Closing Bell - Closing Bell Overtime: Virgin Galactic CEO On His Company’s First Flight With Tourists Onboard; Generative AI’s Impact Across The S&P 500 8/10/23

Episode Date: August 10, 2023

Weaker-than-expected CPI helped boost stocks early before fading into the afternoon. Ned Davis Research’s Alejandra Grindal and Main Street Research CIO James Demmert break down the market action. Legendary value investor Bill Nygren gives his top picks going into the rest of the year. Virgin Galactic CEO Michael Colglazier on his company’s first flight to the edge of space with tourists onboard. Evercore’s Julian Emanuel on his new report, modeling the potential impact on labor of generative AI across the S&P 500. Plus, our Robert Frank on Manhattan rents hitting an all-time high.

Well, the Dow nearly erasing a 455-point gain, though Disney did hold on to the green today. That's the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan. John Ford is off today. Ahead this hour, portfolio manager Bill Nygren opens up his playbook with his top value picks right now. He'll join us in just a moment. And later, we will talk exclusively with the CEO of Virgin Galactic, which just completed its second commercial spaceflight and the first that included paying passengers. Stocks closing near the flatline today after an up and down session. The major averages saw an early surge after consumer price data came in about in line with expectations.

Slightly softer, but those gains faded. Joining us now, Ned Davis Research Senior International Economist Alejandra Grindahl and Main Street Research CIO James Demert. Welcome to you both. James, I'll start with you. Why did we fade the gains here? Was this the week 30-year Treasury auction or something else? Well, you know, I think it's a number of things. And one of them is that I think investors in general have just been overly optimistic as we enter this seasonally weak period. And the number,

the print on the CPI, I just think is a reminder, yeah, you know, the Fed's done a lot of this work that needs to be done, but it's still a bit sticky. So that means rates higher for longer. And I think the I think investors might have sort of looked at that first print said, oh, gosh, we'll buy stock on this. And then they thought about it a little bit more. And then you look at some some other issues in data that we suggest, you know, this market is in for maybe a more of a pullback from here. So I wasn't surprised to see a big open and then sort of take it all back. That's kind of what corrections look like as you sort of roll through. And I think we're just sort of a third through this one so far. OK, Alejandra, I want to get your thoughts on CPI, because there does seem

to be the sense that that today's reading only reinforced rather than improved the present narrative of disinflation in this market. Your thoughts? Yeah, I mean, if you look at the headline numbers, they were quite good. Those 0.2 percent gains that we saw both this month as well as the prior reading is in line if you annualize it with the 2 percent target. I think the worry, and I have to agree with James, is, you know, the numbers were quite good right now, but it's just a couple months. And if you look at the second half of the year, a lot of those disinflationary forces that we saw at the beginning of the year just may not be quite as strong. You know, one is a lot of these, you know, either core services prices, as well as even core goods

prices, they may uptick a little more like used car prices have sort of stabilized and may not provide as much downside. Medical care services could correct. And then the real kicker has obviously been oil prices. When we look at the August reading for CPI, that headline number is going to be higher. Now, again, it's just the headline. But as we know, if you look at consumer inflation expectations, they are greatly driven by energy prices. And that is something that the Fed is watching quite closely. So, yes, great reports. I will put my hand down on that. But second half of the year, I just think those disinflationary forces are going to be a little harder to achieve.

OK, James, you mentioned this is what corrections look like. You didn't say pullback. You said correction. What are your expectations about where we go from here and what drives it? Thanks, Morgan. That's a great question. I mean, I think investors really have to be ready here for maybe the style of what I would call correction that we saw in March or the one we saw in December. We're coming off some very technically overbought areas over the last sort of few months with a huge rally, obviously the AI stocks. And finally, you're starting to see some more participation in the broader market. However, we're really technically overbought. Yes, recent declines

have sort of brought that down, but there's a lot more ways to go before we get to what we call oversold positioning. And that's usually where you really want to start to move into some of the companies that we think are attractive. Also, valuation wise, you know, you're at 19 and a half times earnings. It certainly would be a lot prettier at 18 or 17 and a half. And I think if you got stocks to pull back in a normal correction, which would be closer to 8 to 12 percent, more than a pullback, I think it depends on how we look at this. That's a great entry point to buy some of our favorite businesses. So, of course, I'm now going to ask, what are some of your favorite businesses? Thank you for doing so. I really appreciate that. You know, we've been

pretty sensitive about consistent growth in earnings and strong balance sheets. It's really been a wonderful place to be since the bear market began and into the last few months. And then also themes, right? You know, you really can't be an investor today and not have some AI exposure. That's a theme that's outside of, let's say, the consistency of certain sectors and earnings in sloppy economies. So when we think about our favorite numbers and companies, you know, companies like AMD in this space or Microsoft or the Amazon, but I think here also investors should be really careful to understand this market just recently starting to broaden out. It's not just the super seven or whatever you want to call those high, big high stocks. You can now, you started to see Caterpillar Tractor act well in the industrials, right?

