second half of this calendar year. We're going to get an update on their Blackwell chip that's going to shift in time at the end of this calendar year. It's going to be

delayed a little bit. So I think that's the NVIDIA report. And then we also have a lot of other AI names like Dell and Marvel next week also. And those are going to be Dell's next week. And those are going to be crucial data points for the tech trade. So, Charlie, we don't know exactly what's going to happen with the consumer. We certainly don't know what's going to happen with the presidential election. But what are a couple of the most important themes that are determining how you put new money to work over these next few weeks? We want to look for things that are out of favor, that have temporary headwinds, that will benefit from a reversion to the mean. And the big one on that front is housing.

We have not built enough housing. People haven't been able to finance housing because of mortgage rates. At the end of COVID, we had a lot of people moving out of their parents' bedrooms. And so there is a shortage of housing that is going to be helped by what happens in Jackson Hole, we think, with lower rates. And that's going to help housing stocks, carpet stocks, roofing stocks, all the people that benefit from not just new homes, but repair and remodel, which has also got pent up demand. All right. We heard a bit about that from those in Home Depot and headwinds for now there. Charlie, Adam, thanks to you both. Well, now let's bring in senior markets commentator Mike Santoli with a look under the hood at this market. Mike.

Yeah, John, you're talking about the sort of broadening move, how it's had these fits and starts. Take a look at one picture of it. This is the S&P 500 relative to the equal weighted version of it. Actually, at this morning's open and the highs today, the equal weighted S&P was at a new record, even while the market cap weighted version was one or two percent below. But you see, obviously, the big lead that had built up in the market cap related way. What I always look at is if this orange line were looked at in a vacuum, not comparing it to the rest of the market, you'd say that looks fine. That's a pretty decent little uptrend. You know, we're up, I don't think it's like eight and a half percent on a year to date basis on a one

year basis, 16 percent. That's fine. It's not exuberant. It's not exciting, but it's hanging in there. Similar story of growth versus value for the S&P 500. That's what these ETFs track. So you see, obviously, growth, IVW, way, way ahead, but still well below its highs. And looks like it's in a little bit of a short-term downtrend. It's got a break. Whereas new high for value. But again, the absolute level of gains has been more muted.

So you can sort of eye of the beholder approach makes sense here. Take a look here, though, at two leadership groups I always like to take as a snapshot of risk appetite and sick goal sentiment. That would be semiconductors against home builders. This goes back to the end of 2022. Again, pretty similar sort of amplitude of this chart. And they are still, you know, facing these little bit of resets lower. Again, nothing to be concerned about in a big picture way. But you'd want to see them maybe start to claw back some of the recent losses if this is going to still be the kind of market that is risk seeking. So those are some of the things I'm mindful of, John.

OK, my back to the equal weight versus a major index point. How does this tend to normalize? Because I tend to hear this narrative out there that, OK, well, the overall market might be a bit overheated because of the mega caps. But if you were to take those out, here's how everything else is doing. But if things go down, doesn't everything go down? And then in the reset, things perform differently. How should investors frame what might happen from here? Yes, I would say the short answer to that is yes. And in fact, back in July, when we had that sort of very, very harmonious transition from the mega caps to small and mid caps in the equal weight, I was saying at the time the least likely scenario is this all happens in a painless way. Now, on a three year trailing basis, massive underperformance of the equal weight relative to the S&P 500. The most likely thing is you have sort of a churning transition maybe a correction maybe we just had it. Maybe the character of the market's changing right now because equal weight went down a lot less and was a lot closer to its record high after it all kind of round tripped. So we'll see exactly how it goes. I do think it's unlikely,

though, that the overall market keeps marching higher and the eco-weight just accelerates to meet mega caps. It could happen, but I think that's a lot to ask. All right. Well, we'll see you again in just a bit, Mike. Now let's get back to the broader markets, the S&P 500 up 8% since that 3% drop on August 5th. Joining me now is Fundstrat co-founder, managing partner, Tom Lee. Tom, good to have you back. Now, I know you're saying that the bottom is in for the market from that early August move. I'm still fixated on your expectations for small caps.

