Closing Bell - Closing Bell Overtime: Why The Fed Should Cut This Month, According to Neil Dutta; ServiceNow Sinks On Downgrade 7/8/24

Episode Date: July 8, 2024

Renaissance Macro’s Neil Dutta makes the case for the Fed to cut rates at its meeting later this month. Shield Capital’s Raj Shah on how Silicon Valley learned to love the defense industry. Guggenheim’s John DiFucci downgrades ServiceNow.  

We had an up-and-down session to start the week, but the NASDAQ and S&P 500 setting intraday records. We'll see how they close. The NASDAQ definitely notching a record close. Chip names saw a nice bounce. That's a scorecard on Wall Street. But winners stay late. Welcome to Closing Bell Overtime. I'm John Fort with Morgan Brennan. Well, coming up on today's show, defense investor Raj Shah joins us to talk about Boeing's guilty plea and the companies in the space he's most excited about right now. Plus, could the Fed surprise the market and cut in July? We will discuss with Renaissance Macro head of U.S. economics, Nell Dutta, who said Friday's jobs number could be a game changer for the Fed's plans. And we will talk to Afsanin Beshlos, the CEO of global

investment firm Rock Creek, for her latest read on markets and how global election surprises are impacting her investment choices. And of course, let's dig into the markets now. New intraday highs, yes, for the Nasdaq and the S&P 500 ahead of a big week of Fed testimony. Bank earnings at the end. Let's bring in our market panel. Joining us now, Ryan Dietrich of Carson Group and Nicole Webb of Wealth Enhancement Group. Welcome, guys. Looking at these numbers, looks like Apple quietly retook the market cap crown today, edging Microsoft as the S&P tech sector leads up a little bit more than a half a percent.

And, Nicole, you both expect stocks to move higher from here. The question I have is how much. It better be more than 5% over the next 12 months to beat low risk fixed income, right? Yeah, absolutely. We actually think there's going to be quite a bit of churning here. You know, when you see historically an overbought market like this one, we do get some churn higher in the months to come. And look, we're going to continue to expect to see kind of this level of defensiveness, continued earnings per share growth out of these mega tech names. And so as we count down the days to those earnings coming in, we think that the market will respond favorably.

And we also look forward to Fed testimony this week as we start to expect to hear more about a normalization cycle versus a rate cutting cycle. And so we are very hopeful that the Fed moves towards not a reflexive cut on the back side of something where they waited too long, but instead taking kind of cues from abroad where they'll start to test the waters and bringing rates down. OK, now, speaking of cuts and feeling bullish about stocks, Ryan, why do you think we get two cuts this year? And perhaps more important, is it a threat to your bull thesis if we don't? Yeah, John, thanks for having me back. And first off, no, we don't think that's a threat.

I mean, let's talk about what's going on with inflation. It does come down to that. I know we've got the CPI and the PPI, but as we all know, the PCE is the Fed's favorite measure of inflation. The core PCE has 178 components. Let's keep this real simple. 34% of those components are negative year over year. So outright deflation. That's more than we've seen in late 2019. There are really some positive signs. Used cars down five months in a row. Grocery store prices down four months in a row. We get it. Shelter, shelter, shelter is the issue. But John, there are big improvements under the surface. We're optimistic. We're going to see that. And I mean, the truth is this, the Fed, I mean, I know I saw

Neil Dutta's up next. He's going to say maybe it should cut in July. I'm not disagreeing, but I don't think they're going to. I think they're going to set the stage for that. They're going to cut in September and likely in November again because inflation is coming back. And we do not think it's a bearish signal. We think the economy is still strong. We can get into that stuff. Bottom line, again, is this is a bull market. Been coming on with you guys for a while saying that. It still looks pretty good to us. OK. So, Nicole, we know that the Magnificent 7, or maybe as I think you would put it, the Mega 6, have really led a lot of the gains that we've seen through the first half of the year. We also know that they've led a lot of the earnings growth.