Very exciting. We think that the stock's very low P.E. You pick all these other sectors that, frankly, haven't moved a lot this year, but just until recently. We think this correction is going to invite investors to be part of the whole party. Yeah. Okay. Alejandra, I mean, one of the other things that's been driving the market narrative this week has been some of the much weaker than expected

data we've seen come out of China. You know, you have you have a country there that does seem to be very much in deflation, at least based on the latest reading there. Plus, you have this Biden executive order. And I realize it's narrower than expected, but this Biden executive order on investment flows into certain types of technologies. And I just wonder whether it's China or whether it's Europe or whether it's some of the other parts of the world. Yes, the data has been resilient and Goldilocks in nature here in the U.S., but if you see a slow down or a weakening or even the beginnings of a recession in some of these other major markets, can the U.S. escape that? Yeah, I think that's an excellent question. And I will first start off with this

historical conclusion that it's the U.S. that tends to drive the world down with it. It's typically not the other way around. Now, looking at a lot of the economies that you mentioned, if you first talk about China, it is slowing in line with anticipation. We knew we were going to see a sharp rebound in economic activity after the end of zero COVID policy at the beginning of the year. And then now growth is coming back to earth. But the one thing I do want you all to keep in mind is that we do expect growth to be roughly in line with China's growth goal. They're just going to put enough targeted stimulus to get to that point. And if you look at that 5% growth versus last year's roughly 3%, that's still more, right? So at least it provides some stabilization.

Europe is obviously a key concern, and we are seeing increasing risks that the Eurozone economy could fall into recession in the second half of the year. But again, history shows that Europe typically doesn't drag the world down with it. As I mentioned before, it's usually the US doing that. Now, that being said, that still contributes to, you know, some volatility in the global economy in the second half of the year, because the US is growing, but it's not gangbusters growth, right? And then you have these other economies that aren't growing as quickly as they were in the first half of the year. So very much in line with what James mentioned in terms of our, you know, positioning, at least from a global equity market perspective. We do expect a bullish position, mainly because the U.S. is not in

recession, but due to the seasonality, the excessive optimism and the fact that, you know, Europe and Chinese economies are slowing, the second half will be choppy. All right. Alejandra Grindel and James Demert, thanks for kicking off the hour with me. The S&P finishing the day essentially flat, 44.70 and other major averages eking out again with the exception of the Russell 2000. Let's bring in senior markets commentator Michael Santoli from the New York Stock Exchange. He's taking a closer look at tech. Mike. Yeah, NASDAQ 100 first off, Morgan, and taking a look at a three-year chart relative to its 50-day moving average, just to give a sense of what happens when you have these downside tests as we've been experiencing in the last few weeks.

I like the 2020 to 2021 uptrend that points out once you've touched the fifty day average it usually kind of gets through there for a while and it hasn't necessarily just been about you know kind of tagging it and then resuming the uptrend so these are little scares that you see along the way that did not end the uptrend but it certainly made people think it might be over so right now we've more or less just come down to meet it. And you see, when that's not happening, the index is generally, though not always, remain somewhat clear of that short-term moving average. So something to keep in mind, that it's not game over if we go through this, but it probably is going to seem like it's getting a little bit vulnerable. Now, in terms of sector rotation over the last three months, you've had energy now outperforming tech within the S&P 500 by just a little bit. Now, of course, this is no real true replacement for the power of tech within the overall market, because right now, information technology sector, 27 percent of the S&P, energy, four and a half percent. So it's a tough way to try to make progress if it's at the expense of technology, Morgan. Got it. We've talked about it before, but it bears repeating.