I've been talking about them a bit in this hour through the rest of the year. You still think that they could go up 40% by year end? Yes. John, you know, for small caps to rise 40% means that the PE, the median Russell 2000 stock, goes from 10 times to 14 times. So it's not asking the market to provide some magic and a huge revaluation. It's actually just saying small cap stocks, which have been left for dead largely because the Fed's

been tight for almost two years as they start to normalize policy. And as mergers pick up, you know, it's merger activity has been accelerating this year and it should really strengthen because it's a sign of CEO confidence. All of these flow through to benefit small cap stocks, and it's not like smaller companies are growing slower. I know people post all these stats about small caps losing money. It's mainly because of the biotech components basically don't make money, and that's the largest cohort of stocks in the Russell. But the Russell 2000 median earnings growth is almost 700 basis points faster than the S&P, and median earnings growth is almost 700 basis points faster than the S&P. And top line growth is almost 400 basis points. So you're getting better growth,

lower valuation. And I think the catalyst is now when the market is convinced the Fed is embarking on a rate cutting cycle. It could happen Friday. OK, so if a 40 percent upward move happens for, say, the Russell 2000, what happens for mega caps? What happens for the broader S&P 500? Do you expect them to have similarly dramatic moves? Or is there a major rotation that you're expecting? Well, John, we've already witnessed this happen in large caps. NVIDIA has risen 40% in eight trading days.

So when someone says the Russell 2000, which is made of even cheaper companies, can't rise 40% in the next five months, they're forgetting that we've already seen huge moves in the mega caps. I don't think the mega caps have to go down. Do you expect it to happen in isolation with the small caps is what I'm getting. I know that NVIDIA has done that. Some other stocks have done that themselves. But if you're talking about all of the small caps as an index moving up that much, what do these other things do? Well, I think that a 40% move in small caps doesn't mean the rest of the market goes down.

I just think that's going to highlight that the market is broadening, which is something we all expect. But it's also basically doing a risk reward analysis, which is, look, I think if you can get 18% earnings growth and pay 10 times earnings, perhaps that's a good risk reward. And I think money that's on the sidelines are people who've been thinking bonds are going to be in cash is the place you want to stick for the next five years. But if that starts cutting, they're going to look for places where there's good risk reward. And I think that's small caps. Do you need dramatic cuts for that thesis to pan out?

Are there other potholes in the road that you see that that threaten your thesis? Well, a recession would be negative. I don't think the Fed has to make major cuts. It actually just has to, I think the market narrative that would be the best for small caps is the belief that real interest rates are too tight now, you know, 5.5% versus inflation trending towards 2 two and getting rates back down to a neutral rate of three percent, if the market believes that they don't need the cuts to be front end loaded, but they have to believe we're going back towards neutral, I think that'd be a huge catalyst for small caps. OK, now let me ask you about more about mega caps and about the

consumer. How important, not necessarily just to small cows, but to the whole market narrative, will NVIDIA earnings next week be? Well, NVIDIA is really important because it's underpinning really what is driving the U.S. economy, which is a real push towards productivity using basically digital tools and automation. That's a very important disinflationary trend. And of course, the U.S. companies, all of the big ones are all the U.S. I mean, it's a global phenomenon that benefits U.S. companies.

So I think it's incredibly important. But NVIDIA, you know, trading at 26 times forward earnings isn't that demanding a stock either. So it's not like I would say sell NVIDIA to buy small caps. I think NVIDIA is still a long-term buy. Now, what about the holiday season and the consumer who's very stretched, particularly the working class consumer? What kinds of numbers perhaps did you expect to see at the beginning of that season? Oftentimes that can set the tone for how retail stocks and some other things perform.

Yeah, the consumer is under stress. I mean, it's known that things that are high interest rate, like credit card, auto loans, you know, HELOCs, adjustable rate mortgages, these are all subject to Fed policy. It's been a very penalty rate for consumers when inflation is coming down and they're paying these very high rates. So cutting rates would be a tailwind. Falling gasoline would be helpful as well. And I think the third is CEO confidence has been put on hold as long as the Fed's been tight. If the Fed starts to signal a rate cutting cycle, I think businesses will start to be more expansionary and that's good for consumers as well. All right. We'll see what happens. Tom Lee from Fundstrat. Thank you.

