Power Lunch - Concentration Situation, Used EV Sales Charging Up 6/20/24

Episode Date: June 20, 2024

Amid Nvidia’s record run, the stock market concentration has piled into just a handful of big tech names and some leveraged ETFs…but not much else. We’ll discuss the ramifications.Plus, sales of electric vehicles have begun slowing down, but used EV sales are actually charging up. We’ll dig into why that is with Erin Keating of Cox Automotive. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch. Alongside Kelly Evans, I am John Fort. And stocks are off the best levels of the day, with the exception of the Dow, which is at the day's highest thanks to Salesforce and Chevron. The S&P 500 and NASDAQ both touched records earlier in the session before dropping. The NASDAQ just might snap a seven-session winning streak here. InVIDIA has something to do with that. It also hit a new record before pulling back. You can see it down 2.5% now and giving up that market cap leadership back to Microsoft. Other chip names are rallying today.

AMD up 4.5%. It was named a top large-cap pick for the second half of the year by Piper Sandler. Well, let's begin with more on this market concentration into just a handful of big tech names and some leveraged ETS, but not much else. Kate Rooney has more on that trend for today's tech check.

Hey there, John. Yeah, so individual traders have actually been under-participating in the market lately. Turnover for this group, which is essentially total buys and sells. It's at the lowest level we've seen since before the pandemic. That's according to data from Vanda research, they are concentrating on

just a few pockets of big tech. You got the Mag 7, Invidia, and then these turbocharged Nvidia plays with leveraged semiconductor ETS. And then when it comes to mega caps, Vanda shows roughly 29% uptick, rather, in purchases of the Mag 7 as a percentage of total trading. This is an increasingly crowded position, guys, according to Bank of America's Global Fund Manager survey, Long Mag 7 is now the most crowded trade. on record. Retail traders are also over indexed to NVIDIA. It's the most widely held named by individuals topping Apple and Tesla. You can see there. And then just owning NVIDIA. It's not enough for some people. They're looking to amplify the upside and the potential

downside. You can see the dynamic with the popularity of these long levered ETFs. There's the NVDL ETF. It's a two times Nvidia leverage fund up 500% this year. The S.OXL offers about three times leverage of the overall chip sector. All of this leverage guys, also tends to amplify the downside as well. And then right now at least, the narrow strategy. It's actually working. Retail has been outperforming the S&P. There are, of course, risks in being so heavily indexed to big tech. And this whole AI story, all of this retail interest is resulting in growing short interest as well, which could add it to some of the volatility in these names, guys. I mean, up 500. I would like to get in on that trip, up 500%. Who's not sitting there thinking,

gee, I mean, that's easy money. It's free money. So now what? I mean, that's the $3 trillion question. Right. I mean, it's reinforcing, Kelly, like you said, you could sit there and sit back and say, okay, I'm going to use the whole 60, 40 strategy and really bide my time and take maybe the Jack Bogle, boring investing strategy long term. But, you know, for a generation who's relatively new to this market might be driven by a little bit of FOMO sees that. It's reinforcing if you say, okay, I'm just going to buy a little bit, and then you're up and you're beating the market. You think of the long-term outcome here, which, you know, those with investing experience, a longer time horizon would say that's not the long-term investing strategy you want to take,

but in the near term, it's reinforcing. People see the wind. They see how well NVIDIA is doing. They want to amplify the upside. And as a result, you know, you're seeing more people pile in. I think that's the real dynamic here. I'm just glad it's in the S&P so that, you know, 401K, okay. Exactly.

Even if you don't want to be indexed to big tech, you kind of are if you just buy the index, right? Kate, thank you. We appreciate it, Kate Rooney. So how concerning is it for seasoned investors? that these market gains are so heavily concentrated in big tech. Let's ask Sarah Malik. She's Chief Investment Officer at Newveen. Sarah, what do you make of all this?

Welcome. Thanks for having me. We've got the NASDAQ up almost 20% and it's up for eight days in a row. But one of the reasons tech is doing so well is because economic data points are slowing and tech stocks tend to be less economically sensitive. However, looking at all of this,

the technicals and the flows in the tech does make them look overbought in the short term, the relative strength indicators show that tech is overdone at this point. So I wouldn't be surprised to see a shorter term pause. And then we wait until the next catalyst, which is earnings. And if tech drives second quarter earnings like it did with first quarter, that probably, again, is another support for tech to continue to outperform everything else. Right.