What happens with tech when you see interest rates on the rise? You know, to me, it hasn't really been the main swing factor. Now, in theory, it gets people to reassess valuations of growth stocks, the ones that most of their earnings are way out in the future. I don't think it's all that telling how the market has behaved this year relative to rates in terms of Nasdaq. Now, rates were going up for the most part at a time when the Nasdaq was also rising lately. So to me, it's much more about which direction earnings estimates going. Now, higher yields, they can impact the entire market if it's happening in a way that makes people think the economy is going to be more restricted. So I wouldn't necessarily think of it as the swing factor, though it was a very close linkage in 2022. Yeah. You also have this secular growth story that is centering around AI as well, which we're going to talk a little bit more about later this hour.

Mike, we're going to see you later this hour, too. Thanks. Up next, Oakmark's Bill Nygren on the top opportunities for value investors right now and why he thinks earnings will top expectations for the remainder of the year. Overtime is back in two. Welcome back to Overtime. The Nasdaq is down 4% so far this month, but growth is still outperforming value this year by a sizable margin. Joining us now on set with his value playbook is Bill Nygren from Oakmark Funds. Bill, it's great to have you here. Thanks for having me, Morgan. We've been having a lot of these conversations recently about whether the market is expensive here and we're due for a pullback or

even a correction because of it. How do you see it, given the fact that you are this longstanding, formidable value investor? Well, the way we look at it at Oakmark, the S&P 500 is trading just a little under 20 times earnings. Doesn't look particularly cheap to us at that price. But what's unusual now is after that really strong growth outperformance in the first half, the spread between P. between PE multiples of the expensive stocks and the cheap stocks is getting back up to historically unusually high numbers. So even though the S&P is at 20, we've got a bunch of growth stocks at 40 to 50 times earnings, and then a bunch of value stocks that are still at single digit multiples.

So we think the opportunity is there to put together a pretty inexpensive portfolio. I want to dig into that a little bit more, but this idea, and we saw it play out last year, and certainly at Oakmark as well, this idea that tech is a value play. Can we say that that dynamic or that chapter of the market has come to a close then? I don't know that it's really come to a close, but it's certainly not as attractive as it was last year. Last year, we were using alternative valuation metrics that we thought did a better job of identifying value than Gap Accounting did to buy stocks like Uber at a double-digit free cash flow yield or Adobe Systems when that was barely at a premium to the market for a great business. And those stocks have performed incredibly well. So they've found their way out of our portfolio. And the replacements tend to be more of these single-digit PE names in the banking industry, insurance sector, energy, legacy media. So those names seem attractive.

More traditional value, if you will. So I guess, what are some examples of some of these more recent names that have found their way into the fund? Well, we've added to positions in Comcast and Charter, single-digit PE multiples. I think investors tend to worry too much about video cord cutting, and we think the company should be given infrastructure-like multiples for their internet access business with the banking crisis at the end of the first quarter we thought that got overdone we were able to increase some positions there including adding names like first citizens and truest where we think the regionals kind of all got painted with the same brush of concern that there'd be deposit outflows.

We think both those companies have very strong, well-diversified, transactional-based deposit franchises. We've added in the auto sector to our position in GM, which was a clinker today, and maybe you could say has been for the past decade. But we think they're finally nearing the end of this stage where it seems like there's always another use for the cash they generate. And finally, they'll have an ability to start returning it to shareholders. Yeah, I do want to go back to financials for a moment, because to your point, there was a lot of throwing the baby out with the bathwater and all the regional bank turmoil. And that hit the broader financial sector as well.

Charles Schwab was one of those examples. And I think for me, it raises the question of how do you how do you assess the health of these companies and decide what to invest in when there are different metrics and different accounting methods that could be at play and that we know have affected the stocks? Well, I think we need to look at some of the metrics that gap accounting doesn't pay a lot of attention to, like a breakdown of the deposit franchise. How strong is it? How well diversified is it? How much is it transactional-based versus investment-based based because when interest rates go from zero to four or five percent we all get more more careful about how much money we leave in our bank accounts that are paying much interest income.