Speaking of the Fed, after the break, we just mentioned NVIDIA's big rally off the lows, and NYU's Dean of Valuation, Aswath Damodaran, thinks it's now overvalued. He's going to join us to make that case next. And we are still awaiting earnings results from homebuilder Toll Brothers and beauty company Cody. We will bring you those as soon as we get them. Overtime's back in two. Welcome back to Overtime. Stocks closing in the red today. The S&P 500 and Nasdaq snapping eight-day win streaks. Despite today's moves, they still remain higher for the month, even after the big pullback following the unwind of the yen carry trade. And NVIDIA has made an impressive comeback of its own, trading near record levels. Is that rally and the broader market bounce justified? Well, joining us now is Aswath Damodaran, Wall Street's Dean of Valuation,

Professor of Finance at the NYU School of Business. Always good to see you. So NVIDIA looks stretched. Does that mean you sell it? I think it's a dangerous game to play. If you don't own it, the only way you can sell it is to short the stock. And that's a recipe for disaster, especially leading into an earnings report. And the way to think about NVIDIA is, are you a trader? In which case, you buy at a low price and sell at a high price. And NVIDIA might be the game you want to play. Are you an investor? Are you buying based on earnings and cash flows? NVIDIA is an amazing company, great growth, amazing cash flows, superb margins. But you're paying a premium price even given all of those pluses. So I think you've got to be honest with yourself about the game you came to play. So broaden that out for the whole market. You make an interesting point

here. You say hubris is the greatest sin in investing, the excessive pride. And when people use the word bubble, it tends to be a sign of hubris. Explain. I think that when you use the word bubble, you're essentially arguing that the rest of the market has lost its mind. And that, to begin with, is a sign of an ego that's out of control. When you think something is overvalued, all it means is you think it's overvalued. It doesn't mean it's overvalued. It doesn't mean you have the truth. You have your truth, and you've got to act on it. But the rest of the world has their own truth. So my view on investing is make your own judgments, but don't pass judgment on other people buying or selling stocks because you don't like what they pay. So in your judgment, among some of the mega

cap stocks, what's a better deal right now? I think Amazon is a better deal than Nvidia. As an investor, if you wanted to go with the mega tech, I think Amazon is a better buy than Nvidia. It might not play out that way as a trade, but I think given the earnings and the cash flows, if I had to buy a stock now and you force me to buy a big tech, I would rather own Amazon or buy Amazon than buy Nvidia right now. How are you valuing smaller cap, small cap stocks, which have performed not as well as mega cap names that we've been discussing so far? And when should investors, not traders, but investors start charting out narratives that make sense to them where those are concerned? I think a lot of people believe in mean reversion, which is they

assume that if small caps have underperformed for a while, they've got to come back. I'm going to posit that there's been an economic shift, that the way the economy is structured is you have more winner-take-all businesses, which effectively put smaller companies at a disadvantage. So one reason why I think small cap stocks have underperformed larger cap stocks, not just over the last few months, but over the last decade, is because the market seems to have come to that realization as well. It might have overcorrected, and there might be some kind of a reversion back, at least to a more normal pricing. But I'm going to argue that those people who expect the old small cap premiums, small caps historically have delivered higher returns than large caps to come back, might be barking up the wrong tree. I mean, that's an

interesting point when you think about what's happened to salaries, to incomes in our society, right? The inequality, the wealthy have tended to get wealthier and the working class hasn't fared so well. If you looked at income the same way you looked at stocks, you would expect, well, eventually, you know, the working class has to catch up and it doesn't work that way. Not quite, especially in business, because if your economy is structured with three or four winners in every sector, what is it in the economy that's going to force the smaller companies or allow the smaller companies to catch up? It just doesn't work for them. Now, what about playing the sector game? There are certain historical tendencies during cycles.

Is that similarly dangerous to expect that because something is happening in the macro environment, certain sectors are a better value or worse? I think in hindsight, there's always sector rotation. In hindsight, we can always say, only I've done that. I've looked at sector investing over time. And if you can rotate sectors, well, all the more power to you. I just don't have that capacity. I find myself constantly second guessing myself. So I think you can look at sectors and I think you can make some judgments right now. For instance, if you think interest rates are going to continue to fall, and they have already, then you're going to see utilities benefit from the fact that rates are lower. So you can make

a macro bet with sectors, but beyond that, there's not much you can do. All right. Sobering, but important. Aswath Damodaran, thank you. Thank you. Well, now we've got a news alert on microchip technology. It is falling in overtime. Steve Kovach, why? Yeah, John, you see it now down more than two and a half percent. This is after disclosing what the company is calling, quote, a potentially suspicious activity on its I.T. systems and also saying that that took down some manufacturing capabilities there that they're trying to investigate and get to the heart of, not really calling it a hack necessarily, but it is taking shares down better than two and a half percent. Right now, it was down a lot more than that just a few minutes ago, John. All right. Steve Kovach, thank you. Well, new trial results show Eli Lilly's weight loss drug

