(upbeat music) Join FinterAct, a peer-to-peer community of financial services professionals, and keep your finger on the pulse of the industry. FinterAct offers a digital hub to start conversations, connect with fresh perspectives, and problem solve with peers. This members-only community also provides access to virtual and in-person events, where you can chat tech stack, develop efficiencies, and learn new ways to propel your business forward. Apply at FinterAct.net. (upbeat music) Market insight and analysis. You're listening to the opening bell of CNBC, Squawk on the Street. Good Monday morning. Welcome to Squawk on the Street. I'm Carl Kingston here with Sarah Eisen. Mike Santolia, post-night of the New York Stock Exchange. Kramer in favor of the morning off. Futures a bit soft on this holiday shortened week after the Nasdaq's record close on Friday. S&P now up seven of eight weeks as more strategists raise their targets over the weekend. Our roadmap begins with Wall Street's bullish expectations, the S&P getting a new top target of 6K, and eyeing its 30th record of the year. Plus big tech's dominant 17 of the top 20 performers coming from the IT sector this month. Goldman Sachs saying AI continued to fuel the boom. And shares of Autodesk rallying on news that activist fund Starboard Value has taken a $500 million stake in the company. We've got a lot of color on that one. Let's begin with the markets as we do kick off this holiday shortened week. Of course, the news over the weekend, Goldman upping their year in target and Evercore ISI. Mike at a time where we were starting to get a little antsy about narrowing breaths. Well, I think we're still antsy about it. What's interesting is the targets are all the market-cap weighted S&P 500, and we were in a position which was somewhat interesting, which is even the most bullish street target was not particularly bullish in the grand scheme of things. And in fact, going into the weekend, the average and median sell side target for the S&P was below where the index itself was. So that creates this sort of catalyst for somebody on the sell side to say, do I want to essentially capitulate a little bit or acknowledge the underlying strength or do I want to fight it? So we have a couple of targets go up 6,000 and the S&P is up 10% from here. So when the most bullish target on Wall Street is 10%, it doesn't seem to me as if the brokerage community is completely bolded up and is saying everything is great and don't worry about anything. On the other hand, it does show you that the index itself has kind of left behind not just the psychology, but anybody trying to beat it or keep up with it. And I think that's the source of unease in this market is, you know, the average stock out there has been languishing relative to the S&P. Does that tell us something about the economic outlook and what is being discounted or is it just AI momentum kind of consuming all the fuel? Well, if you read some of these reports, Goldman Sachs, let's hit that one because David Costa and he'll be on this week to talk about it. But they didn't, he didn't change his earnings expectations overall for the market, 2024, 2025 unchanged, but stellar earnings growth by five mega cap tech stocks have upset the typical pattern of negative revisions to consensus EPS. They didn't change their outlook for real yields either. Exactly. It wasn't like a call on, oh, we're going to view the market better now necessarily. It's that, what's happening with big cap tech and how that's influencing the earnings picture. Exactly, and it's giving higher conviction of the achievability of the index earnings because it is in these small number of names that seem to have tremendous earnings momentum. You know, David Costa also kind of resorts to, oh, what if you look at the eco weighted S&P 500 and look at how the valuation there is more modest? That is true, but it's still just taking the outsized profits of the, let's say top eight or 10 growth stocks and spreading them across the entire index. I mean, the earnings are still there even if you dice up the index separately. And so the median forward PE on the S&P 500 is probably 19 plus. It's not 16 like the equal weight said. My point is you can't get away from the idea that the way this market plays defense is by buying the most high conviction names, the highest quality names, the largest names, the ones with the best earnings momentum and they're all the same stocks. Everything I just described is like eight or 10 stocks in the market right now. - This was the subject of B of A's note last week where Savita talked about the fact that we all sort of have shock from COVID, shock from the GFC, big piece of bearings over the weekend about Gen Z and their risk tolerance. And as a result, you wind up in maybe the most aggressive growth names, right? Secular growth names. - And it is really interesting because semis in particular look super overheated. The flows into the ETFs has been massive. There's a lot of just like upside stampedes in Nvidia and some of the related stocks. And that would make you say, wow, the public's getting a little bit overexcited here about the stocks, but they're not getting overexcited about stocks, they're getting overexcited about those stocks. And you see penny stock volumes start to go up because you have the lottery ticket players involved, but then you have everything else kind of just kind of sitting out there. Now here's the thing, and Sarah, I've talked about this a lot of times. If the defensive, pure traditional defensive stocks were working really well, aside from Walmart, you can't really find it, the joomis staples and big pharma and stuff, and it's aside from Lily, of course, it's not happening. - We did have that environment for like 20 minutes in the last week. - Yeah, that's true. - Where