I think also on the asset side of the balance sheet need to pay attention to the duration of the assets and like how far those assets have fallen in value because interest rates are higher. And we've got a mix of those in our portfolio. Companies like Capital One, where the durations are shorter, they could probably sell the asset side of their balance sheet for more than book value today. A company like Bank America that we also like because of their strong deposit franchise, they will be under earning for a couple of years because the duration of their portfolio is a little bit

longer. Health care has been one of the big underperformers, at least from a sector standpoint, so far this year. You've made some investments there, too. We have. It was a sector that last year we struggled to find much of anything that seemed attractive. In the first quarter, a name like Hospital Corp of America that we've owned for several years, I'm sorry, first half, not first quarter, came down pretty significantly in price. We think that's getting very attractive again. We've also added a couple smaller positions that have come down a lot from where they were a year ago, and we're kind of putting toes in the water there. All right,

Bill Nygren, it's always great to get your thoughts and to hear where you see value in this market. So thanks for joining me. Thanks for having me. Up next, Virgin Galactic's CEO joins us exclusively to talk about today's successful space flight. The company's first paying tourists were on board. We're going to talk demand and how quickly Virgin can ramp up flight schedules. And as we head to break, check out two of today's regular session winners. Capri Holdings, surging after rival Tapestry, said it would buy the company in a

deal valued at $8.5 billion. Also, Yeti, jumping double digits after an earnings beat and bullish guidance. Those shares finished up 17%. We'll be right back. Welcome back. Virgin Galactic launching a successful trip to the edge of space, taking off this morning from New Mexico. The flight had a crew of six people, including three civilians who either bought or won tickets to be on board today. It's the first time that the commercial human spaceflight company has actually flown passengers, civilians, to space. They experienced three minutes of weightlessness before descending back to Earth. The company aims to fly the spacecraft

on a monthly basis. Joining us now exclusively, Virgin Galactic CEO Michael Colglaser. Michael, congrats on another successful space flight. Great to have you on the show. Thank you, Morgan. It was an excellent day here at Spaceport America. I'm sure. So I guess just give me the headlines in terms of today and what it means for whether you've set a date already for your next flight. This flight speaks to the heart of our company. Space has always been incredibly restrictive, and we're changing that. And the people that we flew today, we created four astronauts, including Kelly Latimer, our newest space pilot. And they're envoys back to their communities, back to all the people who watch them, to share this perspective of Earth from space.

It was an incredibly emotional day, and it was a beautiful flight. And to your question, we're now going monthly. We've done three flights within the last three months. We came down today. We always do some post-flight analysis. But right now, our expectations is the next flight's going to be in reasonably early September and continuing monthly from that point forward. So we're very, very happy with today's flight

and looking forward to continued space flights with Unity, which is the ship behind me. And then, of course, we're working to rapidly scale the fleet and build the business up. Yeah, and I do want to get into all of that with you. You just said early September, though. I mean, you do have this backlog of about 800 people who are looking to fly to the edge of space with you. How are you working through that backlog and determining who makes up what crew? We have 800 super excited people today because they're all watching this flight.

And we generally go in, I'll call it FIFO order, you know, first in, first out. And each of the private citizens that are going to be flying with us have a number, right? And we will fly them in generally sequential order. Now, that private astronaut manifest also is accompanied by a parallel manifest that we use for research flights.

And so about 10% of our seats we will use for microgravity research, governments and research institutions. And we'll intersperse those two. But you'll see galactic 3 and galactic 4 going to be private astronaut flights in September and October I think November you'll see galactic 5 as a research flight and then we'll continue to move from there yeah now how does that speak to what you have forecast

because you had earnings last week so how does that speak to what you forecast in terms of a million dollars expected per quarter I think over the next two quarters for revenue how do you get to those numbers? So we are flying on spaceship unity as four seats our first few flights we are flying one of our astronaut trainers on one to observe did all of our ground training for the astronauts actually play out the way we wanted to in space looks like that's going really really well and eventually we'll fly four people on Unity. The Delta ships will fly six people.

The people we fly have paid sometimes lesser amounts on their ticket because they bought the tickets 15, 16, 17 years ago. So like John Goodwin paid $250,000 for his flight. Research flights are about $600,000 per seat equivalent. And so the mix of those seats and the mix of those tickets determines our amount per flight. And so we, I think, guided about a million per quarter. This particular flight had two people who won their seats, and John's was earlier. We'll do a research flight in the second quarter. That will be more money. So I think we'll probably be a little closer towards two for the second quarter.

Yeah. And of course, John Goodwin was on today's flight. He's, I believe, the first Olympian to fly to space as well. What's amazing to me about Virgin Galactic is we're talking about commercial human spaceflight company that literally has a stock ticker attached to it. You've been doing these flights, including today during trading hours. The stock initially, when you had a safe landing, it popped higher and then it ended the day down about 4%. We saw something similar after your first commercial flight at the end of June as well. What do you make of investor reaction to what have now been successful missions and milestones? I think one thing that's important is we're going to make this normal.