slashing the risk of developing diabetes by a huge margin. And that news is weighing on companies that monitor and treat diabetes. We're going to talk about the long-term impact on investors in those names next. And Toll Brothers is about to report earnings and shares have been building on strong gains of 30 percent this year, trading near record levels. We'll bring you those results and talk to an analyst about the stock's impressive returns when that happens. Over time, we'll be right back. Eli Lilly shares getting a boost today from the results of a long term study on its weight loss drug. Lilly CEO David Ricks broke down the results this morning on Squawk on the Street. More importantly, we reduced the conversion of people from pre-diabetes to diabetes by 94%. Of course, when you

become diabetic, it's not good. Average risk of heart attack goes up fourfold, people with microvascular and other complications. And it costs the health system more. So I think this is a profound result, actually. And a pretty exciting day for a company that's been working in diabetes for 101 years. Shares of a lot of obesity and diabetes medical device makers selling off today after the Lilly News broke, including continuous glucose monitoring device maker Dexcom, as well as insulin pump maker Insulet, which are the biggest losers in the S&P

500 today. And joining us now is Barclays senior analyst Matt Mixett. Matt, is this sort of the GLP-1 panic of about a year ago all over again, where this is creating opportunities because investors are overdoing it? Or is it real this time? Yeah, I think there's a little bit of a repeat of some of the news we saw last year. So you remember the news flow around GLP-1s was significant, I guess is one way to put it. Last year drove an awful lot of volatility through med devices around, you know, some of the impressive results that we saw. You know, as Eli Lilly put it this morning, you know, the significant reduction in the risk of progression to type 2 is important. It's better, certainly, than some of the select data presented last year, which was similar in the 70s. In terms of reduction of risk, this was in the low to mid-90s.

So I wouldn't say it's as jarring as last year, but it's more support that these drugs are important than they were. So as investors are eyeing the health space and figuring out how to invest, can't help but notice Medtronic had its results today. It actually performed strongly in diabetes. That was one of those businesses with their own operational challenges aside that was hit a year ago when there was all this thought about GLP-1s. How should investors think about who's going to have continuing access to GLP-1s? Who's still going to need medical devices for diabetes and the

potential scale of the market impact if drugs like Lilly's pan out as well as they hope? Yeah. So the first thing I'd say is that one of the things we've seen in this earnings cycle, and this maybe speaks to some of the volatility today on data that you'd say, might not be all that surprising, at least to healthcare investors, in terms of the efficacy of these drugs, is that we're dealing with kind of a heightened sensitivity, heightened volatility environment. Some names that missed slightly or guided it down unexpectedly were really hit hard in the second quarter earnings cycle in our universe. And I think that speaks to kind of the sensitivity to any news that sort of shoot first ask questions later.

The other thing I'd mention is that, you know, there's a bifurcation of, I think, investors in space. From a generalist perspective, you might ask, you know, is this going to affect the potential size of the type 2 diabetes market? These devices and therapies are used in type 2 diabetes. So how is this not bad news? I think it seems very straightforward to generalists. I'd say for healthcare investors, the future is quite a bit more nuanced. And I think many investors in healthcare have kind of become accustomed to

and sort of fit this into our models valuation for names going forward. So what do you do with a name like Dexcom, which right now is near 52-week lows? Sure. So, I mean, there's a couple of things we'd point out. You know, one is that even though in the beginning when these things hit the news flow, it seemed like, well, these have got to just take from the opportunity for a company like CGM.

Clinical data over the last 12 months presented at some of the medical meetings this spring shows increasingly that the use of CGM with GLP-1s is actually beneficial in a sort of one plus one equals three sort of fashion. So you get better adherence for both, which is important to both kinds of manufacturers. Drug companies want to make sure folks continue to benefit from these drugs over a longer period of time, and you get better results in terms of hitting your targets like A1C on the diabetes side if you use these things together versus alone. So I think there's an opportunity for synergy going forward. There's some other elements that we think are attractive about the CGM market, and those are, you know, it's a subscription model.