Earnings expectations are really strong here for the second quarter as that season kicks off really, I guess, sort of officially starting on Friday. Expectations of 9% year-over-year growth earnings per share by FactSet. How much of the onus is now on these mega cap tech names to deliver for us to continue to see the S&P move to record high after record high, given valuations are as rich as they are? Yeah. I mean, you have this confusing convergence of a lot of themes. And so whether you try and navigate in isolation or you try to bring them all together into one picture where you have all of these tailwinds butting up against headwinds. And, you know, what we want to believe

is that we are still in a bull market, that we do expect to see earnings growth that is possible, especially with a GDP backdrop around 2%. That mega technology here in the second quarter is probably, there's going to be a lot of lift for them to do. But in the back half, we actually see those earnings numbers coming through for more of the breadth of the market. That rate cut expectation, you know, sitting at 80% for September, that's favorable for the market. And the data is starting

to really support that on a month-by-month basis. And then we really do believe that you're going to continue to hear stories about productivity, advancement, and cost cutting, all from investment into AI. You saw the response today to Corning. Those stories are likely to continue as we give more time to 2024 calendar year. So Ryan, it looks like we've had our 35th record close for the S&P 500, albeit just barely here today. 55.72 looks like it's where we're shaking out here with the close. What would it take for you to have pause in this bull market? Yeah, and if you extrapolate that out, we're looking at close to 70 all-time highs this year. Who knows we're going to get there. That'd be like one of the most ever. But to us, it's kind of the leadership, right? The message of the market. And

what I mean by this, look at what's lagging. So you think we're going to get to 70 all-time closes? No, I don't think we will. I don't think we'll quite get that many. We think there's a lot more coming, though. I don't think we're going to quite to have that many because, again, election years, I know I sent you guys this chart. These three months we're in right now are usually really strong in an election year. But listen, in September, October, the nervous delis come out. We'll probably get some volatility. Perfectly normal. We're still pretty optimistic here. Don't get me wrong. But what's driving us?

What's going on here? I mean, I love the conversation we just had here. But earnings continue to impress and profit margins continue to expand. When you have those two tailwinds, there are a lot of headwinds out there, sure. But those two tailwinds are a big reason we've been overweight equities all year. We've been overweight equities since December of 22. We still think there's still the path is higher. One more comment on the previous conversation here. Yes, we look at small and mid. I know they're dirty words a lot of times because small caps are flat on the year with the S&P up 17% total return. But once the Fed

cuts, look at history. Once the Fed starts cutting, that's when you really start to see some outperformance. So do us small, mid caps, financials, industrials, those cyclical areas. We think those will do pretty good the second half of this year. Do not get all in bed with the large caps because they've done so well. We've got exposure to them. Don't get me wrong. But we just think some other areas will probably do better second half of this year. Yeah. I think a lot of people would like to see that expansion beyond the narrowness of those mega cap tech names we've been talking about day in, day out. All right, Ryan, Nicole, thanks for kicking off the hour with us. Thank you.

With record highs for the Nasdaq and the S&P 500 yet again. Well, earnings season kicks off Friday, as we just mentioned, big bank results. There is one name that is dominating everyone else. Let's bring in senior CNBC senior markets commentator Mike Santoli for more. Hi, Mike. Yeah, Morgan, we've hit this before in many sectors. There is one kind of clear leader quality name that really has been trouncing the rest of the group. And over the last couple of years, this has been obviously J.P. Morgan within financials up close to 80 percent over that span. You see, obviously, where the divergence happened with the broader list of banks. That's the KBE. That was right around the Silicon Valley bank crisis. Now, the XLF has done pretty well. That's the

financial sector more broadly. What else is in there? Well, Berkshire Hathaway, Visa, MasterCard, all the exchanges, all the asset managers. In fact, banks proper are only about 25 percent of the financial sector. It's still holding up OK, but not really doing a lot in terms of leadership over this two year span. Arguably for banks themselves, expectations are pretty much in check going into this reporting period. Now, take a look at J.P. Morgan having overtaken ExxonMobil in market cap again. And that has happened before, which is somewhat remarkable in the sense that ExxonMobil at various times in recent decades has been the very largest company in the stock market. You see right here we're talking about operating just below the top 10 total market cap companies. They're kind of commodity businesses, let's be honest.