And so, like I said, we've done three in less than three months. You're going to see us go monthly again. I think investors are looking at this, what's historically been a bit of an anomaly, and they will get excited kind of on the ups or downs and did it work. And it works. And it's going to work each time we fly to space. We're going to work each time we fly to space. We're going to bring people back safely. And when you listen to the astronauts that we flew today,

they are incredulous and stunned in a really positive way with the experience. So I think investors will react positively to that. But the frequency and the cadence we're going to do, I don't want people to be surprised by that. It's going to be a regular occurrence that we take humans to space. And we're really excited to be doing it. Yeah. Cash burn is stabilizing. We heard that from earnings last week, too, even as you develop the Delta-class space planes. Do you have plans to raise more capital?

We have about a billion dollars, as of our last earnings call in the bank and that gives us quite a long runway going forward. I think we guided between 120, 130 million dollars for Q3 and Q4. The amount we will spend and the pace in which we spend it depends a little bit or quite a bit on how quickly we scale the fleet. Now we want to scale our Delta ships up quickly. I think you're aware we're actually bringing the factory up this year. Ship sets are going to be on the dock in 24, flight testing in 25, and putting those into service at 26, which is very rapid for an aerospace development program. We want to really scale it up from there. We believe we'll have access to

the capital we need to do that, and the markets will be available at the point times we need them. And if there's ever a time where we want to be more slow in our pace of going into capital, we can do so by just managing the pace at which we scale the incremental ships going up. But the shareholder return is going to come as we scale that fleet up, and we're going to continue to lean into that. Yeah. Delta Class is the path to profitability, as some analysts have laid out, and you and I have discussed before. Would you bring a second Spaceship Two vehicle on in the meantime, given the fact that you do have this big backlog, and so many people that are so excited to finally have their moment at the edge of space?

You're going to see us use this incredible ship behind me, VSS Unity, as our demonstrator. And just like it did today, and it's going to go on generally a monthly cadence, which is an incredible feat for a human space flight to turn on that piece. The Delta ships we're building to fly weekly, if not better. And so we want to get to the Deltas as quickly as we can. So we're going to use Unity for demonstrating the

power of the experience, for showcasing the safety of our platform, and for building confidence in our ability to do recurring flights like this. And I think Unity will do a great job for us there. And then we're going to put all energy and all focus in the company towards our Delta-class ships. That's where the profits are. That's where the scale of the company comes from. That's what people want to see from us. We're going to stay laser-focused on that. You've just got your second commercial space flight under your belt.

Have you seen a change or an increase in your backlog and the amount of people that are looking to potentially buy tickets? Has it had a material effect? We actually have not allowed sales to be open right now. We have about a four-year backlog, which is a little longer. I'd like to have a two to three-year backlog. So we're going to work through some of those pieces, but we're clearly going to be talking about our flights. We had great coverage today, and that is going to build a swell a swell of interest of course we're going to keep track of the people who are interested but when we do open up tickets we'll do so in more limited tranches what you're going to see as we do flights like today is word of mouth is just going to take off the astronauts we brought back are i think are

going to be missionary for us and that's going to just get bigger and bigger as we fly more of these flights to space so we're going to let that demand kind of build for us a little bit and then we'll open up uh tranches of tickets uh right now our price is 450 000 and we've mostly closed at that price there's about a limited number left with a group called virtuoso who we've given as a travel advisory firm access to sell those. And then we'll open up at a new price point. I don't expect that to be less. And we'll do that as we then go forward for the next tranche of sales. I love that we're talking about travel advisory agencies for space flight.

Michael Colglazier. It's pretty incredible. It is. Thanks for joining me today after another milestone, not only for Virgin Galactic, but for commercial human spaceflight in general. Thank you. For much more space coverage, check out my podcast, Manifest Space. It's available wherever you get your podcasts. We've got a new episode in the works today, actually. Take a listen. News Corp earnings are out. Julia Borson episode in the works today, actually. Take a listen.

News Corp earnings are out. Julia Borson has the numbers. Hi, Julia. Hey, Morgan. News Corp reporting an earnings beat, 14 cents in adjusted earnings per share versus the 8 cents that were estimated. Revenues falling a bit short of expectations at 2.43 billion versus the 2.49 estimated. But CEO Robert Thompson making some interesting comments in the company's press release, saying that for the first time, digital accounted for over half of News Corp's revenues for the full year. Also saying that, quote, momentum is surely gathering pace in the age of generative AI, which we believe presents a remarkable opportunity to create a new stream of revenues while allowing us to reduce costs across the business.

