Power Lunch - Countdown to Fed Decision, Earnings Parade 4/30/24

Episode Date: April 30, 2024

We’re just 24 hours away from the latest Federal Reserve decision on interest rates, with more conflicting economic data coming out today. We’ll discuss the difficult position for the Fed right now.Plus, the other big piece of the market puzzle right now is earnings. We’ll trade some of the big names which reported results, and preview some more that are on deck. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to Power Lunch alongside Sima Modi. I'm Tyler Matheson. Glad you could join us for a Tuesday. We are 24 hours away now from the Fed decision on interest rates. Fed already meeting down in Washington, two-day session. More conflicting economic data out this morning. Big drop in the Chicago PMI shows some slowing economic growth. But the employment cost index shows continued inflation. So we'll discuss the difficult position the Fed is in. Plus, the other big piece of the market puzzle right now, earnings will trade some big names, which reported this morning in preview. Some of the names do out after the bell, including Amazon. But first, a check on the markets with two hours to go.

The S&P 500 trading down by 40 points that we did break below 5,100. Small caps, the key laggers, as we watch the dollar strengthened. Gold is down by 0.2%. A big mover to the upside is Eli Lilly, bucking the downtrend as it raises guidance thanks to sales of its obesity drug, which exceeded half a billion dollars in the quarter way ahead of expectations. All right, and here's a few of the other big names we're watching for after the bell. One would be Amazon, two would be AMD, and the third would be super micro. Two out of those three are lower, but AMD is higher by about a half percent.

We begin, however, with the Fed, as we're just 24 hours away now from the decision on interest rates, widely expected that the Fed will keep rates unchanged. Our next guest doesn't see a cut tomorrow, but is sticking with his forecast for three rate cuts this year, starting in July. Michael Faroly is chief U.S. economist at J.P. Morgan. Michael, something just occurred to me as we were reading that introduction, where we talked a little bit about higher than expected inflation and maybe some slowing in the Chicago PMI.

Is the Fed's challenge neither going to be inflation nor too fast growth, but something we remember called stagflation, perhaps? Well, I think right now the bigger challenge is inflation. I didn't take that much signal from the growth numbers we saw this morning, particularly with the labor market that continues to add jobs pretty robustly. So I do think what we see Friday morning is going to be a lot more important than what we saw this morning with respect to any stagnation in the economy. But absent that, I think job number one continues to be,

as it has been for the past two or three years, continues to be inflation. Why are you a little against the grain right now in predicting three rate cuts this year when many are retreating from that number to two, one, some zero? What makes you confident? We're a little on our heels, particularly after this morning's ECI number. But, you know, we'll see if we do see any softening in the jobs data. We have had an unemployment rate that has been on balance drifting higher over the past year. If that continues, I think we could be on track for uneasing sometime this summer or fall. But if we see the labor market, you know,

continuing or showing more resilience and less of a move up and unemployment than I do think it calls into question whether they are going to be cutting any time in the summer or fall. Michael, how do you think Jerome Powell handles questions tomorrow on the strength or weakness in the U.S. economy and how much weakness he is willing to tolerate just to get inflation down to 2%? Well, I think one thing is he's going to sound a lot different than he did six weeks ago, right? When he kind of brushed off concerns about the inflation prints we saw in the first two months of the year, the third month, really seemed to have changed the tune. I think on growth, though, however, you know, he's been pretty consistent that they will react to unexpected weakness in the labor market. That has been, you know, part of their story here for a while, except we just haven't seen any unexpected weakness.

and labor markets. I don't think he really needs to modulate that message, but I think really where you're going to hear quite a difference is how he's talking about inflation, sounding a little, you know, quite a bit less confident, I think. Yeah, and he has started to do that as if to condition the market and the audience for what he might say tomorrow that that his confidence level that we're making a sort of unimpeded progress toward 2% is less high than it was, right? Yeah, so two weeks ago he made those remarks. He also said that because of that, you know, the rate cuts will come later than previously anticipated. So then I think what leaves, you know, what the big question for tomorrow is he had in March

said that the committee expects, you know, rate cuts at some point this year, right? Maybe they're no longer expecting three, but are they expecting any? I think that's another question he'll have to. Is it interest rates that have troubled the market this past month? And what do you see heading into the future for equities? Well, I'm not much of an equity strategist, but I do think clearly the pivot in the Fed has been something the market has had to digest over the past. I guess really three months now. I think we are at a point here where we've taken out a whole lot of pricing for this, a whole lot of Fed cuts for this year.