So when you sign up a patient, you're not selling a vaccination or selling a month or two months worth of pharmaceutical therapy or a knee. You're really signing up someone to a subscription over a long period of time. And like all things, as the CEO of Lilly put it a little while ago, it just extends life. As people live longer, we think they're going to need more therapies, including CGM, including pacemakers and all kinds of other devices. It does tend to work that way. Matt Miksik from Barclays. Thank you. You bet. Well, time now for a CNBC News update with Kate Rogers. Kate. Hi, John. President Biden approved a secret nuclear strategy for the U.S. that focuses on China's nuclear arsenal. That's according to classified documents seen by The New York Times.

And the new strategy reportedly shows, for the first time, the president ordering U.S. forces to prepare for a possible coordinated nuclear challenge from Russia, China and North Korea. New York State's highest court upheld a law that allows registered voters to cast a ballot by mail, the court rejecting a Republican challenge to the legislation, finding that it did not violate the state's constitution. The lawsuit was part of a widespread effort by the GOP to tighten voting rules after the 2020 election. And most Columbia University students who face suspension or arrest for participating

in protests this past spring opposing Israel's war in Gaza will be able to return to campus soon. Though according to information shared by the university from the more than 80 student arrests, only five still face suspension without access to the campus. John, back over to you. Okay, thank you. Well, Toll Brother earnings are out. Our Steve Kovach is back with the numbers. Steve? Hey, John. Yeah, and shares are up on these results. The EPS was a pretty solid beat, $3.60 compared to $3.31 the street was looking for. And revenue, let's just call it right in line here, $2.72 billion versus the $2.71 billion the street was looking for. We see shares up better than 2% after hours, John. All right. Call in the morning, Steve. Thank thank you up next are ai growth expectations

coming off the boil mike santoli has a chart every investor in ai focused companies need to see we'll be right back got more earnings coming in check out lazy boy just out with results the stock is reclining uh beating facts set estimates on the top line second quarter guidance was light management saying the macroeconomic and consumer spending environment remain challenging. Shares down around 3%. Let's see if Cody can make up for it. Earnings are out. Steve Kovac has the numbers.

Still laughing at your reclining joke, John. But Cody shares are down a little less than 1% here after missing on the top and bottom lines. It's a loss per share here of 3 cents. The street was looking for earnings per share of 4 cents adjusted. And revenues, just a very tiny miss here, 1.36 billion versus 1.38 billion dollars. You see shares down now about 1.9%, John. All right. Steve Kovach, thank you. Well, Mike Santoli's back with a look at the growth rate for AI- levered companies. Mike. Yeah, John, it's impressive, but receding a little bit, you might say.

Here is the earnings growth projected over the next 12 months for the companies in this AI ETF. It's like 80 companies. AI companies kind of broadly defined here. It's an equal weighted index. But you see here we shot after GPT-4 launched out of that tech-led bear market in 2022. Earnings expectations shoot higher, go up into the 40-plus percent annual range. And now we're kind of curling lower, as you can see there, even as we have a recovery in broader S&P 500 earnings. And then even below that, you have the non-magnificent seven stocks within the S&P 500 as a group that have now also crossed back into earnings growth pace. So this is a little bit of evidence for those people who

say, look, there was a reason that we got really fixated on AI as a growth driver. Maybe it's losing some of its advantage relative to the other parts of the economy, even though there's still a big growth spread. I guess the big argument now is even for companies growing at this pace above 30 percent as a group, you know, what multiple do you put on that? I mean, because clearly it does deserve a premium. Just how much of one? That's one of the things the market's been trying to argue about in the last couple of months, I'd say. My first thing that came to mind for me looking at this is, is earnings growth the right way to measure the potential of a nascent area like AI?

I mean, I know we're talking about several companies in AI that do have earnings. But, I mean, for Amazon in e-commerce era, I mean, measuring earnings would have been very difficult when it was a young company. No, no doubt about it. This obviously is just the sort of here and now, what we know, what we're trying to effectively put a value on at the moment. And this, again, a lot of mature companies in this ETF as well, right? Cisco is in here, ServiceNow, other companies like that. But I agree with what you're saying. I think the question is, what are we going to ultimately reap out of that right now, that profitless growth that's investing in something big? Is it going to

come in the way of productivity gains? This is a familiar argument that essentially the benefits get dissipated throughout the economy in the form of the potential anyway for more efficiency and better growth for all kinds of businesses. It's just tough for the market, you know, looking out from here to figure out exactly what to do with that. And will some of these smaller cap software names participate in a significant way, or will the big guys continue to dominate? Yeah, Mike, thank you. Up next, a top analyst reacts to Toll Brothers' earnings and what they could mean for other home builder stocks.