Saying we are already in active negotiations to establish a value for our unique content sets and IP that will play a crucial role in the future of AI. Now, Morgan, of course, this is interesting because this comes at a time there have been some lawsuits, some threats of lawsuits to try to protect that IP, the news articles that has trained some of these AI engines. Back to you. This is fascinating. Julia Boorstin, thank you.

Shares are flat right now. Time for a CNBC News update with Kate Rooney. Hi, Kate. Hey there, Morgan. The White House asked Congress for nearly $800 million in additional funding to fight drug addiction and overdoses, a majority of it going to the Department of Health and Human Services for prevention, support and recovery services, and to Homeland Security to help counter drug trafficking, also for fentanyl detection at the border. According to the CDC, drug addiction and overdoses killed more than 100,000 Americans

in the last year. The Mississippi Supreme Court says it will not remove NFL Hall of Famer Brett Favre from a lawsuit over misspent welfare money. Favre is a defendant in a suit seeking to recover millions of dollars meant to help low-income people. Prosecutors say that the money was spent on projects supported by wealthy and well-connected people. And the cost of business travel is soaring this year with competition for airline seats, hotel rooms and cars driving up post-pandemic prices. Travel companies CWT and the Global Business Travel Association report typical premium class airline tickets will top forty4,500 next year. Morgan, back over to you.

Let that number sink in. Kate Rooney, thank you. Up next, the big picture on earnings season. Mike Santoli is going to give us a breakdown on how results have measured up to expectations and what the street is now forecasting going forward. And later, inflation may be cooling, but Manhattan rents just hit their highest level ever. We'll tell you the eye-popping price that New Yorkers are now paying. We'll be right back. Welcome back to Overtime. We're mostly through earnings season, so let's bring back Mike Santoli

for a look at how results are measuring up to expectations. Hi, Mike. Yeah, Morgan. Of course, they came in significantly better than the final forecast by consensus in the second quarter. What it's meant for the overall estimates on a forward-looking basis for the rest of 2023 and next year has been basically stabilization in the outlook. You see it's flattened out here, the estimates for this year and next. I should mention, too, that the normal or average pattern for a year ahead earnings forecast is for them to actually decline by some 10 percent. So not all of this is just because of the steep slowdown in the economy and the Fed raising rates. Some of it is just the normal kind of erosion that happens in the forward estimate. So maybe you could sort of say that we've hooked a little bit higher. It could be an inflection point in terms of expected earnings. in the forward estimate. So maybe you could sort of say that we've hooked a little bit higher. It

could be an inflection point in terms of expected earnings. If you blend together what's left of this year and then the first part of next year, the 12-month forward estimate is around 235 for the S&P. That places the current forward P.E. multiple at 19. Nobody's definition of cheap, but if in fact you can see growth toward the 2024 estimate, usually the market can find a way to stay supported if earnings are no longer going down. OK, so maybe it's not cheap at 19 times. But and I ask this knowing that the last couple of years have been sort of all over the place. But what would be considered normal? What would be considered like health, a healthy valuation for the market or a right-sized valuation for the market? Yeah, I would say over the last, let's say, decade, you're probably looking at 17 as an average

for the 12-month forward PE. Now you can go back 22 years and you were above 20. And so you also, in the early 2010s, were down near 13, 14. So wide range of variation. Also, as many have pointed out, it's the very largest handful of stocks that do inflate the forward valuation of fair because they're much more expensive than the index. The equal weighted S&P screens out around 15.2 times forward earnings right now. All right. I see all bets are trough. I'm going to say feed at the trough. I don't know. I can't come up with any trough to the races was my other choice. That's see, that's pretty clever. And John Fort, he would be proud. You too. I'd like to see you

both go head to head on some of these dad jokes and puns. All right. Mike Santoli, thank you. Up next, we will discuss the impact AI is having on specific industries and whether investor euphoria for AI stocks is starting to fade. Welcome back to Overtime. The QQQ finishing higher today, but closing in on its 50-day moving average. Are we starting to see signs of the AI rally fading? Well, powerhouse stock NVIDIA is down 5% over the past week. C3 AI and Supermicro, both down over 14% in that time frame. Our next guest is out with a new look at the AI impact on the economy and which companies and stocks are most exposed, which is not necessarily a bad thing.