So I still think the bar to hikes is going to be pretty high. And again, coming back to Powell's remarks two weeks ago, he really said the decision is how long to keep rates elevated, not when, to hike rates again. I think for that to happen, you'd really need to see a sense that the labor markets are tightening further and that wage pressures are building inflation expectations are moving higher. But I think we're hopefully still pretty far from that point. What is your take on the consumer right now, Michael? Just given that you're expecting three rate cuts this year, we looked at the consumer confidence data that came out this morning, a 21-month low. And then there's a report from McDonald's, which showed not only did profits come in light,

but the company really stressed this point that the consumer is looking for a better deal. They may offer discounts on their menu. How do you size this all up? So, I mean, first of all, the consumer spending data have been very strong, at least through March. Now, that's history going forward. There are some reasonable concerns about very low saving rates, credit card balances that are moving higher. And those are legitimate concerns. However, I think what's really going to, and not to sound like a broken clock here, I think it really

does come back to the labor market. If the labor market slows the wherewithal for the consumers to keep spending like they have been in the first quarter this year, it becomes more in question. But absent any slowing in the labor market, I think the consumer, you know, can continue humming along here like they have been so far. Even if the housing market stays so strong and prices remain elevated, which we know is pricing out so many people right now. That has been a problem. You know, you are seeing, and I guess you saw a reminder of that again this morning with rental and homeowner vacancy rates remaining super low.

So that is a problem here. I think it's a structural problem that's probably going to take, unfortunately, years to correct. Okay, we'll leave the conversation there. Look forward to your insight tomorrow. Michael Faroley, of JPMorgan. Now, our next guest is also focused on the Fed, but says it's the labor market that holds the key in 2024

to sustaining market expansion. Let's bring in Mark Lushini, chief investment strategist at Jenny Montgomery. And Mark, we know the labor market is important. What specific data will you be watching? We have ADP tomorrow and Joel's data, job openings right before we hear from Powell. Well, you mentioned the latter to me is a little bit more important.

The Joltz report, I'd be looking inside that number for the quits rate, which is holding a 2.2% which is in line with pre-pandemic trends. I'd also be looking at the job vacancy rate. This is something Governor Waller had noted as it continues to move lower from current levels of around 5.3% toward what he believes around a 4.5% rate, which could trigger an acceleration in the rise in the unemployment rate. I'll be looking for that. And obviously, later in the week, jobs claims which have been hovering near historic low levels and obviously culminating on Friday with the BLS number on jobs. And so a lot of activity on the jobs-related

market that'll give us a purview into how well that's going to stay conditioned to be able to provide the income stream and the wherewithal for consumers to continue to propel economic activity. Mark, as to how investors should be positioned, you're saying this rotation away from tech into industrial's energy, that's where investors should be looking for opportunity. But you could argue those sectors have all seen that rotation, the run-up this month. Well, they have, but that's also relatively fresh. I mean, these were the sectors that were really laggards last year, obviously with the domination by tech and tech-related companies that continued in earnest over the first couple of months of this year as well.

It's only more recently that you started to see these other sectors usurp tech leadership and even communication services has only recently given way a little bit to these sectors. And so I still think there's more horsepower embedded in them, particularly given the fact that the U.S. economy continues to elicit signs for the most part, that it's still quite stout. And we're even starting to gather some evidence, albeit somewhat embryonic, but nonetheless,

that global activity is picking up with better news coming out of Europe and China alike. It's so important to the big, large-cap multinationals that propagate those sectors like materials and energy and industrials. Since you mentioned Europe, let's talk about one of your choices, which is B&P Paraba, with a nearly 7% dividend yield on its ADR. Huge dividend yield, obviously attractive for investors who are looking for not just current income, But total return, which, you know, starting off with something north of a six-handle, gets you a long way towards a pretty exceptional prospect for a total return.