Campbell's and Hershey were at the top. - And I'm also finding, yeah, that's right. You see, once you see a little bit of downside momentum in the rest of the, the other piece of it though is credit spreads, everyone keeps talking about, oh, they've kind of widened out a little bit, that's what I mean from microscopic increments from super strong levels. - But I guess the question Mike then is, what do you do with the market that people still complain about the fact that it's poor breath. We just talked about, all the action is in the mega cap. Volumes have been pretty low as well. People are paying attention to, and there are some side. Okay, defenses aren't working that well. You know what else hasn't been working well? People are noticing is the transports. - That's right. - It's cyclically tied in stocks to the economy that have really started to underperform, leading to questions about whether we are in for a bigger growth scare. That's something I'm watching. - I think that that absolutely has the market's attention. So transports have been actually a laggard for a while for several months, but it shows you that this isn't really an economic momentum market or even a broad equity momentum market. It's just kind of a grind that's sort of digesting loose financial conditions and really strong secular AI trends and not much else. - To Sarah's point about cyclical weakness, we did have the earnings pre-announcement from Newcorr last week today. It's US Steel cutting Q2 adjusted EBITDA. And that notion of the economy slowing is something that Neil Koshkari did address on CBS over the weekend. Take a listen. - We need to see more evidence to convince us that inflation is well on our way back down to 2%. We're in a very good position right now to take our time, get more inflation data, get more data on the economy, on the labor market, before we have to make any decision. So we're in a strong position. But if you just said there's gonna be one cut, which is what the median indicated, that would likely be toward the end of the year. - He did say one would be a reasonable assumption. - He's also on the hawkish end now of the Fed. Hard to keep track, he's been on both sides, but now yes. And the fact that he's talking about one cut by December, I don't think is surprising at all. Look, it's about the data as much as it is about the Fed rhetoric. And I know we're gonna get a lot of Fed speakers this week, but actually what might be more important is the retail sales number that we're gonna get on Tuesday. Because last week, the Fed put out in the median one cut for the week and the week ended with Fed Fund's futures pricing in two cuts, because the inflation data mattered more. - Absolutely. - I would argue than the Fed, weaker CPI, weaker PPI, weaker indications on import prices and other factors. And that is what's leading the Fed ultimately. So retail sales will be interesting, because last month they were disappointing. - Yeah. - They grew 0%. They are set to rise 0.3%. Strong consumer could put more pricing pressure on for the Fed. Indications are that it actually should have rebounded in May, consumer spending. We look at sort of data like Bank of America's credit card numbers and that sort of thing. So I think how they're gonna tackle the growth issue right now is almost as important, well, not as important as inflation, but it is important to the market, because markets still trying to figure out that relationship of growth and inflation. - But interestingly, even the inflation clues have been helpful. You mentioned not just the data last week, but even in the New York Fed, manufacturing numbers, prices paid, and prices taken were lower. And I totally agree that the Fed rhetoric in the dot plot last week was seen as somewhat more stale and backward looking than the ongoing data. Also, Kashkari, yes, he's on the hawkish. And I'm sure CBS didn't ask him if he was one of the dots that said unchanged by the end of the year, which are four of them. But what's, he also doesn't vote until 2026. So he's kind of able to define the hawkish edge of the debate without it necessarily directly filtering into what they do. - Yeah. Meanwhile, looking in the corners is the labor market and Morgan Stanley's Eleanor late Friday did have a note, risks to employment growth have risen. She's looking at continuing claims year on year. Obviously, we had initial claims up three straight weeks, even with the last NFP print, more discussion about the Somme rule and what happens when you're up 6/10 on unemployment from the cycle low, things like that. - Right, jobless claims I think people mattered last week where we saw the most Americans filing unemployment claims since, well, 2023, but in several months, it was a notable move up. And look, you've had the 10 year yield lower for the last 10 of the last 12 trading days. That's been the trend, buying bonds. It's reversing a little bit today, but as long as we continue to get inflation numbers that are either consensus or a little bit below, potentially more weakness in the jobs numbers and even Powell himself sort of dismissed the last hot unemployment report where we got a really big jump in non-farm payrolls, but then a weaker move on the household survey. He said that even that looks a little overstated. People are passing around a lot of charts about how much the labor force has grown in the last few years, non-native Americans. - Yeah, sure. - Native American labor force has been unchanged in the last few years. So people are using a lot of those charts and adding it up to say, okay, there still is enough of a picture of a labor market that's pooling for the Fed to be cutting. - I mean, it's worth also reminding everybody that the Fed really fixates on unemployment rate, even though they're looking at the monthly payroll numbers on the different