Chip Stocks Put Up Their Best Quarter Ever Despite Wild Swings

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1:42Carol Massar:Podcasts, radio, news. This is Bloomberg Business Week Daily, reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. You're not going to be surprised by this at all if you've been paying attention. We're talking, of course, about semiconductor stocks, adding for their best quarter ever, extending an extraordinary start to the year, driven by insatiable demand for AI, equipment.

2:21But after recent jitters set the stocks tumbling, investors are wondering how much further can the rally go?

2:27Carol Massar:Yeah, let's see what Ian King has to say. He's Bloomberg News U.S. semiconductor reporter. He is in our Bloomberg News San Francisco beer. He is always our gut check and reality check when it comes to the semiconductor world. Hey, Ian, it is good, great, actually, to have you here with Tim and me. Quite a run, quite a bounce back that we have seen in semis. Is the run, in your view, in the second quarter, is it justified against the backdrop of the fundamentals of these companies? And I think we have to be smart here, right? Because not every semi-name is the same. No, you're absolutely right.

3:00We've seen a huge run-up overall, but some companies have run up way more than others. And if you look at what that's done for the valuations, then that's clearly something that investors can key upon and decide. At the moment, it looks like we don't really care. You've got a company like Intel, which I believe is the second best performer on the SOX this year, and it's trading at sort of above 500 times, whereas a company like Micron, which I believe is still the best performer this year, is trading, I think, in the 20s. So there doesn't appear to be a huge amount of differentiation between companies that are generating, you know really good earnings and companies that are still got to prove themselves and maybe that is how things will pan out as we move forward you know carol taught me this great function on the terminal at the end of the first year of working together where you can just look at member ranked returns for certain categories i just did that for the socks ian the worst performer so far this year Nvidia, only up 6.5%.

4:04It's notable given that Nvidia was kind of the company that, at least for a lot of people, started this all. It was the one that really surged back a few years ago and continued that surge. What has been Nvidia's challenge this year? I mean, just reading the reports and talking to investors, there is no problem. There's nothing wrong. The growth that it is showing from an incredibly high level at this point is still there. All of the demand drivers are still in place. It's getting new products out quickly. The new products are doing OK. So in terms of the fundamentals, it doesn't appear to be anything wrong.

4:42But what people have told me is that the story has changed. We've switched. Going back maybe two years ago, NVIDIA's position was absolutely unchallenged. You could say it's probably not challenged yet, but there is more talk, there's more stories, there's more narrative that's looking at other companies, new offerings that might come in that might begin to steal a little bit of market share from NVIDIA. So that's really what it's facing. It's more of a, the story isn't as fresh as it was, rather than there's anything fundamentally wrong.

5:15Carol Massar:So Ian, I had this great teacher, courtesy of Bloomberg, who has taught me about semiconductor cycles and how demand increases. And then you have semiconductors ramp up to meet that demand. And then you have oversupply. That teacher is you. And so I just, you know, dare I say is something different this time around. Are we seeing the build happen? Or I feel like we've had some conversations around this table with maybe Mandeep Singh and others that, you know, But where are we on that? Yeah, I mean, that's sort of ongoing tension within the industry right now. We have all of this insatiable demand signaling going on.

6:01All of this CapEx spending keeps going up. And we're talking hundreds of billions of dollars that's been committed to spending on this gear. So the demand side is absolutely there. So then, well, why isn't supply ramping up to meet that? And primarily, that's the memory chip guys. They're the kind of bottleneck at the moment. And the answer to that is they're not stupid. They've seen this movie before. Of course, they're going to increase supply. Of course, they're going to tell their customers that they're going to increase supply. But they're not going to do it at this kind of reckless breakneck speed that we've seen in the past.

6:35I mean, there's only really three of them now that matter. So it's very clear who's doing what. And there's no kind of wild cavalry charge into the kind of capacity bills that we've seen in the past. I mean, three years ago, these guys were losing money. So there's an element of sort of common sense exerting itself that maybe some of the executives running Samsung, running SK Hynix, running Micron, perhaps are wise enough that this is perhaps too good to be true. So they're going to be careful. They're not going to get ahead with their skis. So we're seeing that tension right now. Ian, to Carol's point, you have been doing this and covering this beat for a while.

7:12You've seen different cycles. You were actually in Korea years ago covering some of the companies that are now worth upwards of a trillion dollars that we've been talking about for the past few months, SK Hynix and the like. I'm curious about where, not where we are in the cycle, because Carol was asking you about that, but really if there's any historical parallel with the dot-com boom and then bust, what we saw in the 90s or maybe even what we saw in the early 2000s. Is there any historical corollary here? Well, I mean, the callery would always be that, you know, good times, particularly for the memory chip guys, always been the herald of doom and gloom and disaster that follows shortly.