Plus, check out shares of Armour Sports, which are surging after the parent company of sports equipment maker Wilson beat earnings estimates and raised its full-year outlook thanks to strong sales of footwear and outdoor apparel. See it there, up 10% today. We'll be right back. Shares of home builder Toll Brothers are in the green, up better than 1%, but off their highs after it beat on the top and bottom lines, raised full year deliveries and pricing guidance. Joining us now is Alan Ratner of Zellman Associates. Alan, good to see you. So EPS, a nice beat here. Revenue is just a little bit better than in line, but demand optimism in this release. What do you think? Hey, John, thanks for having me. Yeah, a bit of a mixed quarter. You know, this is the three

month period ending July when we know demand was a bit softer. Rates began to move lower towards the very end of the quarter. So we were about 10% below consensus on order growth. And the results pretty much met our expectations, so a bit weaker than consensus. But the commentary was positive. Management indicated that July was their strongest order month of the quarter. And they're encouraged by what they're seeing so far in August. How will slightly lower short-term interest rates affect the home building industry and a player like Toll Brothers? I mean, they've been able to, in a supply-constrained environment, offer incentives that make their offerings arguably more attractive than historical relative

to existing homes? Yeah, so rates are down 50 plus basis points from the recent highs over the last month or two. Clearly, lower rates are a good thing for affordability, for demand, but we haven't really seen it show up yet in the order results. I know the commentary was more positive related to August activity. So we'll wait and see what management has to say about that on tomorrow's conference call. But I think there's still a lot of expectation that rates are going to move even lower later this year once the Fed actually does cut. I'm not sure that's the correct interpretation because the bond market's already pricing in some magnitude of cuts. But the consumer out there today we're hearing is just reluctant to move forward if rates are, in fact, going to be lower a few months from now. So we're

still seeing some sluggish activity. So how much upside is there here? Well, from a stock perspective, we like Toll Brothers. We think the upside has less to do about the near-term demand and more about what they've been doing from an operations standpoint. They've been buying back a lot of stock, and they've been doing a lot of things to structurally drive their ROE higher. But in the near term, we do think that the demand outlook is going to remain choppy. What distinguishes the players in the home builder space here now? Is it their regional activity? Is it the types of homes that they're building? Yeah, I mean, there's a lot of different strategies. There's price point differentiation. There are builders that spec more, meaning they're competing directly with the resale market versus those that are more built to order.

Toll has been speccing more, but they predominantly are more of a move up builder. Roughly half of their business is built to order. So there's different ways to differentiate their strengths and weaknesses, frankly, across those various differentiating points. Geographically speaking as well, we're hearing some softer activity out of Florida, out of Texas, a little bit better activity in the middle part of the country. So, you know, lots of different ways to differentiate right now. So who's advantaged from a stock perspective in the middle part of the country where things are looking a little stronger? Well, you know, Toll Brothers has a pretty attractive footprint in the sense that they're diversifying outside of the coasts. You know, MHO, MI Homes, is a large Midwest builder. They've got a strong market share in the Midwest. And, you know, I think generally

speaking, we tend to differentiate more between the return profile of the builders as opposed to anything overly geographic in nature. What are you seeing in consumer credit and how that's affecting these different builders, depending on what segments of the market they appeal to? Yeah, we're definitely seeing more stress at the entry level. Credit card debt is rising. We're seeing tougher ability to qualify for loans. So that's directly impacting the entry level builders, the DR Hortons, the Lennars of the world. The good news is that these builders have above average gross margins. So they've got some cushion to play with to buy down the rate for the consumer and help that buyer

qualify for a loan. But we definitely are starting to see some signs of stress on that front. We'll continue to watch it as we see Toll Brothers up about a percent now on those results in overtime. Alan, thanks. Thanks, John. Well, Texas Instruments announcing a big change to its capital spending plans as it fights off activist investor Elliott Management. We've got details straight ahead. And Palo Alto Networks, the big winner in the S&P 500 today after the cybersecurity company's earnings beat strong guide in a rocky time in overtime yesterday. Came out on top in the regular trade. Be right back. Welcome back to overtime. Activist investor Elliott Management scoring a big win in its push to get Texas Instruments

to increase its free cash flow. Seema Modi has the details. Seema. John, Texas Instruments slashing its capital spending plans amid criticism from activist investor Elliott Management. The analog chipmaker now projects free cash flow of $8 to $12 a share in 2026, higher than the estimate of $6.91. Now, one factor helping new funding from the U.S. Chips Act, TI is building three new chip plants in the U.S. Pressure has been growing on Texas Instruments to reduce spending as its two biggest end markets, industrial and automotive, remain challenged.