But, you know, it's the largest financial institution in Europe, banking institution, ninth largest in the world by assets, trading it about seven times a multiple on earnings and trading at about 30% below book value with signs of improving conditions in the European economy leads us to believe that B&P is undervalue. and a re-rating is at hand. We know that Kay Schiller data shows home prices remaining at an all-time high. Do you think in a way that's propelling the stock market mark where Americans just don't have another place to put money if they can't buy a new house, might as well put it into the equity

market? Well, that could be a cause for it. Certainly cash continues to compete on a lot of levels with the equity market, given the enormous piles of cash that are sitting in money market accounts. But at the same time, yeah, I think a deterrent to committing capital that otherwise might go into, say, investment if not necessarily a primary home, real estate as an investment property may be finding its way into the stock market because cap rates on real estate, whether you're talking about residential for renting purposes or for commercial purposes, are exceedingly low, leaving a very low margin of safety for investors there. So perhaps some of that money, that capital has been freed up for risk-based investment that would be otherwise earmarked for real estate, helping to, again, put a bid into equity prices and sustaining them at somewhat elevated levels. Your previous guest talked about some of the chop we've seen here recently, which we expect likely to continue for a little while as investors realize that perhaps race will stay elevated for longer than what was originally expected. but ultimately, we think the advance will resume.

Why did stock stumble in April, and what do you expect through the summer? Well, Tyler, I think it was an intersection of somewhat overbought conditions, intersecting, if you will, colliding with rates. And this, you know, fundamental shift in the outlook for what the Federal Reserve's reaction function is going to be to high inflation, that we've had, you know, three CPI readings, We had a PCE reading and obviously culminating with the exclamation point, the employment cost index came out with today is shaving those rate cut expectations. So I think investors were out a little over their skis with regard to the prospects for an imminent and multiple rate cuts. That's been reflected in a revaluation of stocks lower somewhat.

We had a correction that maybe we're not through the complete midst of at this juncture. But ultimately, in past its' control. So what's next? This could last for a while, but we'll rally into year end. You think we'll rally into year end? I do. What sets that up? Well, the presidential election cycle, if as an analog, if passed this prologue, what

we typically see in an election year is some consternation over the summer, you know, sell in May and go away and a rally that emerges later in the year, which could coincide with still sturdy economic data and the Federal Reserve getting away with maybe one or two cuts before the end of the year. possibly even three like Michael had expressed. But nonetheless, that that would be enough, I think, to put a bit into equity prices, as long as, again, consensus estimates for earnings stay reasonably sound. Yeah, I guess the answer there is if the Republican doers, and that's good for stocks. Mark Lushini, thanks very much.

You're welcome. All right, coming up, Musk announcing another round of Tesla layoffs. This is coming after a watershed moment for the company as it gets self-driving when the dust settles. What can we expect for the future of Tesla? We need to talk about Tesla every day, and we're going to do that next. Shares of Tesla pulling back today after a big gain yesterday, this on news of layoffs earlier in the month. Phil LeBow tracking the latest news for us. What's happening with Tesla today, Phil? Well, we got two. We have two pieces of layoff news. You have the news that came out last week about cutting 10% of the staff. I think it was last week.

It might have been the end of the previous week. It's all kind of running together here, Tyler. And then you had the news that came out last night. This was first reported by the publication, the information. And here are the latest Tesla layoffs that has gotten some attention here, the senior director of the supercharger business, as well as the head of the new vehicles program and the employees in those divisions. Some numbers have put that at about 500 employees. Bottom line is, more cuts at Tesla.

The company, as you mentioned, had already said, hey, look, we're going to be laying off 10% of the staff. That's approximately 14,000 employees. Those were cuts that were announced a week, week and a half ago. Elon Musk, however, after those came out, there were a number of reports that he wanted even more cuts than 10%. And whether you believe that or not, it is clear from these latest moves that he is serious about cutting as much as possible to bring the company's finances in order, because they are in facing the EV winner that everybody else is.

facing, which we saw with the numbers that were reported last week. As you take a look at shares of Tesla, keep in mind that the earnings were down 47% versus last year in the first quarter. That will get any CEO, and certainly Elon Musk to say, how much more can we cut and where can we cut? And that's why you had these latest moves that caught so much attention last night. My question is, you mentioned that the executive in charge of the supercharger division, and the executive in charge of new car development were being cut. And then I think maybe I misunderstood. Are those divisions being eliminated?