I mean, when you look at the fact that we'll call it the Fab Five, earnings per share growth in the first quarter was up 84%. And for the rest of the S&P or the typical S&P stock, it was up 5%. So I almost feel bad for the professional money managers. What do you do? You know, is it sort of prudent to take client money and say, well, let's make sure we're not overexposed to something like massive that could massively correct. But if you sit out of it, then you can't show the gains and you can't afford to do that either.

Well, given the structural tailwinds around artificial intelligence and the lack of supply of companies that are public that you can invest in, like Nvidia and Microsoft in order to take advantage of the AI trend, I think there's still going to be a lot of demand for these stocks going forward. But I think it's imprudent to also balance that on the other side. Look at other sectors that maybe don't sound as exciting. But for example, REITs, which have underperformed for two years, they tend to outperform in periods of rate pauses or rate cuts. They're cheap. They're trading at a discount to NAV. Look outside of the U.S. emerging markets, which are starting to perk up in certain areas. You can look at those like India now that the elections are moving behind them.

But there's other areas where you can find valuation, support in order to offset some of the premium that you're paying to be in tech. Sarah, how much is the overall market and market sentiment dependent on Nvidia now, given what we just heard from Kate Rooney about the leverage that many investors are placing on that? It's a very large stock in the market. It's heavily represented in the S&P 500. And it reports before the bulk of tech.

I believe August is when we'll expect new numbers from Nvidia. Well, Nvidia is definitely becoming the tail that lags the dog. The interesting thing that with Invig. is that it is not expensive versus a semiconductor sector. It's actually trading at a discount. It's crazy. It's not a stock that people, given the earnings worth that they've had, it's just not a stock that you're paying a lot for. That's why there could be a lot more upside given also the limited supply of AI stocks. But let's look at another side of tech where there's some value software, which has been beaten up so much year to date, techs up, you know, almost 50,

semi-fectors up like 50% year-to-date, software basically flat. This is areas where we can find companies that have good fundamentals like Snowflake, which is a decent A, I think software is a place where we can pick through the carnage and find some good stocks. That's really interesting because that was one of the unexpected losers initially from the roll out of this software. Maybe you and John know more about this than I do can explain is it warranted or not? You know, if you start to integrate AI tools into an enterprise product that makes people feel more secure about using it at work, it sounds like a boon.

If not, maybe it cannibalizes it. Well, there's these derivative AI plays like Snowflake, which is cleaning up the data that we need to use and therefore within the AII industry. their fundamentals were still pretty strong for the first quarter, some of the best revenue growth we've seen from them in quite a while. So I think there's these other companies that people are ignoring and overlooking because everybody wants to be in Nvidia. And it is a big benchmark name. So for portfolio managers that were not invested in some of these AI stocks, they're losing if they cannot get to a neutral and overweight in some of these stocks like

Nvidia and Microsoft. Plus, Sarah, we've got this unusual bifurcation, I think, in software, where small caps are really suffering. Usually when you see one of these, big, new generational shifts in software, it's the newer disruptive companies that are getting the benefit from that. But in this case, we see the hyperscalers and semiconductor names getting the benefit and some of the smaller caps are suffering because of what's been happening with the Fed. What turns that around potentially? Does it have to do with the macro data that we get? And I'm talking software overall in the smaller cap names in particular, or is it evidence that there are winners emerging in this AI race of the smaller size. I think there's two things to

consider with what's going on with small cap. First of all, this tech cycle is different in the sense that the large company spent tens of billions of dollars investing in artificial intelligence. They got such a head start that they are the clear winners. That's different than the late 90s where there were these small companies popping up left and right. We all remember ipet.com, which we're trying to get into the internet and then eventually failed. Now small caps, if you look at they tend to outperform in a cycle, it's when you're coming out of a recession. We can talk a little bit about how we are seeing early signs of a recession coming, but it's not here yet. So when I want to own small caps, it's a little bit before I see the bottom of a recession. And we're just not there

yet since we're maybe just seeing early signs of a recession coming. All right, Sarah, we appreciate it today. Thanks for your time. Thanks for having me. Sarah Malick. Well, so far in June, technology has been the best performing S&P 500 sector, up 11 percent, while you, Utilities is the worst group, down 4%. But with a lot of the country experiencing a heat wave, could utility stocks heat up as well? Pippa Stevens is right here to tell us. Pippa?