survey, the business survey, they're predicting 4% on the year end in the unemployment rate, that's where we are. And so you have to be attentive to those dynamics. I do think that's where the market is. It was always gonna be waiting through an ambiguous set of numbers on the way, even if we get a perfect soft landing. So it's always gonna look like slowing too much or inflation's not cooperative enough. And that's what we've been all year. - In the meantime, if you own the index, you've been fine because it's been really animated by other things. - Couple things on the big tech dominance that you mentioned, Mike. One is that Causton does address it in this move up to 5,600. The other is that Citi closes their positive catalyst watches on both Apple and Nvidia. We got in WWDC under our belts, got the split of Nvidia and Computechs under our belts. - Now what? - Isn't that the concern? - Well, that's definitely the concern. At least that's the takeaway of okay, we got what we thought we might get in a best case scenario. Apple back up to 30 times forward earnings. The earnings estimates haven't started to move on whatever new order cycle might be helped by AI. That might happen, but at this point, it shows you that it's kind of fully valued on its own terms. And that Nvidia, it's such a common talking point for everyone to say, you know, Nvidia's PE's come down, even as the stock has gone to the moon, because a year ago it was at 50 times earnings, and now it's at 44. But you know what? It wasn't a 50 times earnings a year ago. The earnings that actually happened in the year after that made it a 22 multiple, okay? So it was at 22, and if you have perfect foresight today, if they're gonna make the numbers exactly from here, it's twice as expensive. Obviously the numbers can keep going up, but how much? I think that's where we are with Nvidia. - Yeah, by the way, today, I think it's Susquehanna, it goes to 160 Nvidia. That's a street high. They're doing 51 times 2025. - Yeah. - Which is much, the median group is in the 28 range. - Yeah. - What is it, 160 this year? - Yeah, 160, yeah. - Would be a street high Nvidia. - And that's, I'm just trying to do the market cap on that, because I think, yeah, that's a four trillion dollar market cap, basically. So, yeah, no big deal. (laughs) You know, just to add almost a trillion, yeah. - They're just crazy. I have to get to the street highs. Dan Ives of Wedbush, who's been bullish all along, says it's only 9 a.m. at the party, and the party's gonna go all night when it comes to the AI revolution. And some of these names, he obviously calls out, Nvidia, the Microsoft breakout, which also is notable. Apple, what's happening there, joining the crowd. We're gonna talk to him in the next hour, but-- - In my experience. - We're in early hours here of this late night party. - Parties that start at 9 a.m. Don't go all night. (laughs) - I was gonna say, what party starts at 9 a.m.? - One more question for Michael Dell. - It goes to the morning. - Yeah, Michael Dell, he's gonna be on with us. - I guess we're tailgating, and then we're gonna go to the game and go to the party app. - No, but there is this question about, so if the winners in the AI revolution were the picks and shovels, right, the semiconductors, who's next as the beneficiary for all this AI spending? The server companies like Dell have been tremendous. HPE has been in there super micro, has been one of the best performing stocks of the S&P 500. And then what? And I think that's sort of one thing that we wanna talk about with Michael Dell, how much of the company of his company is gonna be transformed by AI, and is it gonna be profitable? Remember, there were some questions about that off the last earnings, when the stock dropped almost 20% on earnings, because the margins missed. - There is a huge debate that's developing about just who's gonna be entitled to this massive profit pool, points along the food chain. So yeah, kind of the sort of the installers, the resellers, and then software, because that's been sort of left out in the cold largely, meaning non-invidia software. - Yeah, it's a good day for Dell. It leads to have them on. Morgan Stanley reiterates a top pick on that name as well. When we come back, Boeing once again, in the Capitol Hill crosshairs, when it comes to the company's safety issues, we'll get to Disney, got some news on Autodesk, calls on Best Buy and Stellantis. As futures are split, stay with us. (upbeat music) - Join Finteract, a peer-to-peer community of financial services professionals, and keep your finger on the pulse of the industry. Finteract offers a digital hub to start conversations, connect with fresh perspectives, and problem-solve with peers. This member's only community also provides access to virtual and in-person events, where you can chat tech stack, develop efficiencies, and learn new ways to propel your business forward. Apply at Finteract.net. - Earning your degree online doesn't mean you have to go about it alone. At Capella University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals, to academic coaches, who can help you form a plan to stay on track, we care about your success, and are dedicated to helping you pursue your goals. Going back to school is a big step, but having support at every step of your academic journey can make a big difference. Imagine your future differently at Capella.edu. - Boeing Safety Issues in the Spotlight. U.S. Senator Chuck Grassley says he is launching a new congressional oversight inquiry into both the jet maker and the FAA, the Iowa Republican announcing that probe after, remember, the January mid-air emergency involving a 737 MAX-9. Clearly, all these issues might have weighed on the stock. It's the second worst DAAP performer of the year, down more than 30%. I think only Intel is doing worse this