Because those seem like pretty important. Unclear. Unclear if it's divisions eliminated or if they're going to be consolidated into other divisions or if there's going to be some type of restructuring. You know how this works with Tesla. Even when you reach out and you ask for a comment, which you often, you don't hear anything often in response. So, you know, so that,

That's up to your interpretation, Tyler, in terms of what will happen there. And let's be clear, the Supercharger Network is one of the shining stars, if you will, within Tesla, in terms of what attracts buyers. And we know that they basically have become the gold, it has become the gold standard within the EV business here in North America with other automakers saying, yeah, we're going to go with Tesla's service and we're going to have access to the Supercharger Network. interoperability there between their vehicles and Tesla's charges. We also want to ask you about Stalantis, down 11% following its results. What was the stumble there?

A little bit of the stumble was accelerated, not just by the numbers that came out early this morning regarding Q1 deliveries and revenues. Remember, we don't get the first quarter earnings. They do a half-year earnings and then full-year earnings. But look at the deliveries. Not great. Total down almost 10%. Europe down 7%, the U.S., almost 6% increase, which is, relatively speaking, a bright spot for the company. But keep in mind, they have made the decision that they will not be taking any hits in terms of pricing,

that they're going to hold pricing as much as possible. That said, that means you have lower volumes. And that was reflected in their Q1 revenues dropping 12%. But again, the real pressure that came on the stock, it happened. after the executives gave an outlook in terms of what they're expecting, and it was not a very optimistic outlook, even though they have reaffirmed their earnings guidance for 2024. Bottom line is, Tyler, you're looking at an industry right now that is facing pricing pressure, and you have one of two choices if you're an auto company right now.

You either cut volume or you're going to have to cut prices. And that's why you see inventory levels, whether it's at Stalantis or at other automakers, continuing to increase because they have not cut pricing as much as many believe they should. All right, Phil, thank you very much. Phil LeBow on Stalantis and Tesla. All right, after the break, copper is rallying to a two-year high. We'll take a look at the commodity space when Power Lunch returns. Welcome back to Power Lunch. Stocks falling and bond deals are spiking today following more data pointing towards sticky inflation.

Let's get to Rick Santelli in Chicago for more. Hi, Rick. Hi, Seema. Indeed, it was a wild ride this morning. Let's take it chronologically, shall we? At 8.30 Eastern, ECI jumps. 1.2% to find a higher percentage of employee costs. You have to go back to the Q2, second quarter of 22. But what's interesting is, if you look pre-COVID and ECI began in 1996, if you look pre-COVID, 1.2 was the high until COVID hit, and that was established in, March of 03. If you look at the remaining numbers, whether it was 945 where we had Chicago PMI or 10 o'clock when you had consumer confidence, while ECI was jumping, confidence was dropping and Chicago, well, 20 months since we had a reading above 50. How do you spell stagflation?

Look at 10-year note yields. Boom. They jumped. As a matter of fact, portions of the curve were actually higher and price, lowering yield until that number hit. That all reversed. higher. And if you look at the dollar yen, which is still being talked about, here's a two-day chart, and that's the dollar versus the yen. So you can see the yen is creeping up a bit. The dollar is slipping just a bit. But what's interesting here, and I continue to point out, that while everybody's talking about comping to the 90s, because we're not above 160 anymore, we haven't closed above it, though, since December of 86, 38 years. And we're still not sure whether the Bank of Japan actually intervene, but when you put it all together.

it's pretty hard to say that they didn't. Seema, back to you. Yeah, there is this speculation, right, that the Japanese stepped in with intervention. We'll be watching that closely. And of course, Tyler, I would mention with this weaker yen, we're watching a spike in travel. So more Americans going to Japan, taking advantage of not just the stronger dollar, but weaker yen. So we'll see if that trend continues. Something to watch when Booking Holdings reports this week.

All right, let's talk copper, shall we? It's trending lower today, but still pacing for its best month in years. And Pippa Stevens is here with more. She covers everything, including copper. So copper is lower, as you said, after perhaps getting a little bit ahead of itself, but still on track for the best month in more than three years. And Kepler chalked it up to recent supply disruptions that we've seen. And they noted that those supply disruptions aren't actually going to have a long-term impact on the physical market.

But what it's done is it's acted as a catalyst to bring to the attention of the wider market what the underlying fundamentals are saying in copper. Of course, we see all this demand from the energy transition, from the AI boom, And so there are these calls that we are going to flip into a market where demand outstrips supply. So on the heels of that, we've seen since the middle of March a huge influx into traders into the copper market. Long positions have increased by about 133 percent. While short positions have decreased by 40 percent, you see that we flipped net long there. And so in the short term, that does mean that perhaps, you know, we are due for a pullback here.