That's where the company makes about 75% of its revenue. Elliott commending TI's capital allocation update. Stiefel analysts calling the company's new financial targets, quote, aggressive. We did see shares turn higher on the news, ending financial targets, quote, aggressive. We did see shares turn higher on the news, ending up by nearly 1 percent, John. And it's interesting when we look at this challenge that TI is facing. It's similar, structurally at least, to what Intel is facing, where these chip companies have to make these big capital outlays up front to, you know, fund the

next decade, two decades, what they see of potential in the space. But then in the near term, if their products aren't in the right markets based on what's happening, they encounter all kinds of turbulence. Intel in AI and PCs and Texas Instruments, as you mentioned, in automotive and industrial, right? Yeah, Intel came to mind as well, John, when I was hearing Texas Instruments CEO, Javiv Yon, talk about the challenges he's seeing in industrial and automotive. He talked about how he just came back from China, where he sees some green shoots emerging. But to your point, they also see this geopolitical story that's playing out, how that will over time help Texas Instruments

and its build-out of chip plants here in the U.S. Of course, TI is really focused on the more mature chips that are used in the analog sector, more mature chips that are found in everything from washing machines to microwaves, among other places. So I think other products, excuse me. So we'll have to see how quickly that story changes and when it starts to see a return on investment here in the U.S.

Really underscores the difference between the AI chip names, the ones that have the products now. We talk about NVIDIA all the time. And of course, AMD yesterday with its acquisition plan for ZT and then everything else. Exactly. Exactly. Two very, there's the winners and then those that are trying to be the winners. Exactly. All right. All right. Thank you, Sina Modi. Up next, all the big names on tomorrow's earnings calendar, including more signs on whether

consumer spending is slowing and how that might impact the Fed. And because you love overtime, you want even more, you can scan that QR code on the screen. Follow us on LinkedIn, where we'll post exclusive content. We'll be right back. Welcome back. Retail and tech earnings going to take center stage on Wall Street tomorrow. On the retail front, we'll get results from Target, Macy's, TJX and Urban Outfitters. And Snowflake, Zoom, Synopsys and Zoom Video are big tech names on the calendar. Investors will also be able to closely watch the latest Fed Minutes for more clues about a possible interest rate cut, as well as the weekly mortgage applications data.

Now, Mike Santoli rejoins us. Mike, on the retail front, I'm particularly interested in TJX with the pinched consumer. It's a discounter that's performed particularly well, and you have to wonder whether that continues. Yeah, conventional wisdom says that they tend to be a net beneficiary of a value-minded consumer. We'll see if that does play out. You know, it's very interesting when you look at the setup and the way the market values these companies. TJX and Ross Stores are much higher valuations than the, quote, higher end. Things like other department stores. Target also going to be interesting to see if it can kind of ratify what Walmart said last week about general merchandise and more discretionary goods having a little firmer demand in July, which which did cool off some of the fears about the consumer among investors.

I was just talking to SEMA about Texas Instruments and the chip situation for those that aren't directly AI. It's going to be an interesting play here with Synopsys and Wolfspeed. Wolfspeed making these silicon carbide chips. Its chart looks challenged. Synopsys makes the software that helps people design chips. And of course, there are more different types of companies designing chips now. It's had some pretty strong performance off the August lows. And you wonder whether that can continue with all of the AI interest as well. Right. So it's been this vigil for, you know, a real cyclical turn in those non-AI parts of the market, more industrial type chips. I mean, if you look at auto, that's been a uh in terms of demand expectations so yep that'll be interesting um i do think you know if we're looking a little more

macro you know the the fed minutes seem stale because they came before that week jobs number but any discussion in there of what the committee believes the neutral and normal rate they're working toward should be you know it's gonna get people's attention and then of course there's always zoom one of those pandemic high flyers. Can't help but think it's reporting near the same time that Peloton is. Yeah, exactly. I mean, look, you see, obviously it's a sustainable business. You just don't know what the real run rate here is of growth. So, you know, that's a familiar looking chart from those names.

Competing with Microsoft is hard. Thanks, Mike. That'll do it for Overtime.