7:55This time, though, they are actually saying it out loud. They're making that dangerous proclamation that it is different. And it's certainly we're certainly seeing a new area, you know, that the extent that it's happening is enormous. us. But really, we have to be careful. We have to be clear-eyed because computing has changed. Computing has found a new form. It's found a new market, but it's still restricted to computing. What we need, I think, for this to gain confidence and gain the sense that, hey, it's going to last longer is AI to get out there in society to have more profound impact on the economy.

8:32Right now, it's made coding much better. It's made internet search much better. It's made some of the things that we all do on computers on a regular basis easier. But what else has it done? And I think if we saw more signs of that, if we saw more signs of it really getting into new industries, pharmaceutical, for example, then perhaps there'd be more confidence that this isn't just a bigger bubble than we've seen in the past.

8:56Carol Massar:Yeah, I feel like it just plays so largely into this whole AI narrative, right? Like just how big is this going to impact our world? And obviously that would determine how much we need in terms of semiconductors. you are a great teacher Ian King thank you so much always always Ian King he's Bloomberg News US Semiconductor Reporter he's out there in San Francisco stay with us more from Bloomberg Business Week Daily coming up after this

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11:47Carol Massar:Let's bring in Dan Suzuki. He is a global investment strategist at iCapital. It's an end-to-end platform for alternative structured investments and annuities. It has$1.2 trillion in active global platform assets at the end of May. So that's assets moving around the platform and across the platform. He's here in studio. Hello, hello. Good to have you here. Yeah, thanks for having me. So good first half. Absolutely. Amazing second quarter for a lot of names. Tailwinds are in the rear view. How come? Well, I think if you look at where we are today, it's hard to argue that things aren't phenomenal, right?

12:20I mean, we have the best earnings growth since 2021. You're seeing all these different indicators like retail sales are double digit. Employment's starting to come back. PMIs are doing really well. So growth is obviously really good. And that's kind of what's been powering the market higher. As we look to the second half, I think the bigger question is, are the growth drivers that drove the first half, are they going to be sustainable into the second half? I think a lot of those are going to be going away. And so it doesn't mean the market can't go up, but there's more risk to that story. I think it's going to be a little bit choppier.

12:51What are some of those risks to the story? Right. So, you know, one of the big things is record tax refunds, right? Those are all paid out. And so you get a little bit of a continued boost as those get spent. But that's going away. Part of the big first half boost was just the fact that we are reopening from the government shut longest government shutdown in history. Last year, you had the Fed out there doing RMPs and buying treasury bills. You had Fannie and Freddie buying mortgages. And you have AI spending those, you know, obviously surging. That's continuing. But a lot of these things are going to get a little bit more choppy.

13:25And so we look at the second half, and there's probably three big risks that, you know, they don't have to happen. But they're the things that you should be monitoring if you're going to be worried about the second half. The first is the fading consumer tailwinds I already kind of alluded to. The second is AI capex vigilantes. You're starting to already see that story play out. And then the third would be just sort of a higher for longer interest rate story as it sort of cycles through the economy. So we think that interest rates are more likely to be lower than they were from where we were. And inflation should start to come down as it's peaking.

13:57But the fact that they're going to still be elevated, I think, you know, listen, credit card delinquencies are basically 15-year highs. We have a record amount of credit card debt. There's things that we have to consider as you look to the back half because things have been so good. The credit card debt and the delinquencies. Well, let's start just with the debt. Is that inflation adjusted? So, like, is that a fair way to compare it? Well, even if you inflation adjust it, it's high. I mean, if you think about, you know, why the consumer has been so good, I mean, it doesn't make any sense. We've had, you know, real incomes just went negative, you know, for the first time in a while.

14:34Because of inflation. Because of inflation. So you have these headwinds to consumer, yet spending is really strong. Well, how is that? Well, they're drawing down their spending. We saw basically, if you go back in the 40, 50-year history of savings rates, you don't sustainably come down to these levels where we are today. You did for a few years pre-GFC, but you don't come down here. So they're drawing down to their savings. They're tapping their credit cards. And so that's what's kind of happening here.

15:02Carol Massar:Dan, is what really is happening is something we've talked about so much, and that's the K-shaped economy. That the consumers that are feeling the pinch or are facing credit card delinquencies, is it the lower rung of that K? And this is the disconnect we get of people not feeling so great, not doing so well in this economy. And then you have a stock market at record highs because there are those folks at the higher income strata, if you will, who are in the market who are doing well. 100%. And so when does the problem of those that aren't doing so well kind of play out in the economy? Especially when we talk about the wealthier consumer is really what pushes consumer spending.