But longer term, the forecasts are that prices are going up. We saw last week with BHP submitting that unsolicited takeover bid for Anglo-American, which Anglo did reject. But Anglo has a lot of assets and what BHP was specifically looking for was there copper mines in Chile and Peru. Copper is widespread. I mean, it's in everything from phones to kitchen appliances. Any talk from economists on how this is inflationary as we await Powell tomorrow? Well, I think that's the point, that copper is in absolutely everything.

And so then there was demand was already there. And then when you talk about things like, you know, the China property, market bouncing back, the energy transition, and then now AI and data centers, and what that means in terms of grid upgrades, that all increases the demand. And in order to build a new greenfield mine, it takes about 15 years. And so it's difficult for the miners to now forecast, how can they forecast building a new mine when they don't know what the price is going to be? So so far, it hasn't been high enough to incentivize, you know, all of that, CAPEX, and also shareholders haven't wanted that. We've seen the same thing in oil and gas, where shareholders want steady

discipline and not, you know, signaling we're going to invest billions of dollars in a new mine that won't come to fruition for a decade and a half. Not to mention environmental issues that might arise around the building of new mines, wherever they might happen to be. Exactly. That's our hard balance. Puba, thank you. Pippa Stevens. Let's get over to John Chu for a CNBC news update. Hi, Don. All right, Seema, Tyler, Columbia University officials say the students who occupied a building on campus overnight are facing expulsion. They say their top priority is restoring safety and order on campus. The school's warning comes just one day after students were told to leave a pro-Palestinian encampment nearby if they wanted to be allowed to complete their semester. Meanwhile,

about four dozen encampments remain on other campuses across the nation today. The Supreme Court declined to block a Texas restriction on pornography today. The state is requiring age verification to prevent minors from accessing adult content online. The justices turned away the request to hear the case made by free speech group. groups. Hell's Kitchen and Stereophonic dominated nominations today for the 2024 Tony Awards. The former, inspired by Alicia Keys' teenage years in New York City, picked up 13 nods. Stereophonic, which tells the story of a rock group in danger of breaking up, was nominated for best play and in 12 other categories as well. The Tony Awards will be held on June 16th, SEMA. I'll send things back over to you.

Amazing. We'll be watching. Dom, thank you. Following alphabet, And Microsoft's strong results, Amazon has a high bar to meet. After the break, we will dig into the company's balancing act between growth and profitability. We're back in two. Marijuana stocks are soaring this afternoon as the White House moves to reclassify pot as a less dangerous drug. Brandon Gomez joins us with more on this move now by the Biden administration. Brandon. Yeah, that's right, Tyler. Take a look at shares of Tilrey and some of the marijuana-related ETS, stickers MJ, MSOS, all up double digits, surging on this news that the U.S. Justice Department will recommend reclassifying marijuana as a Schedule 3 narcotic instead of Schedule 1.

Now, that would move marijuana into a category that includes drugs like Tylenol with codeine and steroids versus now, where it is currently reclassified alongside drugs like heroin and LSD. This is the first time the drug would be reclassified since the Controlled Substance Act came to be more than 50 years ago. Now, what does it all mean for investors, right? while rescheduling cannabis opens the door for pharmaceutical companies to get involved with the sale and distribution process of medical marijuana in states where it's legal. Companies in the $34 billion industry would also be able to deduct business expenses like any other firm, possibly saving billions in taxes.

And it makes the industry much more attractive to investors, right, while potentially shrinking the black market for marijuana. The move, though, still faces a public comment period and the industry needs Congress to pass additional legislation before it can fully access. traditional capital markets. But look, this is a big step forward for those who have been pushing to open up the legal marijuana market. See what? Markets responding. Stocks are up there. Brandon, thank you. Brennan Gomez. Thanks. Shares of Alphabet shooting higher following its earnings report last week, and one key factor behind that strength was cloud. Microsoft, similarly, strong performance. Now Amazon's cloud business will be the focus when reports after the bell. Kate Rione here with a breakdown on

what investors are expecting, Kate. Hey, Sima. Yeah, so the big focus is Amazon Web Services, AWS, which really is still the profit engine for Amazon. The growth rate to beat 14.7 percent investors want to see that growth re-accelerating in any signs that last year when growth did dip, that that was the bottom. A miss on AWS could signal that Microsoft's Azure and Google Cloud are taking some market share. It's a very competitive cloud space right now, especially with what's going on in AI. E-commerce business, that is still in focus.