year. - For sure. And you've had just complete waning confidence that there's any kind of an upgrade new order cycle that's gonna kick in. Keep deferring that moment when they're gonna get back to really being a strong free cash flow story. And I guess this also just underscores about, it's bipartisan, it's everybody who wants answers out of Boeing. There's definitely sort of a reflex that says, when the CEO's being called in the carpet to Congress, and it seems as if this company is friendless, that from a contrarian perspective, maybe we've gotten to a point where, could there be more negative news that we don't know about yet? But it's tough to hang around. - I mean, is it just more fine and what are they looking at here? I think is one of the questions that-- - Or more scrutiny on the manufacturing process, which seems very well underway in terms of Boeing itself, trying to revamp that process. - There have been some that have been trying to stay constructive, B of A last week, reiterated neutral, went from 180 to 200, and employed what we're calling the duopoly defense meeting. There aren't many other suppliers to go to, but did argue that it would take time for this confidence towards-- - Yeah, you're down to arguing, it's an indispensable company. Obviously, it's not going to be a point where you're really gonna compromise the business model, it's much more about when can we get back to feelings, if they can take advantage of what should be a very strong aerospace cycle. - The other side of this too is the page one of the FT today, as a story about the defense sector at large, hiring at levels that we haven't seen since the Cold War, because there are so many flashpots when it comes to geopolitics right now. - That is true, and Boeing has gotten almost no credit from the whole defense boom that the rest of the industry has, they had some problems in there, defense unit as well, but yeah, it's been one of these tricky spots that, I don't know, it's not at all representative of how overall industrials have done, I mean, that's been one of the stronger groups, but it's a totally different stream of revenue and profits, which is kind of CAPEX manufacturing chips. - But to Carl's point, I wonder the industrial strength, how much has to do with cyclical, and how much has to do with structural issues, like defense, for instance, which is clearly going up as geopolitics get worse around the world, infrastructure building in the US, with all these subsidies and industrial policy. - It's by far more of that, yeah. - The economy's looking open. - Definitely. - When we come back, one chief strategist gonna tell us which stock he believes should replace Tesla in the Magnificent Seven. Meantime, take another look at the pre-market as we get set up for a busy week, as Sarah said, retail sales looming tomorrow. Squawking the street continues in a minute. (upbeat music) - Join Finteract, a peer-to-peer community of financial services professionals, and keep your finger on the pulse of the industry. Finteract offers a digital hub to start conversations, connect with fresh perspectives, and problem solve with peers. This member's only community also provides access to virtual and in-person events, where you can chat tech stack, develop efficiencies, and learn new ways to propel your business forward. Apply at Finteract.net. - It appears that Tesla's getting some positive news out of China, a source telling Bloomberg, the EV maker's been granted approval to test its advanced driver assistance system on some Shanghai streets that would mark the next step in rolling out that feature to Chinese drivers. Of course, last week we had the time story about some 16 cities in China doing some form of testing on public roads, probably the most aggressive stance of any developed country. - I mean, they've clearly prioritized EVs, and Elon Musk, that visit to China, what, a few weeks ago when he met with Premier Lee, clearly paid off. UNICEU and our reporters been saying that Tesla has been granted the ability to do these tests, so more evidence that that's happening. On the other side, he now has this SEC investigation into the Twitter disclosure. So remember when he was buying up, buying shares of Twitter, this goes all the way back to 2022. There's some questions about whether he disclosed it after he had as much of a 5% stake, which is the rule on the SEC. He might have waited till he had a 9% stake. - We said it at the time, too. It was unorthodox, yeah. - The question is what implication could this have? Obviously, Twitter's a private company, but could it matter for Tesla? The Wall Street Journal with the piece that, if this amounts to something like the SEC asking a court to revoke his privileges of being a director of a public company, that could have some questions around what's gonna be allowed for his Tesla. - It's pretty significant. And of course, he had previously had this SEC settlement related to his public disclosures, related to a potential Tesla buyout, and that was, you know, he's supposed to buy by certain agreements on that score. You know, the obviously Tesla shareholders gave a huge endorsement last week to that pay package. That was tied in large part to the stock getting up to really tremendous levels from where it was initiated in 2018. On the other hand, to me, the part of that, that was a little bit uncomfortable was he had such incentive to jack the market cap up by a certain date, and he has an ability and a willingness to basically hype the stock publicly and sort of put out these aggressive targets about what's gonna happen, including robo-taxis, and in terms of when that was gonna be a reality, what do we mean? And so it seemed as if he had this unusual ability to get those targets met, even though all above board, and obviously shareholders said that's fine. - It's