We're going to break it all down with Julian Emanuel, Evercore ISI Senior Managing Director. Julian, it's great to have you on the show. Good to be with you again, Morgan. All right, let's talk about this because we've been having so many conversations all year long about whether AI is going to be a job killer, whether it's going to be a job supercharger, where we're going to see it adopted first, what all of this is going to look like. As far as I can tell, you're the first market participant to actually lay out a methodology and try and wrap your arms around this from a quantitative standpoint.

Break it down for me. We are trying to do it. And look, the bottom line is, if you think about it, the generative AI is like the automobile, which is like the color TV, which is like the internet. There is always a point in time where there's going to be extreme concern on the part of society in terms of embracing change, in terms of regulating the potential sort of unintended consequences of change. But what we would say when you think about the potential for generative AI to create jobs, the important facts, two of them. Number one is that if you look at the last 70 years, increases in productivity have gone hand in hand with increases in jobs. OK, and then the other fact, which we found very interesting, is that if you look at today,

60 percent, fully 60 percent of the jobs that exist right now did not exist in 1940. So it's a question of the difficulty of transition. But ultimately, we think the generative AI is something that can really unlock a new chapter in productivity and growth, all the more important because populations globally are starting to peak and decline and we need new avenues for increasing productivity. Now, when we see higher rates of productivity, it tends to help with inflation or put downward pressure on inflation as well. Have you looked at it from that standpoint? Absolutely. And look, whether you're the Fed or you're corporate America or you're anyone right now, one of the largest concerns has been clearly the bump in inflation, albeit moderating, that we've had the last couple of years.

And part of that story has been, you know, this upward continued pressure on wages as the labor market has been what I think to a lot of people, inexplicably tight. But again, part of that is the aging of the population and several other certainly pandemic-related factors. But the fact is, is that generative AI is specifically designed to help mitigate that through the coming years. So what sectors do we see adopting it or realizing the benefits from it first? So there are two in particular that we think are an interesting focus. The first being financial sector, essentially being a very knowledge-intensive an economy-wide number, 32% of all jobs are exposed, or 32% of an average job is exposed to generative AI. That number rises in the finance profession to 43% because of the nature of the work. And so there are two things going on here. Number one,

we've certainly seen it in the headlines in recent months. There have been the start of downsizing with the potential for an economic slowdown. That happens in every cycle. But bigger picture, when you think about the potential for productivity boosts in finance, what it does is it frees that entrepreneurial spirit because finance has long been really ground zero for innovation across the economy when you think about the last 40 years. That's the long run positive. For us, the other sector that's interesting is the consumer sector. Now, because, you know, your local restaurant has, you know, whether it's a barista or a server or whatever, it's a more social aspect to that occupation. So there's less degenerative AI can affect.

But what it can do is do a better job of segmenting clients, understanding their needs and produce, you know, added revenue by giving the customer more of what he or she wants. Yeah. It sounds fascinating. You've done an extensive amount of work on this and got to think it's going to be a positive for the economy based on your research and thus a positive for the market, even as I know you think there's a retest here coming in the coming days of the SPX at 4,200. Julian, it's great to get your thoughts on this. Thanks for sharing this new data with us here on Overtime. All right, Julian Emanuel with Evercore. Inflation keeps cooling, but don't tell the people who live in Manhattan where rent prices are soaring to record highs.

Got those details on the other side of the break. Welcome back. The July CPI report showing inflation keeps cooling, but shelter costs are bucking that trend, rising 0.4% last month. And nowhere is that more apparent than in Manhattan, where the nation's largest rental market exists. Robert Frank explains why. Hi, Robert.

Hey, Morgan. Well, the average rent for a Manhattan apartment hit $5,588 in July. That was an all-time record. Median rents also hitting a record along with price per square foot. In fact, you look at every measure of Manhattan real estate in the rental side, it hit an all-time record in July. Meanwhile, a lot of the U.S. is seeing rents moderate or even decline. Manhattan was up 9% over the last year, 2% month-on-month. Rents are now 30% higher than they were pre-pandemic. This despite the fact that New York's population is smaller than 2019 and offices are still half empty. The big reason for the high prices is that inventory