investors are watching North American revenue margin expansion and then free cash flow margins. Amazon's investments in fulfillment centers and logistics during COVID have really started to start being reflected in margins. We have seen faster delivery speeds also translate into prime membership. So advertising, another big one to watch this quarter as Amazon Prime Video Ads start to factor in. They've got these more broadcast style commercials. We may also find out how many customers are willing to pay extra for the ad-free service,

which rolled out in the quarter. Amazon is now the only big tech company, other than Tesla, not paying a dividend. That is not expected to change, guys. The street really wants to see Amazon reinvesting in AI, but not going overboard. So this is sort of a balance here. They need to balance CAPEX spending and also profitability. Amazon this morning announcing the expansion of its chat GPT competitor, Amazon Q. That is a Gen AI assistant for AWS.

We do expect CEO Andy Jassy to talk a bit about that on the call, guys. All right, Kate, thanks very much. that. Let's get an analyst take now on Amazon's earnings. Our next guest agrees that growth in its cloud and retail segments are key and he expects it to deliver on both when it reports later. Joining us now is Ron Josie, U.S. Internet analyst at City. Ron, welcome. Good to have you here. I guess if I'm reading my notes correctly, one of the reasons you are favorably inclined towards this stock is that you see margins potentially expanding over the next couple of years. How can the company do that at a time when they are, having to spend as much as they are spending on capital investment in the cloud and in AI. Tyler, thanks for having me. And that is the question, really. We're at a point where we think AWS demand is actually accelerating. And if it's accelerating, we should see revenues coming up.

And ideally, it's accelerating not through optimizations, call it attenuating, as a company likes to say, but through new instances doing better. That's higher margin revenue. So that's AWS. But Tyler, the real answer to the question in our view is that I think the core retail business is actually becoming more efficient. We started seeing this call it last year with the implementation of their regionalized shipping zones in the U.S. that's rolling out overseas. We're seeing new fees come out. We're seeing basically a shift from consumer demand being mostly discretionary, a lot of it discretionary to a lot of it being non-discretionary.

If we're getting our goods faster, that means we're using Amazon more. And I think they're clear to say one of their cheapest or most efficient form of delivery is quick as the quickest. So frankly, I think they're becoming more efficient in the core retail business. And as AWS improves, we think that margin can at least sustain itself as the retail business improves overall efficiency. I think there's more room to go there. They seem not only maybe to be more efficient, but just better at getting more goods in the hands of consumers quicker. I mean, that's been a game changer. I think same day, next day delivery just opens up so many different opportunities for them. We saw recently the launch of a new prime add-on for grocery. I think $9.99 a month

for grocery orders over $35. You get it within several hours, sometimes within the hour. But the bottom line is if you can actually rely on Amazon for more of your goods, whether it be paper towels or shaving cream, whatever, you're going to rely on it more. And, you're going to rely on it more. scale be get scale here. I wanted to send a really romantic thing to my wife. And the cat litter arrived that afternoon. I mean, it was. That's impressive. It was impressive, man. But internationally, that's not the same case, right? So what are they doing on the international front to have similar margins that they have here in the U.S. and make that work? Yeah. So, Seema, a few things. But first and foremost, what's driving here and now retail margins in our view is the advertising

business that that'll be around $55, $56 billion this year alone, growing 20 plus percent on our numbers. But as the core retail business becomes more efficient, that's going to drive margins overall. Internationally, advertising helps. But as importantly, there's a lot of these emerging markets that they've been in now for five, seven plus years. And it takes about seven to 10 years to reach that profitability threshold. We saw Mexico reached profitability. I believe in 4Q. That was about eight years after launch. So really, we're coming to a level and scale here in more of these emerging markets that they're getting to the size that they can be more profitable. And just taking their largest markets overseas,

which are Germany, UK, Japan, you're getting this new, call it benefits from the regionalized shipping where I think they're shortening the distance to delivery and therefore getting goods to users faster. And we think that flywheel effect just gets some stronger and stronger. So that's retail, that AI. We talked about cloud. What about its dividend or potential dividend? So just looking at the S&P 500 companies with a market cap of a trillion dollars or more, they're all offering a dividend, and video, Microsoft Alphabet, but Amazon is the one left out. Do you think they changed that today? You know, I'm not too sure if it's today.