not his first fight with the SEC, either. Remember, they had a problem with the funding secured about Tesla, which ultimately led him to have to step down as chairman, pay a fine, and settle with the SEC. So there's history. - We're gonna keep an eye on it today. There's the open bell. I'm just here to see how it kind of changes with the big board cap authorities of New York and the archbishop of New York. That's gonna keep hard to go on at the NASDAQ. It's a Kanjoon, China's largest online recruitment platform. As once again, Mike, we sort of either split between the S&P and the Russell, that ratio now, a new cycle high for the S&P. - Yeah, I mean, it really has put a tremendous amount of air underneath that ratio. The bad news is that it suggests that there's very slim pickings in terms of the stocks that are working. Another day, at least at the open, when you have negative breath on the New York Stock Exchange, almost two to one to the downside. On the other hand, in a weird way in aggregate, the 2,000 stocks in the Russell are less significant because they're a smaller part of overall market cap. If you look back at past cycles, whether it was 2,000 or whatever, at some point you get mean reversion here, but sometimes it's only when the cycle changes, when you do get either into and out of a recession, or of course, if we get the Fedese, they eventually should get some relief. But not in anticipation of the Fedeseing, usually it's when it happens. - Should we talk Autodesk's top gainer on the S&P right now? I can give you a lot of color here on this one, but the story with Autodesk, so we've talked to the CEO on earnings all the time, Carl, this is the company that does software for architects, really, and design. And the news is that activists, investors, starboard value, Jeff Smith, their leader, has taken a stake in Autodesk and is about, is going to today on track to file a suit to delay the annual meeting, the shareholder meeting, which is actually set for the mid part of July. And the company raises some starboard, that is, some governance concerns about Autodesk. And it relates really to an investigation tied to accounting that the company has disclosed, but it really goes back to the way they bill and how their upfront billings work, which is what they were doing for years and they were transitioning out of that. And that was going to sort of set new cash-free cash flow targets and diminish free cash flow. And then they pivoted the company, and again, the company disclosed this in 2023, and it raised some questions about what the free cash flow actually looked like and whether there was a true apples-to-apples comparison. Of course, that free cash flow being tied to executive compensation. The upshot of it was they didn't have to restate or anything, but the CFO of the company was moved out of her role, and they created a new role for her as chief, I think, growth strategy officer, raising again some questions about who knew what, when, and are there governance issues so that investors were misled, ultimately, about voting this late, you know? And this was all disclosed again in April. There were questions about whether the company knew as early as March because that's when they filed with the SEC that they're going to look into this accounting. Here's the letter that Starboard writes to shareholders today. Despite our belief in the strong, long-term prospects of Autodesk, we have significant concerns with the company's operations, governance, oversight, and accountability to shareholders, given its lengthy history of missed commitments and underperformance from an operational and financial perspective. I did speak with Jeff Smith this morning, guys, and he said, look, it's a great company. They have a lot of experience, Starboard, and Splunk, and Salesforce, and GoDaddy, kind of others in this group, and improving the operations and the margins, which is clearly an issue here. They also need to work on some of the governance issues as well. So, speaking of Delaware, we were talking about it with Tesla. Now, Starboard is asking a Delaware court to postpone that meeting and reopen the slate so that either Starboard or others can nominate new directors. Autodesk also gave a statement to CNBC.com saying their board and management maintain an open dialogue with shareholders. Welcome, constructive input from them. We are confident in our strategic direction, significant margin opportunity, and corporate governance. Clearly, Starboard disagrees with that. >> Interesting that the stock is getting a little pop, that there might be some kind of extra set of eyes here from Starboard at that sort of the standard, you know, activist response from a company. What is also good is the reminder that free cash flow is kind of in the eye of the beholder. It's always defined as, you know, gap cash flow, minus some stuff. We think it's okay to exclude. And software accounting is notoriously also a little bit tricky to have to actually know what they're telling you. This stuff is, sometimes as you say, it's booking space, it's usage-based, subscription-based. So I think it's interesting that we'll see kind of what the true underlying long-term earnings power might have been here and, you know, see if they get to any answers. >> Yeah, but clearly, Starboard wants to hold their feet to the fire, both on the governance front and on the operations front. You know, they were probably looking at it before all of these sort of governance and accounting issues came up. >> Things that have been such an underperforming. >> Underperforming, some of the peers potential for margin improvement in a growth business. I mean, the company has still grown. And we've talked to the CEO a lot, Carl, about how, you know, that design business is actually a good one. It's recurring revenues. It's, they have