Banks and energy, the low multiple, kind of slower growth. And you also see Bank of America, the number two in banks, also basically nosing ahead of the number two within energy right here, too. So this is together all these one point seven trillion dollars of market cap. It's, you know, just a little bit more than meta alone at this point. It's really fascinating. It does speak to whether it is an Exxon or whether it is a J.P. Morgan, the defensiveness of these names within these sectors in the market more broadly, which I know you've talked about quite a bit on this show. I am curious, though, the fact that J.P. Morgan has overtaken Exxon,

is that more of a reflection on J.P. Morgan or is that more of a reflection on Exxon, especially as we do look to bank earnings, where I think there's going to be a lot of focus on consumer credit trends and also investment banking and specifically dealmaking? In this instance, in the last several months, I would say it's a little more about J.P. Morgan. You know, ExxonMobil, it's basically been knocking around these market cap levels for a while. I think there's a sense out there that the very largest energy companies have a bit of a ceiling just in terms of longer term demand. Now, when it comes to J.P. Morgan, I think it gets this premium because it is so bulletproof to most of the macro influences. It gets the credit for being conservatively capitalized at a time when other banks are crying they want lower capital standards. So I do think there's a lot of regard built into the multiple for J.P. Morgan. But, you know, it had a bad reaction to last quarter's earnings.

Let's remember, because they were a little bit downbeat. We'll see what happens this time around. Indeed. Coming up this week, Mike Santoli. We'll see you in just a little bit. After the break, will the Fed surprise the market with a cut at its July meeting? We will ask Neil Dutta from Renaissance Macro, who says the tradeoffs for the Fed have shifted after last week's jobs data. And later, shares of ServiceNow finishing near the bottom of the S&P 500 today after Guggenheim downgraded the stock to sell, saying the AI hype might not pan out. We're going to talk to the analysts behind that call.

Overtime is back in two. There is very little drama in the U.S. economy at this point. Things are chocking along at a fairly steady rate. So in that sense, there's just no really reason for the Fed to cut rates at the moment. That was Apollo Global Management's Torsten Slaag with us on Friday, sticking with his call for no rate cuts this year, despite a slowdown in the labor market. But others are saying the Fed needs to get on with it already. And joining us now is Neil Dutta from Renaissance Macro Research.

Neil, good to see you. You say it's time for the Fed to cut now. You also say at the current pace, the unemployment rate will hit 4.4% by year end. Now, if you're right and that happens, why not just wait until 2025 to cut? So an unemployment rate, I think, of 5 percent or less is often considered full employment. Well, I don't think monetary policy is a light switch, John. It's not on or off. The Fed can be nimble and flexible and recalibrate before things get really bad.

And remember, the risk with unemployment is never that it just goes up a little bit. It either goes up a lot a bit or barely at all. So I think that that's important to think about. And that's what I mean when I say the tradeoffs have shifted. You look at the unemployment rate. It's been rising one-tenth of a percent every month for the last three months. The last time we saw anything like that was in 2016. If you'll recall, the Fed thought it was going to hike four times that year and it ended up going just once. So I think it's important for the Fed to kind of get on the right side of the eight ball here, recalibrate policy. We know that unemployment is rising. That means

that there are more people out there competing with those that are already working, pushing downward pressure on the wages of those that are working. And at the same time, we know that inflation has been slowing. And we also know inflation is a lagging indicator. So whatever inflation is right now, that represents where policy was yesterday. So to the extent that policy hasn't changed and inflation is still slowing, suggests that there's a little bit of inertia behind both of these things. So I do think the case for cutting is strong. And I do think the Fed is going to cut, frankly, at least twice this year. Well, you mentioned labor supply. If rates where they are

has helped to drive an increase in the labor force participation rate and other measures there. Isn't that a good thing? Yeah, it's a good thing. But, you know, ultimately, it's about the unemployment rate and inflation. I mean, if there are more of people looking for work, that's going to put downward pressure on the wages of those that are working. Either, you know, what will be more likely is that they just don't see their pay increase, which is, in fact, what's happening. There's a bit of, you know, sort of wage rigidity. But that's disinflationary at the margin.

I think all that means, that's an argument from my perspective. The fact that the prime age participation rate's gone up, that's only a reason for the Fed not to cut a lot. It's not a reason for them not to cut at all. And just to keep in mind, the economy is growing at the moment below potential, right? I mean, we know this because the unemployment rate is rising. But more importantly, if you look at where GDP was in Q1 and where GDP is tracking in Q2, you're talking about something that's running about one and a half percent. The Fed believes longer run potential is around 180. That's why the unemployment rate's going up in the first place. I mean, if the economy can't grow at potential, that means that you're not growing fast enough to