I'm sure we get some insights this year at some point around capital allocation. We're looking for, I mean, this is a business that has a significant cash balance on its balance sheet. In our view, as we just talked about OI getting more and more profitable around retail and AWS as well, I think capital allocation has to be a question on today's call, whether it's buybacks first and then a dividend. But frankly, we saw the benefits with Meadow. We're seeing, obviously, Google Institute, a dividend. So certainly a change in approach across my coverage universe in terms of capital allocation, both on buybacks and then increasingly dividends. We'll be watching. Ron, thank you. Ron Josie of City Research.

All right, coming up on the show, A, check on chips, Nvidia, rival AMD, set to report earnings after the bell. Can AI help feel its results? We'll discuss when power returns. In addition to Amazon, two closely watched chip names are reporting this afternoon, AMD and Super Micro. Christina Parsons Nevel is joining us now

with what to look for those two companies, Christina, as AI still seems to be the dominating factor here. Yeah, it is the dominating factor, but cyclical headwins is another concern and the fact that TSM warned anything non-AI is weaker. That's in their latest report.

Intel warned PC and CPUs will continue central processing units, I should say, will continue to be flat in Q2. But the positive is that all of these companies are talking about this bottom, this, well, paraphrasing, a cyclical bottom with improvement in the second half of the year, which bodes

well, possibly for AMD. So we're going to be looking for any demand trends in PC and server, as well as changes to AMD's product roadmap that should reflect those trends. They're embedded segment, which is really just Xilinx, it's programmable chips. That contributes to about 25% of revenue.

that's still dealing with an inventory correction. AMD also said gaming would fall significantly in Q1, so expecting weakness there and why we've seen this pullback and shares just over the last month down, what, you know, about 11% on this non-AI cyclical weakness. But the most important factor this turning season for AMD is the adoption of its latest AI chip,

the MI-300 series, and any updates to its previous fiscal 2024 revenue forecast you're seeing on your screen now at $3.5 billion. The street is anticipating that number to jump up anywhere between 4.5 to 5 billion so that investors feel confident that there is a path towards, you know, $10 billion next year. And I bring all of this up because this is the AI that you're referring to, the AI demand, with recent CAPEX spending of about $140 billion coming from Microsoft meta, Google. That's helping the AI demand narrative. Now, another AI CAPX beneficiary is Server Assembler Super Micro. Some even say it's in meme territory, given how the stock is climbed.

But they currently have 6% of the AI server market. With key bank betting, that jumps to 23% of the AI server market just next year, given that a super micro focuses on high performance computing. They didn't, though, pre-announce positive earnings last Tuesday when they normally did so. So that had a lot of investors spook. You saw the stock dropped dramatically. It's down about 14% just over the last month. But this name is still considered an AI dark.

Do you expect Christina, China, to come up in the discussion tonight on the earnings call? For AMD and Supermicro, definitely given the weakness and concerns that, you know, there was a lot of front-loading, ordering just over the previous quarters and a slowdown. So yes, the answer is 100% yes. Okay, we'll be listening for your reporting on this. Christina, thank you. Thanks. All righty, McDonald's posting a first quarter earnings miss as consumers do some belt tightening. Is it time to sell your shares?

We'll trade that one and a couple more in three-stock lunch. All right, time for today's three stock launch. We're going to take a look at three Dow components, making moves after reporting results here with our trades as Adil Zaman, partner at Wall Street Alliance Group. First up, we've got Adil 3M, best Dow performer today after a beat on first quarter earnings. But the company cutting its dividend, this puts an end to six decades worth of dividend increases your trade here on 3M. Great to be with you, Tyler. For us, this would be, and we would sell, because, you know, typically we like companies like this, which have, you know, slow growth and pay a good dividend, but they're stable. But three, I'm afraid, has been the opposite of stable.

The stock has been for the past five years down more than 30 percent. Sales are going in the wrong direction. They have a host of litigation issues that they're facing. So for us, this would be an avoid. Next up is Coca-Cola Adil, topping Q1 estimates, hiking its revenue. new outlook and it shared, or the shares, I should say, are lower by eight-tenths of one percent. What's the trade? So for us, this would be a biosima because, you know, there's a reason behind why this is

a Buffett favorite. You know, we feel that the broader theme over here that's happening is that eventually, whether it's this year or next year or the year after that, we are going to get rate cuts. When that happens, we feel that the near $6 trillion that is sitting in money market will flow to dividend-paying companies like Coca-Cola, which for the past 62 years has consecutively raised its dividend year after year. And consequently, you know, conversely, if they don't get rate cards, Coca-Cola could also be viewed as a safe haven, so it could potentially do well under both scenarios. So that's why for us this would be a buy. It wins, even if we lose.