a plan for AI and all of that, but clearly going to be under some pressure here with Starboard. >> Yeah, although some of those subscription products, Adobe's a good example, have sort of been through the mill in terms of questioning the business model. Of course, that got answered a little bit on Adobe's earnings last week. It's interesting too, the, I don't wanna have to call it a trend of activism, but we did have Peltz Disney. We've had Elliot Love. And now this, speaking of Disney, inside out too, we've been looking for something to rescue North American box office. And this is the best opening weekend since Barbie, second best animated opening since the Incredibles 2 back in 2018. >> Did you guys see inside out the first one? >> No. >> Okay, I could have told you that this is gonna do well. >> Oh, I could have did. >> That movie is genius. My kids don't like any movies. They only wanna watch sports, except for inside out. And they're dying to see inside out too. We didn't have a chance to take them, but I know if that's my story, a lot of other parents. And it's also one that the parents love too. I know they say that about a lot of the kids' movies now, but this one really is, I don't know if they won any awards, but they should have when it first came out because it was an incredible, imaginative movie. >> My daughters now, 2016, remember the first one finally, went to see the new one with two friends of the same age. And loved it, but the fact that they were motivated to go and see it on opening weekend was interesting. I mean, you gotta make the call. It's about a girl going through puberty, Sarah. So, you see if you wanna bring the kids or the ones. >> I know, well, they sort of teased that at the end of the inside of the first one about puberty. But look, Disney's adding the most of the dough right now. It's adding 10 points to a- >> And the narrative as to whether movies are alive or dead basically changes every weekend. So, you have to just more or less take it on, you know, as the release has come, yeah. >> Meantime, chips, obviously, once again, with their hand on the steering wheel, Broadcom's the number one S&P or Micron, not far behind, Sarah, as B of A goes to 170. Man, the now surpassing the weight of software in the indices, it's incredible what chips have done this year. They're breaking out. And look, this is partially why the NASDAQ 100, the NASDAQ, the S&P, and the semi-conductor ETF all broke out last week. This is the story of the market, Mike. And one of the debates, you know, there was a good note over the weekend from Matt Mayley of Miller-Tayback, is it a bubble? >> Yeah. >> And if it's a bubble, are there signs that it could burst? >> I think most of the evidence comes down to, first of all, all bubbles are based at their core on something genuine, real and new. >> Right, but how much hype is there in terms of future >> And then on top of it, you have people over extrapolating that trend and paying too much for it. And feeling as if the valuations don't matter. So I think it's more about, this is a leadership group of the market that's probably gotten a little too extended in the short term, especially when you have the people looking for the next one, as with Micron, which wasn't really its business at the core of what the main trends were, you know, in AI. >> Looking at some of these social media stocks as well, increasing scrutiny, to put health warnings on social media. I thought that was interesting. So I met us down a little bit today, not having a huge impact. Alphabet's down 1%. >> Although, yeah, big piece in the times, looking at the warning that the impact that social media has on teens and kids, met as an interesting case study because it did fall almost 20% after Q1 earnings, and I think is back within about 4%. >> Exactly, it almost recovered all of it. And then it's sort of hesitating here at this level, yeah. >> The only thing working, so it's information technology. Thanks in part to what's happening in Autodesk and Broadcom. I mean, that's it. Every other sector is down, utilities giving back 1%. But we're coming, what, one week out, Mic, from the half year, so from the end of the quarter. And I don't think anyone expected, look, technology obviously the best performing sector, up 30% communication services. Utilities right there, number three, up 8.5% on the AI trade, I guess, and then financials too. And in part, I've been hearing from shareholders, look, the financial fundamentals are good, but also there's an AI story here. All these companies with labor as their top expense, as they continue to spend more on AI. I just wonder how far that goes. Does it go until we have a downturn, and then we start to see the layoffs at companies like Big Banks, and then that's already been priced in? Also, sort of the high profile stumbles of product out of Microsoft and Google last few days. And then McDonald's turning tail on this IBM partnership in which they were testing chatbots and drive-throughs. We still don't know what that's all about. >> No, that's right. And I almost think that exacerbates the semis over everything storyline, because what we really know is the linear demand trends in those areas. And people, companies feel compelled to invest heavily, whether they know they're getting the payoff on the other end or not. And for now, that does benefit the hardware. >> Let's turn to tech dominance today, and MAG-7 performance. Our next guest is interested in a lineup change. Let's bring in Steve Sosnik, interactive brokers, chief strategist, Steve, welcome. Good to have you in. >> Great to see you in person. What would a line change be? What are you looking for? >> In January, I proposed that the MAG-7 really changed its roster, and that was to add Broadcom and Ditch Tesla. And I think I feel vindicated by that recently. The