keep the unemployment rate from rising, which is exactly what's happening. Yeah. So, you know, this is about risk management. Right. I mean, tell me what what is the right side, right tail for GDP growth at the moment? It's really tough to come up with one. Yeah. I mean, there are downside risks. So the Fed should lean against those risks. It's not a very complicated call. And to your point about the data we have been getting, that to me was one of the most notable things out of Powell in Portugal last week was the emphasis he was putting on the dual mandate, which up until relatively recently was not being talked about so much. It was really the focus was almost solely on inflation. So it raises the question, especially as you talk about the fact that the Fed needs to start cutting and you're forecasting two this year. Rate normalization versus cutting cycle. What does each one look like? What do you suspect we get, especially knowing that a cutting cycle would probably be signaling that we're on

the verge of recession? Well, I don't know that a cutting. No. See, I think that that's part of the issue is that this sort of on and off switch. The Fed can cut sometimes when there's no recession, like 1995, like 2019. I mean, there are times in recent memory where the Fed can cut without a recession happening. And I think this is going to be more like that than something like, you know, 2001 or 2007, 2008. You know, household balance sheets are fine. You know, we don't have broad asset deflation. We don't have a corporate balance sheet recession. So I think what that does is basically put a limit to how much the Fed can cut. I think it's really hard, at least for me, to see the Fed cutting more than 100 basis points over a one year period. So if they start in September, I mean, that's kind of where I'm at, because I do think that cutting by that much will probably start to perk things up in,

you know, credit-sensitive industries like housing. But that doesn't mean, I mean, but the idea is to kind of get on with it soon so you don't have to go a lot later. You shouldn't be, I mean, if you're waiting for it to become so obvious that there's no alternative but to cut, you've waited too long. And I think that's a bigger mistake. So I think, you know, to me, it's about tradeoffs. That's what policy, food and monetary policy is about. And the Fed believes they're running a very tight policy, right? So they should be far more concerned about downside risk to GDP growth than upside risk to inflation. So to the extent that growth has been slowing and unemployment's been rising,

that's, I think, what you're getting at with these risks now better in balance. It gives the Fed some space to ease. Okay. Neil Dutta, great to get your thoughts. Of course, that points us right to the neutral rate debate that we've been seeing begin to percolate as well. Boeing getting a fleeting pop this morning on news that the company has pled guilty to criminal fraud charges following the 737 MAX crashes. Up next, we will ask defense investor Raj Shah how Boeing's guilty plea could impact its government contracts and more. Welcome back to Overtime. Boeing agreeing to plead guilty to criminal fraud and pay a fine of $243 million tied to the fatal 737 MAX crashes back in 2018 and 2019. The deal, which requires a judge's approval, would brand the U.S. aerospace giant as a felon,

but allows the company to avoid a trial. Now, this could complicate, potentially, the company's ability to do national security work with the U.S. government. Reuters just reporting the Pentagon will assess Boeing's DOJ agreement before determining how best to protect government contracts. Well, joining us now, Raj Shah, managing partner of Shield Capital, a VC firm focused on defense tech. He was also the managing partner of the Pentagon's Defense Innovation Unit and the author of Unit X, How the Pentagon and Silicon Valley are Transforming the Future of War. This is a new book focused on that tenure and on that relationship between defense tech and the Pentagon.

Raj, it's great to have you on the show. Welcome. Morgan, glad to be here again. So you're a defense and national security guy. I'm not going to ask you about the commercial piece of the business at Boeing, but I do think this highlights both the impacts that that business could have on the defense and space business of Boeing and also more broadly, this conversation, this debate you see playing out in real time around military readiness and the role of defense primes like Boeing and the need for some of these

new tech startups to be able to fill the void? Absolutely, Morgan. I think what the Boeing case and what we're seeing broadly is showing the importance of innovation, particularly software, and how it's changing aerospace and defense. You know, the locus of innovation has shifted to the commercial sector, right? The market caps of Apple, Microsoft, NVIDIA, each are 3x times the broad industrial base. And so for the Pentagon and the government to be able to work with these commercial companies that are different is really, really critical for our national security. So in light of that, when you see a report like we just saw from Reuters about Boeing, how is the scene set, I guess you should say? And I have the book right here because you have been instrumental in bridging the divide

between Silicon Valley and the DOD. But how is the scene set for some of these companies and these startups and these defense tech players to be able to come in and compete against the Boeings and the Lockheeds, et cetera, of the world, especially at a time where programs of record, we talk a lot about the valley of death when it comes to defense tech investing, when so many of those big programs are still going to the primes. Yep. So look, we've had almost two systems of technological production in this country, right? If you see on the cover of the book, you have an F-35 and an iPhone.