Hey, John, well, more than 100 million Americans are facing extreme heat, and when consumers turn up their ACs, that can be good for utilities, since they sell more power. And that translates to higher revenue and earnings, although there are some caveats based on which state a utility is in. But one group that could really do well here

is the independent, power producers or IPPs, like Vistra, Constellation, NRG and Talon, which operate in restructured markets. Basically, they only own generation assets and sell into competitive markets, and so when demand rises and power prices are higher, they make money. And while extreme heat might not have an immediate impact on regulated utilities, longer term, it's yet another strain on the grid, which helps utilities case when asking regulators to approve higher rates to pay for more capital investment. And with AI-DGELD, it's a lot of the grid. And with AI-D, it's a lot of the grid. driving power demand, Bobby Edameka, who manages PGM Genison's utility fund, told me that in the

25 years since he's covered the space, the fundamentals behind the sector have never been more positive. For a long time, it was just seen as a bond proxy, but things are getting a little more interesting here. What about blackouts and old grids? I mean, you've got the supply of power to satisfy demand. I guess that's good, but what if that breaks down? Yeah, so far we haven't seen any cases of rolling brownouts or entire blackouts just yet. But a lot of that is because utilities are now focusing on demand response programs. So I'm in New York. I have Con Ed, and they texted me on Tuesday saying, please don't use your heavy load between 2 and 10 p.m. So they are trying to shift some of those heavy energy users like your washing machine, your dishwasher, things like that.

And so that's been a big initiative to get consumers in front of it. And in some markets, they'll actually reward you. It will lower your utility bill if you do shift your load. And so that's really been helpful here. But then again, we're only in June, and you know, prices do, sorry, temperatures do rise into July and August. So so far right now we're okay, but that could look very different. People are tying together the rise in heat right now with the rise in utility bills. But if I'm correct, the utility bill increases we're seeing are from the Russia-Ukraine war a couple of years ago, is that right? I mean, can we look forward actually to some relief?

Because not gas prices amid all this have been pretty contained. I don't think relief. I mean, we are still working through some of those higher prices. but that's on the fuel side. And then we have to remember that more than half of the bill is on the operating side. So it's things like to run the wires. And actually last year we saw about $18 billion worth of higher rate increase requests from utilities. That was the third straight year of a record.

And so with all of these stresses on the grid, I don't think we're going to see lower bills anytime soon because it is that other portion they have to invest in. They have a lot of CAPEX, and that's what they earn that rate of return on. Dishwashers. And cars. You've got to charge your car at night too. Exactly. That's a big one. A lot of people do.

But thanks. Speaking of, coming up, sales of new electric vehicles are slowing, but sales of used ones are charging up. We will dig into why. And speaking of electric updates, our own Robert Frank, will be live from Marinello, Italy tomorrow, for the unveiling of Ferrari's E-building, where it'll build the first all-electric Ferrari.

Tune in to CNBC tomorrow for Robert's exclusive interview with Ferrari CEO, Benade. Vino, and we'll be right back. Welcome back to Power Lunch. Dow is about at session high, it's up nearly 340 while the S&P and NASDAQ are still in the red. Meanwhile, while U.S. electric vehicle sales are cooling, it's a different story for used EVs.

That's what Carvanna CEO Ernie Garcia told us when he joined us earlier this month. Evies make up a meaningful portion of our sales. We sell disproportionately high levels of EVs. We do sell to the entire mix of customers, whether it's age or income or any kind of demographic mix that you look at, but we do skew a little bit younger, a little more affluent. Among the reasons why used EV sales are soaring, falling prices that are now almost on par with gas-powered cars. According to Cox Automotive, an average used EV sells now for $36,000, while a regular used car costs around $32,000. Joining us now to dig deeper into this trend is Aaron Keating, executive analyst at Cox Automotive. Aaron, Tesla cut prices several quarters ago, and you see all these pictures of lots full of undriven, unused Teslas.

Which is the chicken and which is the egg here? The fact that people can get used cars for less so they're not buying new cars, so they're filling up lots, so they're cheaper, so, so, so. And how do you think it ends? You know, I think it's a mixed story, actually. We have to remember that just in 2021, we had less than half a million EVs sold in the first place. So we do have more used EVs now entering into the market. And of course, back then, it was Chevy and Tesla that were both dominating the market. And so we're seeing mostly Tesla's because that's what's available in the supply for used EVs. So I think that, you know, it's becoming a more affordable option for consumers. There's up to $4,000 that they can get in a tax credit right now. And that's also helping them pull down the initial outlay of costs that they have on a used EV. So it's a mixed story. It's a mixed bag. But we do definitely see that the cost parity is really driving a lot more sales of the used car. And how does the lease market fall into this? I think I saw something about a lease deal on Hyundai's Ionic 6, where you could get it for less than

$300 a month and less than $3,000 down. Like, I don't even know why I'd buy a used EV if I could lease, if I could lease one for that price? So, I mean, that's also a tale of two stories, right? It's one, it's helpful because it's good for consumers. It's driving down the price of the used TVs, because to your point, if you can compete in a new lease vehicle, the other good news about that, though, is that now we know that we will have a better supply of used EVs coming into the market two or three years as well. So it works both ways.