reason for that at the time was not just that Tesla was underperforming. It was that Broadcom captures the whole zeitgeist of the moment right now. It's an AI stock, much more so, even though Tesla may be one more in the future. Broadcom is one in the present. >> Does it say something that idea? Does it say something more about Broadcom than Tesla? >> Yes, it does. It's more just about, you know, Broadcom is part of this whole movement. And what we're seeing now is this great combination of Momo and FOMO driving the market higher. And Broadcom is part of it. Tesla is not right now. >> To me, part of the premise of some group like the MAG-7 or the old FANG getting anointed is that these are the companies that have a long-term enduring advantage, and you don't have to overthink it beyond that. If we're going to be shuffling the members all the time, like, what's the point in a way? >> Well, I mean, it's a fictional character anyway. >> Yeah, yeah, yeah. >> Right, I mean, so, you know, we can do whatever we want with it, and I just felt that that would represent, and it does represent us better right now in terms of what's going on. >> But is it also worrisome that the breath is so poor and that the concentration is so high? >> Extraordinarily so, yes. Because I think what we've had here is essentially a pair of binary outcomes. Either we're going to keep getting driven higher by tech and momentum, or this fails, and because we're so stretched right now, there's not a lot of room. It becomes sort of like everybody trying to crowd out of a fire exit, or something like that, and that really is the problem. That's why I look at this as if you want to follow the momentum, go ahead. But this is where when volatility is low, when options are cheap, this is maybe where you want to be looking at insurance. >> I do wonder about the dynamics of that, in the sense of people want to complain about the fact that the index maybe isn't reflective of the typical stock. So let's say the big ones that have been driving the upside do get tired, do break stride, do correct hard. Does that mean that target and Bank of America and all the stocks that haven't been participating are going to go down more? Because the median stocks underperforming the S&P quarter to date by like eight or nine percentage points already. >> It depends how the exit, if it occurs happens. Because remember, anytime you buy, let's say spiders, which is the generic basic ETF, you're putting 25 to 30% of your money in tech, whether you want to or not. And so if you get a bit of a route in the tech sector, my fear is that people get out of spy, they get out of cues and that drags the other stuff down, creating probably better value in the value stocks, but in the short term, that could get nasty if it occurs. >> I had a question about sort of behavioral economics. We mentioned this Baron's piece over the weekend looking at Gen Z, which is they've grown up either in a pandemic or being told the planet's going to end because of climate. And as a result, their risk tolerance in their FOMO is extraordinarily high. Is that, do you see that as sort of cornered into a certain element of the market that's not material to the broader market or not? >> Yes and no, I think most of the, as the parent of Gen Z people, I would say that they do at least my kids have an understanding of what's kind of real and what's kind of fake. The one thing I will say is when you're very young, you can take more risk, you can chase game stop, you can chase these other situations. I don't think that's, you know, like part of a healthy balanced diet, so to speak, but you know what, this is the age where you can eat junk food and get away with it. So, you know, they give it a try, but I'd like to think they come back to, you know, what I would consider more established type of investment for you. >> Well, kind of related question at interactive brokers, what do you see in terms of retail sentiment right now? >> Our customers love volume and volatility. That's basically where we see where we see the action. >> But we're not seeing either. >> But we see it in individual names. So, Nvidia, GameStop, AMD, Tesla. These are like the perennial leaders, well, GameStop is more of a recent one. But every so often, we'll find on our top 25 most active list some name that I have to look up because it went up, you know, 10 fold in two days, and everybody jumped in and started trading around it. So, our customers are very trading- >> Are they losing money on those meme trades? Are they doing well? >> I don't think it's kind of, I don't have any insight into whether they're making or losing money. The fact that they're still here means that they're losing money. >> It's kind of zero sum on some level. >> I think it's probably zero sum to sum. >> I mean, to Karl's point about Jansy, I think one of the arguments is that, you know, if you feel like housing is chronically unaffordable, and I feel like I'm never going to be able to have that, you know, kind of orderly accrual of wealth, lottery psychology might as well take over. And, you know, I can either sort of look for the long shot and bet it, and I'm okay if I lose, or, you know, I can maybe hit the score, and I'll be, you know, I'll be one of the lucky. >> It's crypto, too, is kind of fed into that. >> Crypto is entirely part and parcel of that. And I will say, my Jans, one of my Jansy years basically does social media for a range of crypto companies. And my comment is, what do your customers get out of it? But they, he's doing, they're well doing this, because that's what they respond to. >> Attention is the product. >> Exactly. >> Before we let you go Steve, really quick, are you seeing election-driven hesitance creep in? >> Not yet, although we do see it reflective in the VIX futures curve, where you see a bump in