The F-35 is a fifth generation, basically flying computer, but its design was frozen in 2001 and didn't fly until 2016. At that point, the state of the art had already flown past. You know, your iPhone 16 now has 100 times the processing power of that aircraft. So how did that happen? You know, it's the speed of innovation has really changed. But Morgan, I tell you, the good news is that, you know, from 10 years ago when we were setting up the Defense Innovation Unit till today, we've seen a sea change both in the Valley, almost

$40 billion was invested by venture capitalists in national security and defense last year, to also some of the larger defense primes. In fact, my own firm, Shield Capital, has a partnership with L3 Harris to try to help merge the larger primes with younger VCs. Raj, back in 2018, in a way, it seems like ancient history now, there was employee backlash at Google over some government and military contracts. And since then, New York Times has documented this move of a lot of national security, former national security personnel into VC and private equity. To what degree has

that influenced the relatively higher number of exits related to defense tech in 2024? How do you expect it to continue to influence the amount of investment and the exits there over the next couple of years? John, it's a great point. I think we had a level of mistrust between the Valley and the Pentagon that is slowly starting to go away. When the DIU was founded and put together in 2016, then-Secretary Carter came out to the Valley to announce its launch and its purpose to bring innovation to warfighters. No Secretary of Defense had visited Silicon Valley in 20 years prior to his attendance. We also had the Edward Snowden disclosures, and it was the height of the mistrust, which was then in these Google protests for the Maven project. But I think since then,

we've seen a dramatic shift. I've never seen more engineers than ones who work on national security. They see the threat of authoritarianism, what's happened in Ukraine, what's happened in Israel, and they want to be part of something that's a solution. Plus, you're seeing the Pentagon now move more towards working with the Valley. There's a new collaborative combat aircraft program in which Andral and General Atomics, two nontraditionalitional suppliers were chosen as the winners. So I think that the future is very bright for this relationship. And, of course, we do have this NATO summit converging on Washington right now this week.

Whether it's Ukraine, to a certain extent the Middle East, we are seeing what the future of warfare looks like in real time right now. How does that speak to the role that software, AI, some of these new technological capabilities will play on the battlefield? How are you investing in that? I think it's an extraordinary moment in the history of war and conflict. Everything is changing. There was recent reports that our main battle tank, the M1A1, which we gave to the Ukrainians, have been pulled from the front lines because small, low-cost drones have rendered them unsafe. This is a sea change from how a multimillion-dollar tank fights against a drone.

So you're seeing advances in AI, robotics, autonomy. And so I think you're going to see a significant amount of investment continuing to grow in the Valley and with NATO, which has recently put together a billion-dollar euro fund to invest in these future technologies and startups. OK. Raj Shah, Shield Capital Managing Partner and author of Unit X. Congratulations on the book and thanks for joining us. Thanks, Morgan. Appreciate it. It is time now for a CNBC News update with Contessa Brewer. Contessa.

John, Panama is using barbed wire fencing along the Darien Gap and other major routes in an effort to block migrants who are heading for the United States. The Panamanian Public Security Ministry says it put up the installations. It doesn't appear to be working. In videos on WhatsApp seen by NBC News, it shows that the migrants are getting around the wire fencing by going under it. We'd love to show you, but another time. Alec Baldwin's role as co-producer is not relevant in the fatal shooting on the set of the Western movie Rust.

A New Mexico judge ruled in a pre-trial hearing evidence related to that role will not be allowed at Baldwin's manslaughter trial. That's supposed to start tomorrow. Authorities say Baldwin was rehearsing with a prop gun that accidentally discharged a live bullet, killing the film's cinematographer. Millions of Americans who develop heart disease may not be able to get the care they need. New research from the Journal of the American College of Cardiology finds nearly half of all counties in the United States don't have a practicing cardiologist. So that's about 22 million Americans who need to travel 90 miles, more or less, round trip, just to be able to get care.

That's a lot. Yeah. That's an important issue for sure, linked to all kinds of career and economic issues. Contessa, thanks. And coming up, Paramount's next act, the drama surrounding the sale of the company, appears to be ending as David Ellison's Skydance buys the storied Hollywood firm.