It's good that the consumers have good affordable options from a leasing perspective, which then, of course, put some downward pressure on the used price, but it also allows us to see in the future that we will have a steady supply starting to come into the market of used eBs, making that transition just a little bit easier. I wonder if they're about to inflect lower, because I like this comparison. You know, currently a used traditional car $32,000, a used EV $34,000, and EVs might keep dropping in price because one of the interesting data points I saw lately, Aaron, was that a lot of people who have bought one have buyers or more. Sure. Okay. Some people are thinking that the infrastructure hasn't caught up with us yet.

Charging's a little bit more difficult than it was before, anxiety range, things like this. But, you know, this transition is going to take us some time. The industry needs time for consumers to catch up with supply. They need to be understanding where the infrastructure is. They need to be knowing that they can go down the street and charge or that they can charge at home and have a good amount of range. And, you know, we were seeing at Mannheim a lot of used vehicles that are coming in and they're going through our, you know, industry first, VIN specific battery health school.

And the great news is we're not seeing a ton of degradation on those batteries. So it's a really good news for the consumers to know that, hey, you can trust the batteries that are coming in these cars for the most part they're holding up really, really well. Warranties are still really good. You can be assured that OEMs are going to take care of you. So while there might be some buyer's remorse of individuals who have had EVs before, I think that as things continue to pick up, the awareness and so forth, we're going to continue to increase adoption.

And what about, Erin, the math. for the buyer on buy versus lease versus, you know, buy new or buy use. It seems like it might be different for EVs because, you know, the conventional wisdom had been, hey, you buy a car, you keep it for like 10 years, and then it's a better value than leasing. But the technology is such a key part of an EV. Is it different? Are you just going to get less on trade-in or resale value in the future because the technology

will have advanced and the demand won't be. high for that vehicle you've got. Sure. And that's something to consider because when we think about getting a used, call it a BMW or Mercedes or a Honda, we're thinking three years generation, you know, changes doesn't really change dramatically the car that you're buying. And in an EV, there is this pent-up fear of, hey, if I'm buying a car that's three years old, am I missing out on the newest battery technology and so on and so forth. A lot of the cost savings and developments that are happening in EVs is honestly more about mass, shape, size, of course, you hear from Tesla.

So making the cars more aerodynamics so that they can go longer range and so forth. But I don't think that the technology is going to change so much that you won't have people comfortable with the first and second generation of the EVs that are coming out now. All right. Well, either way, you're taking a different kind of gamble, I guess. You are. Yeah. You buy used or new or lease.

Aaron Keating. Right. Thank you. Of course. A quick power check as we head to break. On the plus plus side today is. science is the stock is surging on a phase three trial that showed its HIV drug showed a 100% efficacy and prevention for women. Shares are up 8%. On the downside today, Trump media,

the shares are down as much as 15% on news the SEC approved its request offer for additional shares, which would dilute current shareholders, but provide the company with more funding. DJT is down almost 14%. Ahead will discuss the new Moody's assessment of what happened to the economy, whether Biden or Trump gets elected. But first, a quick break. Stay with us. Welcome back to Power Lunch. Let's get a quick check on the markets, where the Dells up 1% helped, as we were just discussing, by Salesforce and Chevron today. The S&P fighting back to positive territory. It's down three, but it was above 5,500 for the first time earlier. And the NASDAQ is down half a percent as NVIDIA has reversed lower throughout the session today. Bond yields are slightly higher after the latest economic data, which is a bit weird, Rick Santelli, because it wasn't that great unless it's still the aftershock from the CBO numbers earlier this week.

You know, you nailed it. That's the whole point of what I'm going to talk about. is how counterintuitive today's data is to reconcile with the market activity. Now, if you look at continuing claims, they came out at $1.8 to $8 million. Okay, but here's the thing. Continuing claims are not only at the highest levels in over two and a half years, we now had the second monthly read over at $1.8 million. If we look at the rest of the data points today, not only claims, look at housing starts. And Diane Oleg's been talking all about housing starts and breaking them down, but on a quite simple level, that's the lowest seasonally adjusted annualized pace in four years.