remains low. Much of the new construction in New York is condos and many would-be buyers are camping out in the rental market. But there are some hopeful signs. Inventory was actually up 11% in July, so that could start to ease some of that pricing pressure. And new leases, well, they fell 6% year over year. So that suggests that renters may have finally reached their limit on affordability. They're looking elsewhere or just moving back in with their parents. August is usually the peak rental month with back to school. So brokers say expect another month of records in August, then maybe, maybe flattening out or even decline in the fall. Morgan? I'm just wondering if there's any way to

know when you look at the median price or even the average price to know what the breakdown is of that apartment inventory. We're talking about studios or one bedrooms or two and three bedrooms and whether it's a reflection on the types of folks that are choosing to live in Manhattan and New York City right now? It's across all segments. So if you look at the price increases and inventory, it's pretty consistent. But Morgan, what I will tell you that's interesting about the segments, the highest price increases relatively are at the top. So if you look at, you know, it's 9% year over year, 30% overall since pre-pandemic. The studios are up about 14%, 15%. The three-bedroom plus, that's up 36% versus pre-pandemic.

So it's those bigger apartments that are commanding bigger price increases. And a lot of that are, these are buyers that can afford to buy. They're just waiting for prices to come down relative to interest rates and they can rent. And it's not uncommon now for rentals to be $20,000 and up. I mean, that part of the rental market was tiny pre-pandemic. Now that's a fairly substantial market. It's fascinating. Robert Frank, thanks.

We've got a couple overtime movers to tell you about. Check out shares of Flowers Foods, the maker of Wonder Bread and Tasty Cake, reporting earnings this hour, trading higher after EPS and revenue topped estimates. The company's CEO saying customers may be acclimating to higher prices. Shares are up 4% right now. Also, shares of thrift store Saber's Value Village. Those are jumping. Revenue topped estimates and same-store sales climbed 5.5%. Those shares are up almost 6%. Up next, the key economic data that could move the market tomorrow. And don't miss last call tonight at 7 p.m. Eastern. It's going to be live from the Tin Building in Manhattan, where Brian Sullivan will be speaking to some of the biggest names in the hospitality and real estate industry.

So you don't want to miss that. Welcome back to Overtime. Some weaker than expected inflation data today helping boost stocks before the afternoon fade. And we're getting another read tomorrow when producer price index, the PPI for July is released. The market is expecting a rise of 0.2 percent. That's slightly more than the previous month. We'll also get consumer sentiment. Expectations are for a slight increase versus last month. Our Mike Santoli is back with us to break it all down. Mike, we've seen CPI tend to track PPIs. The expectation that that could happen again here?

Yeah, I would think so. I mean, PPI is one of those indicators that is only a market mover in certain periods of time. And this might be one of them. We're waiting to see if things like the uptick in energy prices is filtered through. And the other thing is, even though today's CPI number was generally reassuring and perfectly consistent with the disinflation theme, we also had this sense out there you can make the case that it's going to get slightly tougher from here. So probably something similar. I think tomorrow's data in general might be a little bit of an interesting test of what is the market more afraid of. Is it you know inflation remains sticky and we have to worry about longer term yields or is it consumer confidence and sentiment

has a further gain. We start to feel as if we're reaccelerating on the consumer spending side and then it becomes a little bit of a more of a push toward toward the inflation story remaining with us for a while. There was a time the inflation expectations number in the University of Michigan consumer sentiment data actually mattered for the markets. We'll see. All right. We're also pushing up against seasonality. I mean, it's August. You see the volume drain happening as people go on their summer vacations. And then we know September is historically not a good time for the market. What are you watching in terms of in terms of those levels? And I guess in terms of

indicators about where we go from here? Yeah, there's a sort of a mechanical kind of sell instinct in the market at the moment. And it's been explained, you know, by basically some of the more systematic traders are out there feeling as if they don't actually have clearance to raise exposure too much more. They came into August with a lot of exposure to equities. Volatility has ticked higher in their models. It means they sell some.

So that's, I think, caused some of the churn in this market. We've absorbed pretty big pullbacks from the leading stocks. So in terms of levels, anything down toward, you know, 4,400 would be an absolutely minimum, no big deal pullback. I think we'd be kind of lucky if that's all we got on this look. But we'll see if we do.

It's a couple percent from here. And we know you'll be charting the moves as we get them. Mike Santel. The Etch-a-Sketch, it works, yeah. Yeah, yeah. All right. Thanks for joining me today. And just another check on the markets right now.

All the major averages did finish the day fractionally higher, except the small cap, Russell 2000. That's going to do it for us here at Overtime. Fast Money begins right now.