Up next, Mike Santoli looks at how Paramount stock has performed against its peers. We'll be right back. Welcome back. Shares of Paramount closed lower today after agreeing to merge with production company Skydance. Mike Santoli is back with a look at how Paramount has performed compared to its peers. Mike? Well, John, I mean, I think we all instinctively know that the market says new media is where it's at, old media not so much. Even though Paramount is a culturally important and, of course, coveted company, right?

CBS Network, Paramount Pictures, The Godfather. But look at the three-year chart here of Netflix and Spotify moving exactly together on the same trajectory, even after that bear market in 2022, when everything was sort of considered similar in media. And then since then, Paramount, as well as Warner Brothers Discovery, two of the pure play older media companies linked to linear networks. It shows you really dwindling assigned value here. Those together are $25 billion in market cap. Spotify and Netflix together are like $350.

Take a look here. A very similar story within communication services. In 2018, this new category of the S&P was created because telecom was getting to be too small. It was like 3% of the S&P. And they telecom was getting to be too small. It was like 3% of the S&P. And they took the Meta and Google from tech. And what you see now is just almost exactly as lopsided as it used to be. It's now a much bigger part of the S&P, except the old telecom, AT&T and Verizon are similarly small. So look, the market's going to go to where the longer term perceived secular growth is, even if it overpays for it in the near term, guys. Mike, it's going to go to where the longer term perceived secular growth is, even if it overpays for it in the near term.

Mike, it's interesting in that first chart. It seems like there was this idea until a couple of years ago that the traditional media players would strike back against Netflix, against Spotify, the new media distributors and sort of match their digital content creation capabilities. But it got awfully expensive to do that. How much do you think that that shift, at least in investor perception, is what influenced the different trajectories? I mean, it's a huge piece of it. There was a sense out there that things were moving so fast to streaming there was going to be room for everybody. Of course, Disney, which was not shown there, did get to scale on some level. And then it sort of plateaued as an industry.

And yes, the cost of participation remained too high. And I think also just the undertow of linear TV shrinking more quickly than even some of the pessimists thought might be the case has created the situation we're in right now. All right. I mean, I'm just I'm still wrapping my head around the losses we're seeing on that chart for some of these legacy media company stocks. Mike Santoli, thank you. Up next, Rock Creek CEO Afsaneh Beshlas on how wild election swings in Europe could impact your money here in the U.S. Plus, a top software analyst reveals his best AI bets for the second half and the big name he just downgraded to sell. We'll be right back. Welcome back to Overtime. More than 80 countries, about half of the global population,

goes to the polls this year. It's a historic amount of elections. Some surprising results like this weekend's election in France. But one thing that's sustained so far across many of them, backlash against incumbents. So what does that mean for risk in the markets? Well, joining us now is Afsanin Beshle, Rock Creek Group founder and CEO. It's great to have you back on the show. Welcome. Great to see you, Morgan. So it has been interesting to see with just the election outcomes in the UK and France over the past week, the fact that there has been this pushback towards incumbents. We've seen some significant changes through these election outcomes to prospective future policy, an injection, I would argue, of volatility into the markets, not just domestically, but globally. How does this now play out? How does it reflect

back on what we've seen across the global economy? It's been so interesting when the French snap election was called, you remember, just a few weeks ago, you had French markets fall by 7%. The very interesting thing that happened over the weekend is how UK and France sort of ended up in the same place in the sense that they ended up with left and left-centrist governments, but in such different ways. In France, you expected Marie Le Pen's party, the very far right party, to be the winner of this race. And it was a very big surprise over the weekend when they did not win.

And you saw the impact on the market being, I would say, relatively positive in the sense that French markets today were sort of sideways, slightly down. Although in the longer term, because you've got the three parties all with different shares in terms of their election results. But with this big surprise, there probably will not be a very big impact in terms of new economic changes in France. The U.K. was completely different, though. U.K. labor came back very strong. It was expected to win. And labor really won on bringing stability, job creation, growth.

So very different things than maybe labor of the past. OK. So given the fact that we've just come out of these elections in both the UK and France, given the fact that you do have an ECB that has already started to cut rates and a BOE that is expected potentially to start very soon here. Does it mean that Europe is investable? So Europe has become more investable. There are different parts to Europe. France obviously has been becoming more like southern Europe.