Now, look at twos and tens. We made our low yield right at 8.30 Eastern when the data hit. Just as Kelly pointed out, that makes sense. What doesn't make sense is how the rest of the session went. We started to see rates move higher. Now, granted, they're about in the middle of the range, but what we really have done is we've closed that gap to some. some of the rate drop we saw on Tuesday with the weaker retail sales. Remember, we have an anecdotal slowing economy.

We have lots of new evidence from initial continuing claims that the labor market might be losing his grip on some of the most intense labor conditions to the bright side that we've seen in decades. Is it weakening? But along all of that, we also have issues with debt and deficits. And no matter how much pushback we get from a political administration, that's involved in an election year, this is something that continues to be a big deal,

especially weeks when we have supply. And as for tomorrow, we don't have top-tier data, but which side four-and-a-quarter-tenths close at or which side four-and-three-quarters-two's close at could have big ramifications technically. John Fort, Kelly, back to you. All right, Rick, thanks. We can scratch our heads over that for a while.

For now, let's get to Contessa Brewer for a CNBC News Update, Contessa. John, the first name Storm. of the season has now weakened from a tropical storm to a tropical depression. Alberto made landfall this morning in Mexico bringing heavy rain and flooding that local officials say killed three children. The National Hurricane Center warns even with the downgrade, the storm will bring intense rain to northeastern Mexico today. New York Governor Kathy Hochel is moments away from signing a first in the nation bill that requires social media companies to restrict intentionally addictive algorithms for users younger than 18. This is set to take effect in a hundred

80 days after New York's Attorney General sets out clearer guidelines. Social media companies have already raised concerns about potential free speech violations. And the NCAA reportedly pitched a plan to Division I conference commissioners to expand March Madness. According to the Associated Press, the proposal would add either four or eight more teams to the lucrative men's and women's basketball tournament. The AP says the plan would keep the traditional 64 team bracket, but would add play-y-year-old. in games for 10 through 12 seed schools. Because of could be really exciting.

All right. Yeah, there's more money in the NCAA and maybe more games. Evermore. While still ahead, go with the flow. Shares of insurance giant progressive up more than 30% this year. And our trader thinks there's still more room to run. We will get his thoughts in three-stock lunch next. Welcome back.

And it's time for today's three-stock lunch. And since tech and growth names like the Mag 7, have been dominating markets lately. We asked our trader to go somewhere else. We don't want to hear the word NVIDIA once in the next five minutes. Let's talk to Michael Lansberg. He's chief investment officer with Landsberg Bennett Private Wealth Management. Michael, thank you joining us for joining us along this right.

Okay, let's talk Tidewater. That's definitely not NVIDIA. Tell us about the stock up 33% this year and you think it's a buy? I do, Kelly. It's the largest offshore supplier. It basically is a support vessel for some of the big major oil companies. and you're seeing, you know, ironically, there's an aging fleet. It's tough to get new big vessels built.

And we're seeing CAPX kind of blow up here a little bit because I think you're going to continue to see a demand for energy and electricity. I won't mention the N-word, but obviously AI is going to continue to draw big money into energy and electricity. Oh, no. And you've got to have to do it somewhere. There's a play even in tidewater here. I think energy is one of those overlooked places that I think, you know, I think it's 10 times the level of power to be able to do an AI search and it is a straight, you know, Google type search.

Where are we going to get that energy? We're going to get that power. I think you've got to look outside just the AI direct stories. All right. I can say the N-word, but I won't because Kelly said we're not going to say it for five minutes. Up next is Progressive. Shares of Progressive are up about 30% this year. Michael, this one isn't so under the radar.

It's not. I mean, part of the issue here is we're in, I mean, everyone was excited, inflation touched down a little bit last month. Auto insurance is up 20% year over year. So if you don't like inflation, why not buy the people that are pricing and making some money with inflation? So we like this story. They're very disciplined on their underwriting.