That sounds great. All right, let's go to McDonald's. It missed its first quarter estimate. That same store comps falling short of expectations. Middle Eastern boycotts weighing on sales. Adil, what's your take here on Mickey D? Yeah, so Tyler, another good dividend paying company, so the same team there. But if we take a step back and look at the bigger picture, we feel that this is an extremely strong company. So for us, this would be a buy. You know, they have over 90% of their restaurants are franchises, and majority of them don't own the building.

So they have to pay McDonald's rent. So McDonald's makes money on the high margin rent and on the high margin franchise fee. This makes it an extremely profitable business. I mean, to give you an idea, their operating profit margin for last year was about 46%. Compare that to Chipporteley, which was only. 16%. That is a pretty big difference. Adil, thank you very much. We appreciate it. Adil Zaman. And remember, you can always hear us on our podcast. Be sure to follow and listen to Power Lunch on your favorite streaming service. We'll be right back. I want to draw your attention to the markets as

we are falling to session lows with a Dow down nearly 470 points, down 462, labor costs rising at its fastest pace in a year and a half. That was the latest data that we got from the employment cost index this morning, the S&P 500 and NASDAQ, you'll see are down more than 1%. So that's a look at markets. Another story we're watching, Tyler, Viking River Cruise, going public tomorrow, aiming to be the third largest cruise line on the public market with a valuation of $10.5 billion. The luxury cruise line is focused on the older baby boomer traveler that is willing to pay up for experiences, whereas Carnival, Royal, and Norwegian have emphasized their efforts to go after

not only the older generation, but millennials as well. So that'll be a key topic. You were telling me on the break that Viking is no longer just the river cruise business, which I guess was the core of their business. It looked like very elegant vessels. Now they're in the ocean liner business as well. That's exactly. They've sort of transformed from just a river cruise line.

About 80 vessels that are still river off the Nile, Mississippi, among others around the world. But now they've really transitioned to an ocean-based carrier. So they're looking to compete with the big three. And those river, they're built to go under bridges and everything. I mean, I'm not sure they are. It would get... No, it's a great question.

They're a completely different vessel than a cruise ship where they're smaller about averaging around 190 passengers per ship. But people love it. And again, they're not shying away from the fact that they're really going after adults 55 and older. And you're going to be interviewing... We'll be interviewing the CEO, Terson Hagen, tomorrow, on squawk on the street as the company gets set to trade. So don't miss it.

All right. All right. The Treasury Department announcing the new interest rate for eye bonds. It's now 4.28% for the next six months. That's down almost a full percentage point from the last time the yield was adjusted. That was six months ago. The variable portion of the yield is tied to the inflation rate, not the bond market. But despite the drop in yields, eye bonds can still be very attractive due to the tax advantages.

I think you pay no state tax on those bonds. That's right. And they've been a popular. And they've been very popular. They're going down because I guess interest rates have come down from where they were a few months ago. Just a little rebalancing in the market. Separately, the Wall Street Journal reporting that CNBC parent Comcast and NBC Universal are preparing to pay upwards of $2.5 billion annually to secure air rights to NBA basketball games as Warner's T&T Network tries to hang on to those same rights. Sources telling the journal the package at hand includes both regular season and playoff games and would air on both NBC and streaming services, Peacock.

This would be obviously a big content buy for NBC and especially for Peacock. They've been with TNT for a long, long time. And TNT's Kenny Smith picked Warner Brothers Discovery in our stock draft last week because he was so confident that WBD would hang on to those rights. We'll see. Soon you'll be able to eat, play, and gamble at your local Dave and Buster's Restaurant and the arcade chain partnering with the software firm Lucra to create a betting function on its mobile app, which will let customers 18 and older place $5 wagers on

games like hot shots and basketball. We gotta leave it there, but Dave and Busters, you're gonna be able to go there, you're able to make some money to pay for your hamburgers. Thanks for watching. Entertainment. Power lunch. Closing bell begins right now.