UK has done really quite well on the expectation that this Labour government would be winning and would be changing economic policies. So if you look at equity markets in the UK, they've done quite well. Other parts of Europe, like the Netherlands, Denmark, of course, with this particular stock they've had, whether it's clean energy on one side or on certain drugs for weight loss on the other side side has done really quite well as well. So when we talk about Europe, it's very different kinds of markets with very different politics and very, very different markets. Asana, good to see you. So the Trump presidency was characterized in part by tariffs and some breakdowns in traditional global alliances, the betting markets are seeing more likelihood of another

Trump presidency over the past couple of weeks. How does that affect the way one invests? The interesting thing with increased potential for the Trump presidency is how it has impacted. Initially, you saw after the debate, interest rates go up slightly because it's seen as a highly inflationary impact if that was to come. And the reason for that is, obviously, immigration policy will be more restrictive, so wages would be up. Tariffs, as you said, would be up, so that would increase prices of goods. But I would say on top of all of that, it's what Ewan Morgan said earlier, which is sort of this volatility, which in the U.S. has been extremely low at around 12 percent, with a VIX level of 12 as we speak, is most likely to go up as we get

closer to November. And if the chances of a Trump presidency becomes even higher, uncertainty increases. Markets don't like uncertainty. And that could have a very major negative impact. Well, I also want to ask about emerging markets. To what degree can you invest based on demographic trends in EM? I'm thinking in particular about India, the youth boom it's projected to experience over the next two decades. Is that a really important, reliable data point? To what degree do other things intersect with that that make it less reliable? So I think no question demographics is important. China has had negative demographics in the sense that they have had lower childbirth, and so a larger population that is getting older with very, very heavy health and Social

Security-related costs in the future in China. In India, you do have a younger population. In Africa, you have a younger population. In parts of Latin America, you have relatively younger populations. So that certainly has a positive impact. I think you have to look at the demographics together with the impact of climate change, where the particular country is situated with the growth and the politics again. Morgan said earlier, there's elections going on. There are a lot of elections that have just happened, as you just mentioned, in India. South Africa had an election. A lot of these elections are also

having major impact in the sense that what we saw in India initially was seen as maybe a little negative because Modi got less votes than he expected. Maybe if India is more democratic in the long run with good economic policies, it will be a powerhouse. With Powell on the Hill the next two days, I do want to get your thoughts, given the economic data we've seen here in the U.S., whether you think the Fed cuts this year. I'm pretty, I should say, I was going to say I'm pretty sure. I really do think that it's unlikely they would not cut rates in September. I think he would want to start getting ahead of the changes that are happening.

He's very data driven and and he is going to probably mention again his approach, which is to look at data tomorrow when he speaks. And what we're seeing is the earnings reports that are coming out are probably going to be strong, but maybe not as strong as everyone expected. Employment is getting a little softer. You're having the various indicators point towards slight softening, even though growth rates are high relative to the rest of the world, they're still softening a little bit. Consumer is strong, but has been borrowing more. So all of that, I think, may lead very well to at least 25 basis points in September and at least one more cut later this year. Okay. Afsaneh Beshlos, thanks for joining us. Thank you. ServiceNow, one of the worst performers in the S&P 500 today after Guggenheim downgraded the

stock to sell. Up next, the analyst behind that call explains why he's worried about the company's generative AI business. And check out shares of Corning, the big winner in the benchmark index. After hiking its second quarter sales guidance, the specialty glassmaker CEO saying growth is being, quote, primarily driven by the strong adoption of our new optical connectivity products for, what else, generative AI. Shares finished up 12 percent. Stay with us. Welcome back to Overtime. Shares of ServiceNow taking a hit today after Guggenheim downgraded the stock to sell, gave it a price target of 640. See it there, down about 5%. Guggenheim,

the only firm on the street with a sell rating on ServiceNow. And joining us now to discuss his downgrade and the broader impact of AI on software is Guggenheim Senior Managing Director John DeFucci. John, good to see you. So I was looking back, January 2023, you downgraded Microsoft to sell from neutral when it was at 240. It's at 465 today, up 94%. You downgraded some others at the same time, including Palo Alto Networks to neutral from buy. It was at 145. Now it's at 335, up 131%. So why is your methodology better this time? Thanks, John. You missed that we upgraded Microsoft though soon after. We did downgrade it, but that's a different call.