They don't go out and do stuff willy-nilly. They're very focused on what they do. A lot of margin there. You have to have auto insurance. And the prices keep going up and up and up. And to me, that's an area where if inflation continues to kind of be sticky or move higher, this is a name that will do well, should continue to do well. It has done well, but it's one of those, again, that's a little bit under the radar from a standpoint of it doesn't get the attention

of the average investor. Yeah, take your point, though, and the Fed's watching too, believe me. So let's move along to CRH, not CH Robinson, CRH, up 2% today, up 10% this year. It's respectable. Why buy it? It's an infrastructure story. I mean, it's originally an Irish company. They've got, you know, recently a U.S. offering, you know, made it more. of a U.S. play, if you will. Half their business is U.S. And when we look at the infrastructure in this country, we don't need a big thesis to figure out. We get a lot of potholes, a lot of old bridges, a lot of stuff that needs to be fixed in this country. Theoretically, the infrastructure bill is going to be able to put some money in play for businesses like this. We need to fix, you know,

roads and infrastructure, things like that. So I think it's a way to be able to play kind of where money has to go. We're seeing that with, you know, with areas and accidents in the country, random places with old infrastructure. And we know we need to take care of it. This is a good way to be able to play it. Not a dividend story, but obviously a name that's got half European exposure and half U.S. exposure. All right. Michael Landsberg, we appreciate it.

Thanks for your time. Still ahead. Opting for paper over plastic. Amazon going greener with its packaging. Diana Oleg is live with the details. Diana. Well, John, we will answer the burning question, what protects your stuff better? This or this? Coming up next on Power Lunch.

Welcome back to Power Lunch. Amazon is taking some of the air out of its packaging in an effort to reduce waste and lower its carbon footprint. Diana Oleg joins us from an Amazon fulfillment center in Baltimore with details. Diana. Well, John, after extensive testing with employees, consumers, and third-party analysts, Amazon is putting into motion one of its most ambitious, sustainability efforts to date. It is basically saying goodbye to plastic and hello to paper. It's Amazon's largest plastic packaging reduction in North America so far. Recycled paper is replacing the 15 billion plastic pillows used every year. They're difficult to recycle because first of all you have to pop up. You have to pop it. And they can't go in a curbside recycling bin.

Paper may also just work better than plastic. This paper is a little bit softer. It's made with 100 recycled content, post-industrial as well as post-consumer industrial recycle content. And that allows the items to kind of cushion in there rather than bounce. In addition to losing plastic, Amazon is using AI to right-size its packages by eliminating empty space in boxes. So it's an investment across automation, investment across material science, as well as machine learning and artificial intelligence. We asked Linda how much this transition will end up costing Amazon. He wouldn't say exactly, only that some plastic bags are less expensive than paper bags, but the new technology, by simplifying the process, automating

and right sizing the packaging, it allows Amazon to bring down that cost difference between the two. But I got to say, I'm going to miss that satisfying pop. Am I right, guys? Well, I disagree. The big pillows are too hard to pop versus the little ones that have the little pop pop pop up. But I've been getting the paper packages in my Amazon. deliveries for quite a while now. So I get the sense they've been piloting this for a while, and now they must have a huge impact on overall plastic consumption, given how much they've consolidated retail spent. Right. They started this a while ago, to be sure, they are 95% there with the plastic pillows. And they just wanted to announce it when they still had 5% left.

They said by the end of the year, all the pillows will be gone. But as of now, you're right, most of them are. They're still working on those plastic envelopes, though, to transition those to paper, so we'll have to wait. That could be more next year. Yeah, those envelopes are super annoying because I need like scissors and I can't quite get them open on my own. Diana, we appreciate it. Diana Oleg reporting. Coming up, a political tipping point. Former President Trump's pitch to ease taxes on people with their tips certainly created a buzz, but is it actually moving the needle for blue collar workers? And is it feasible, we'll discuss. And as we head to break, CNBC is celebrating Pride Month. Here is Drew Elliott, Matt Cosmatics, Global Creative Director.

I think from a career perspective, I think it's really important that you find a place that also nurtures and understands. And while that might be a difference, it's really celebrated as a strength. What can you really bring, you know, using the queer experience to, whether it be customers or whether it be media and how you can use that as a strength because it's part of who you are. Welcome back to Power Lunch. We are one week away from 2024's first Biden-Trump. debate. And this morning, we got a new analysis from Moody's analytics about the impact on the economy depending on which candidate wins. Megan Casella is looking at that report. Megan. Hey, John. So the big takeaway here from Moody's is that Trump's policies would hit the economy

much harder initially, even bringing a recession by the middle of next year. But recovery would come swiftly and growth would actually be higher under Trump by the end of the term. So the report highlights two most likely scenarios, either Biden wins and Congress. divided, or Trump wins and the Republicans sweep Congress. In the Trump version, the analysis assumes that he follows through on plans for widespread tariffs and an immigration crackdown, and both of those would drag on the economy. So halfway through the term, the forecast show much slower GDP growth under Trump. Of course, CPI would be higher.