October. Bearing in mind that VIX is always looking ahead 30 days, so mid-October VIX is looking at the election. We do see that bump, it's not, it's not there yet, but I do think that bump is going to get more pronounced as we get closer to the election, because I think the range of potential economic outcomes stemming from the election is quite wide. >> We'll be talking about that more in the months to come. Steve, it's great to have you in. >> Thanks for coming by. >> Thank you. >> Steve's listening. As we go to break, let's watch bonds today. As you know, FedSpeak is a back connection. We will get some today with Harker at one o'clock. Meantime, bonds got a yield, got a little bump as the Empire survey came in a bit, a little bit better than expected. We're back to 428, stay with us. >> Well, as we've been tracking, consumers may be spending at restaurants more cautiously these days, but there has been a bright spot for some companies with specialty protein offerings. Kate Rogers is here with more, Kate. >> Hey Sarah, good morning. The sector overall did have a challenging quarter, but protein was definitely a bright spot for some chains. Sweet Green CEO Jonathan Neiman told me that the introduction of protein plates were one of the drivers in its most recent quarter with the most recent menu addition there being steak. In fact, the company's dinner business, he says actually grew more than its lunch business this quarter with Neiman pointing out that $15 for dinner right now actually feels pretty reasonable for consumers in an environment where fast food is starting to feel more and more expensive. Kava is also getting in on the steak action, raising its full year comp guidance ahead of its recent launch due in part to an anticipated tailwind from offering steak. And this will likely again appeal to dinner time customers, which is something that Kava actually managed to grow significantly during the pandemic and has been a leader on. Dutch bros, another great example, the chain offers specialty coffees and introduce protein infused coffee as a limited time offer, but CEO Christine Barone said younger consumers are drinking it and some customers now use it as a meal replacement. So they decided to add it as a permanent fixture to the menu. Reminder, bros had 10% same source sales growth this quarter, its strongest quarter in three years. Now for the story I spoke with mandatory investments, that's a private equity firm investing in the health and nutrition space. The consumer desire for more and more protein is stronger than it's ever been, according to their investment lead, Steve Young. Consumers are willing to spend a bit more on something that may be perceived to be healthier or something that achieves a desired goal for them like adding more fat or protein to their diet. So very interesting trend here guys. In sweet green and Kava we should know both up more than 100% year to date, which is quite impressive. Back over to you. - It kind of reminds me, Kate, of the grief that Chipotle has gotten for the servers that are giving you food, if you whip out your phone, they feel under pressure to make the serving size a little bit larger. - Yeah, definitely. And Brian Nickel has said that's a little rude to the servers, right? And they want to give you what you want. And in fact, Chipotle says it has not changed its serving sizes. So again, this gets back to that trend where people are spending a bit more cautiously perhaps. They want more from restaurants and this environment and everyone's trying to keep everyone else happy, right? - Is it a fad, do you think? They just people protein now or this is a long-term story? - I think it's a long-term story because remember, health kind of comes and goes and Chipotle was a leader on this one. And remember, a few years ago, made the whole 30 partnership quite popular and that also helped grow both their lunch and their dinner business because people wanted something that was healthier and kind of adhered to some of these different dietary shifts and changes that they were making. So I think that this is here to stay. It takes different formats, you know, as time kind of evolves, but I don't think this one's going away anytime soon, guys. - Kate, appreciate it. Hopefully we can catch up again and talk about the McDonald's AI, another interesting story on your beat. That's okay, Rogers, out west. When we come back, we'll talk some Megatec and AI with web bushes, Dan Ives raising his target on Microsoft as the week opens a bit, soft S&P's down nine, don't go away. - You've been listening to the opening hour of CNBC's Squawk on the Street. - All opinions expressed by the Squawk on the Street participants are solely their opinions and do not reflect the opinions of CNBC, NBC, Universal, or their parent company or affiliates and may have been previously disseminated by them on television, radio, internet, or another medium. You should not treat any opinion expressed on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of an opinion. Such opinions are based upon information, Squawk on the Street participants consider reliable, but neither CNBC nor its affiliates and/or subsidiaries warrant its completeness or accuracy and it should not be relied upon as such. To view the full Squawk on the Street disclaimer, please visit cnbc.com/squawkonthestreetdisclaimer. (upbeat music) - Join FinterAct, a peer-to-peer community of financial services professionals, and keep your finger on the pulse of the industry. FinterAct offers a digital hub to start conversations, connect with fresh perspectives, and problem solve with peers. This members-only community also provides access to virtual and in-person events where you can chat tech stack, develop efficiencies, and learn new ways to propel your business forward. Apply at FinterAct.net. (upbeat music)