On ServiceNow, why is the methodology different? It's different every time, right? Why is it better this time? Listen, we just make calls based on the data that we look at, and the data we've looked at is data from partners that we talk to every quarter. We talk to several partners. We talk to other industry experts.

We comb through data that the federal government puts out for federal government business. And it all points to ServiceNow being a great company, just like every company you just mentioned, both of those two companies, just about every software company that's a public company is a great company. But that doesn't mean that if a stock is priced for perfection, it's going to execute on perfection going forward, even if it has over the last year and a half. So we expect that in the second half, those numbers are going to have to come down. And it's not their fault. I mean, it's happening for a lot of companies out there, but it's going to happen for these guys too. That's what we think. Okay. Interesting. Now,

I believe you say here in this report, ServiceNow seems to be expecting an uptick in gen AI business in the second half, but our fieldwork indicates this is not likely until 2025, if ever. Now, we've seen certainly from the hyperscalers, the sort of cloud infrastructure providers, an expectation of continued Gen AI momentum. It seems like that only happens, it only works, and some of the application providers that are working on top of those platforms also see growth? Are you just not expecting that ServiceNow is going to be one of them? I think you will see growth in spending on AI and AI will change the world. It really will. And Gen AI, because everybody can

use that, any of us can use it. You can use it with natural language, either typing or talking. At the same time, I think that a lot of that, the monetization of that will be difficult for a lot of companies, especially in the application space. There'll be companies like Microsoft Copilot, right? Microsoft 365 Copilot. That's a near monopoly business. They'll see benefit, though. If they add incremental value, they'll be able to charge for it. Other areas of software are a little less certain. And in the application space you're talking about specifically, areas like, it's hard to say that ServiceNow is going to benefit.

They're not benefiting much at all right now. It's hard to find anybody that's bought it other than the partners that are buying it for themselves. It's hard to find enterprises across the world buying it. And we've been talking about this, right, that AI is disrupting software, you know, turning it on its head, and specifically in terms of some of the investment dollar flows and where those are going right now from customers, et cetera. So if not service now, what would you be buying right now from customers, et cetera. So if not ServiceNow, what would you be buying right now, looking across your coverage universe? What is set to be an immediate beneficiary? Yeah, Morgan, so John mentioned all the spending that's being done in public cloud. Well,

you can buy those players. You can buy Oracle, for instance. They're seeing a big benefit in their OCI, Oracle Cloud Infrastructure. If, by the way, it costs a lot of money to run AI workloads, and if you need really high performance, well, OCI might be the biggest beneficiary out there over time because it can provide work, it can run workloads at a lower cost and better performance. So I think that's one you can buy. Another one is some areas of security. Security will likely benefit from AI because one of the things that AI also does, it puts it in the hands of the bad guys. And there's going to be, we're going to need more security. One of those players out there is CrowdStrike. And that's

somebody that's always led with AI. It's been part of what they've always, it's part of their DNA. So those are a couple that you can look into. Okay. And certainly a name known to overtime viewers. John DeFucci, thanks for joining us. Thank you. Investors could get new clues on a potential interest rate cut when Fed Chair Jay Powell testifies on Capitol Hill starting tomorrow. Your Wall Street look ahead. That's coming up. Welcome back to Overtime. The Fed will be in focus for investors tomorrow when

Chair Jay Powell gives his semiannual testimony on monetary policy before the Senate Banking Committee. Wall Street will be closely listening for any new clues on the timing of a potential interest rate cut. We'll get more in the House testimony on Wednesday, too. Boeing could be a big mover when it reports its June orders and deliveries data and gives any indication about when activity could again pick up. We will also find out whether used car prices continue to decline when the Mannheim Used Vehicle Index is released. And keep an eye on defense stocks tomorrow as the NATO summit kicks off in Washington, D.C. And that's just the next 24 hours, John, because we've got earning season kicking off.

We got CPI, PPI. And we do also have University of Michigan Consumer Sentiment Index, too. I've got to go back to software. You know, we're just having a very stimulating conversation about service now in the broader enterprise space. I think that's a key question for investors right now is what do you do with AI winners? Because it touches on the mega caps, your Microsoft's, your Amazon's, NVIDIA certainly, but also smaller but still quite large enterprise software names like a service now. Do you try to time the market and win against them? Yeah, we'll have to see. I mean, in the meantime, you do have such lofty expectations for Q2 earnings, so we'll be watching that as well.

That does it for overtime. Fast Money starts now.