The unemployment rate is a full percentage point higher. Debt is rising faster, and the Fed is slower to cut rates. But then there's a little rebalancing, and by the end of the term, the economy is growing faster under Trump, mostly thanks to corporate tax cuts, although those cuts have also driven up the debt. Inflation and unemployment are still lower under Biden, but the gap has really narrowed from earlier in the term. One final point here, take a look at corporate profits. They fall more than 7 percent initially under Trump in the first year, and it's a little bit surprising given his cuts to the corporate tax rate. But the analysis says that those

cuts plus his tariffs would drive up inflation and interest rates. On average, though, growth ends up about equal between the two. And so it might become a choice here, guys. Would you rather have a slow and steady growth economy or a hard hit and then a pretty rapid recovery? Do we know the credibility of their take on this from the past? We don't, Moody's has really been strong on this. It's led by Mark Zandi, who was a John McCain economic advisor.

So they've been pretty straight down the road. It really is a rigorous analysis, some 30 or 40 pages here. So they dive deep. I just chose these five variables, but they're also looking at any number of personal income and everything else. So they're assuming they're taking these policy promises at face value, assuming the candidates follow through. We do know from history that Donald Trump likes to follow through on what he's promised. And so we're just taking this. They're analyzing as best they

can. He likes to? Okay. It seems like a lot of guesswork that they have to do for something like this, especially given the amount of surprise that we've had about the resilience of this economy, the stickiness of inflation, but also the continued spending of the consumer. But it's hard to factor in, isn't it, Megan? Absolutely. Economists have to be a pretty humble bunch, right? They have to recognize that there's been a lot of wrong predictions over the past few years in particular, and especially with these two candidates. There's also multiple outcomes, right? They're assuming here in these two scenarios that Trump, for example, has sort of unbridled power if Congress flips Republican as well. They're also in that main scenario, assuming that Biden does not have that same

power because Congress stays divided. So there's a lot of different assumptions. They do look a little bit at those other outcomes too. They're doing it as best they can and they really sort of, you know, assume that like I said, that they're following through on these promises and that Congress doesn't step up and get in the way, that the Fed doesn't really break the rulebook or throw the book out the window. So there's a lot banking on this. It's just one data point at this point, but it shows us maybe what we're going to get. All right, Megan, thank you, Megan Kassela. There's one part of Trump's campaign that's been getting a lot of buzz lately. And that's his pitch to exempt tips from being taxed.

So could it be a good way to lure in working class voters? Well, the plan isn't hitting the mark for everyone. Let's ask Ted Papa George about that. He's Secretary Treasurer for Nevada's Culinary Union. Mr. Papa George, it's great to have you. By the way, have tips ever been exempted from taxes before? I'm just curious what's the back story here? Well, not since any of us have been working.

I was a tip earner. My parents were tip earners. And the reality is that we've been fighting. against unfair tip taxation for over 30 years. But that's been, the courts have ruled the tips are income. So the idea that somehow we're going to get out of taxes on tips is just kind of silliness. And, you know, that just, and that leads to kind of the problems with Trump's, again, it's a wild campaign promise, really, is that, look, for four years when Trump was president,

he really didn't help any tip earners at all. And since he's been out of the presidency for four years, has never heard a peep from Trump about helping tip earners until now we're getting closest elections. So he's really been this way. Nevada, as I understand it's an important state politically. I think there's a Senate race as well that if it went Republican could have big ramifications. If he did this even as a political gesture, what would be the impact? Yeah, but that's the problem because the idea of getting past a wild promise to actual

some kind of reality. And the second part of the problem here is that, look, Nevada is incredibly unique. There's no concentration of tip earners anywhere else in the country like there are here. And, you know, every other, all the other 49 states, most voters believe that, you know, tip earners should pay their fair share just like anybody else. You will not hear Trump make this promise anywhere else in the country except in Nevada, hoping that some folks will fall for it. But the reality is that we've had, Senator Harry Reid was a staunch advocate for fair taxation. Senator Catherine Cortez Mastow, Democrat went after the outgoing IRS commissioner on Capitol Hill. Congressman Stephen Horsford sat in negotiations with us at the table with the IRS.

So the problem is that not only is it unattainable to get rid of taxes on tips, you're never going to hear Trump even make that promise in any other state other than Nevada. He will never even be able to bring it forward. But we have to have his real policy to try to reduce unfair taxation. And just the last thing I want to say, I know you want to have questions, is that, look, this causes more harm than it does good. Because the inference and every other state is that tip earners are tax cheats and don't want to pay taxes on their income. Tip earners are not tax cheats. against unfair taxation. They're willing to pay their tips. But we just, we were able to fight for

60% tax reduction on tips during COVID. And we got from the administration. Well, nobody likes to pay more taxes than they absolutely have to. And I believe former President Trump would be at the front of that line. Tell me, what's been the impact of tipping, shifting over the last generation, say, 15, 20 years, from probably a bit more cash to more. more digital, therefore more trackable and more taxable. What's the impact that you've seen? Well, if you're working in restaurants, then it's clear just 80 to 90% of all tips are paid for by credit cards, and it's absolutely trackable.

And the IRS has developed over the last 30 years, and we've been in negotiations for 30 years with the IRS in Las Vegas of a tip allocation system. And as I said before, we were able to negotiate ups and downs during the weather. whether it's the recession or COVID, but the problem that pendulum has swung the other way, and we think it's unfair right now. So we do need some relief. But this idea that somehow we're going to make some argument that tips shouldn't be taxed, that was lost in courts 30 years ago, and it just, again, produces the idea that

tip earners aren't willing to pay their taxes, and that's just not the case. Ted, Trump has also proposed doing away with the income tax altogether. feel about that? Well, again, there's an old saying about death and taxes. It's just silliness. You know, the defense of this country is required to, it can only happen with us paying our fair share of taxes. But look, it's very rich that somebody like Trump talks about doing away with taxes. One of the problems is that the IRS spent less time going after working folks like us and going after rich billionaires that don't pay any taxes like Trump, that would be, kind of a way to go. But look, Trump supporters don't want to hear that because that's President

Biden's program by adding firepower to the IRS to go after billionaires that don't want to pay their taxes. Mr. Papa, George, I take it from your comments. You might not be the biggest fan of the former president. Let me ask you this. There's been a lot of talk about how he has made more inroads with unions than previous Republican administrations have. Do you sense that amongst your members that a group that might have traditionally voted as a block for blue? might be more open to hearing. Whether or not they think it's feasible, are they more open to the arguments

that a Republican candidate, president, Senator, what have you, might be making now that in the past? Well, first of all, union members don't vote as a block for blue, and Nevadans don't vote as a block. We're actually barely purple, you could say. We're about a third independent, a third Democrat, and a third Republican. But what's really going on is that the economy has been difficult

for working class votes. And look, Democrats have to do their part. President Biden's been a champion. He actually has walked picket lines and has been supportive of higher wages, higher minimum wages, better health care for workers. But at the end of the day, the rising prices of gas, the prices of groceries, the prices of rents and the ability to own homes, that's serious business. And it has to be dealt with. And I think the election is going to swing on those issues. But in other words, it could potentially detract from the current president's support. Well, I think that the president has to stay the course.

This idea of the economy and good union jobs bringing manufacturing back to this country, making sure people have health care, making sure that they have retirement and dignity through their work. This president is the best friend to workers that we've seen in our lifetime. He's brought us through COVID and is making changes in manufacturing. And, look, part of the criticism we have for Trump is that, you know, infrastructure weak was ended up being a joke during the Trump presidency. And President Biden made it happen. So whether tip earners in Las Vegas or room cleaners in Las Vegas or factory workers in the Rust Belt,

we think the Democrats have to stay the course and just come out swinging about going after high prices. and, you know, big oil, big food, and these giant Wall Street landlords that are going after workers. And if president does that, he'll win in November. Mr. Papa George, thanks for your time today. It's good to check in with you. We appreciate it.

Agreed. Thank you. The Nevada Culinary Union. Remember, you can always hear us on our podcast. Be sure to follow and listen to Power Lunch wherever you go. We'll be right back. Welcome back. Look at this bifurcation today.

The Dow's up 380 points near session highs while the NASDAQ and the S&P were briefly lower. We were watching InVIDIA to see if that was kind of the tell. But, you know, that stock had been down as much as 3% came back, John, a little bit. It's heading back towards the session lows and the Dow's still near session highs. Microsoft is doing better than it was earlier. That has some influence, too. Indeed, outsized, you might say. Well, thanks for watching, Power Lunch.

Closing bell starts right now.