15:43Yeah. I mean, Carol, you hit the nail on the head. That's absolutely right. And the problem is that the K-shape is getting wider. And we talk about this in the report in our mid-year outlook. But also, you know, probably the bottom part of that K is growing, right? And so the concern is that that lower-income consumer that's feeling the pain, it sort of moves up into the middle-income consumer, which becomes a bigger part of the pie. And one of the things that's fascinating is that when you look at inflation, we talked about inflation. Actually, if you're in the highest-income part of the consumer, you actually have had deflation over the last few years.

16:20So not only has your stock market been going up, but actually the prices of stuff you spend your money on have been coming down. whereas it's this lower income consumer that's felt the most inflation. The interesting thing is the middle income consumer that we talked about they're just now moving into that inflationary territory so that's where they start to feel the pain and that's one of the concerns. Not that it has to play out as a disaster but when does it matter?

16:45Carol Massar:Like I will be honest with you. I think we've had wealth managers on and are like well they're not our customers. And also they're not the ones driving spending in this country. Exactly. That's what they say too. I'm not trying to be critical, but they're kind of like, well, you know, everybody we're dealing with, they've got lots of money. So I'm like, when does it become a problem in terms of an economy? Certainly it plays out politically. Well, it's really on the margin, right? I think if you see, like when you look at disposable income I talked about that just went, the real disposable income just went negative.

17:15You know, that's including the wealthy, by the way. So it's like as a whole, the consumer is seeing. And that's not just inflation. growth for total income is actually slowing, right? So that becomes a bigger headwind for the consumer, especially now that the refunds are paid out. I think that matters today. It doesn't have to be a disaster because the higher income consumer can still spend. But if you think about the starting point, I mentioned credit cards, but pretty much every category outside of mortgages is basically GFC level delinquencies today. That's a problem. Yeah, it is a problem.

17:51But to your point, it is concentrated in the lower end. It's the concern is that it starts to grow. And not that it's going to collapse things. But on the margin, higher delinquencies and slower growth, that's something that's really not baked into people's expectations.

18:04Carol Massar:Can I just ask? But it happens in an inflationary environment, right? Or is it? Or do you anticipate inflation coming down? Well, so that's the thing. It's like if inflation, well, I do think inflation is peaked or is peaking. And a lot of that has to do with sort of the roll through impacts of Iran and oil prices. So as that comes out, you know, inflation is going to come down. The other part of inflation, the other thing that's been driving inflation higher is not just Iran, but, you know, the economy. We just talked about how great the economy is. People always forget how cyclical inflation is.

18:38And so if on the margin things start to slow, not collapse, but start to slow, and oil prices are coming down, you could actually see inflation come down more than people think by the end of the year. I think it's going to be sticky, but it might come down because people are saying inflation is going to stay high. We're pricing in one or two hikes by the end of the year. We don't think that's going to happen. In fact, if I had to choose, we think base case, no move by the Fed. If I had to choose, I'd say cuts are more likely given what we just talked about. Yeah. So then what's the right way to construct a portfolio for what you think this environment will look like?

19:09Well, I think, listen, I'm going to be the 1000th person that's come on your show this week to say diversification. But diversification matters given what's happening. I mean, you're seeing what type of diversification is asset class diversification. Is it regional diversification? Is it stock size diversification?

19:27Carol Massar:Alternately. Yeah, yeah, exactly. At the heart of it, you want sort of factor diversification in the sense that like, I don't care if you have a thousand different assets in your portfolio. If they all move just based on AI, that's a problem. That's not diversification. Same thing if they all just move based on oil or interest rates. So that's the type of diversification. But I do think that in order to get that, you need size diversification. You need regional diversification. And I do think that the private markets give you a lot more wider of a menu. I mean, most companies in the world and in this country are private companies, right?

20:01So you can either go to the public markets, which are more concentrated than they've ever been, or you actually look to the sort of the private markets and alternatives to look for other alternative sources of diversification.

20:12Carol Massar:What should realistically be your exposure in private markets at this point, considering some of the private credit concerns that we've had and still questions about disclosure? Well, that's what people forget. That's what people forget. It's like asking how much should your alternatives exposure be is like asking what should your stocks and bonds total allocation be, right? It should be because basically— Well, there is a prescription for 60 based on age. And also, yeah, and 60-40 is classic. Yeah, it should be based on your risk tolerance. But I think what people forget is it's not a separate asset class.

20:49Equity at the end of the day is equity, and debt at the end of the day is debt. So it doesn't matter if it's public or private equity. You're owning shares in companies. But it does matter.

21:00Carol Massar:There's transparency. The vehicle matters. But the underlying asset you're buying is still a company. Like SpaceX went from being a private company to a public company. At the end of the day, you're an owner. And if SpaceX grows its profits, you're going to benefit from that. And if it doesn't, you're not going to do well. So I think there's benefits. The benefits I see to alternatives are that it's a wider menu that offers more opportunity for diversification because you talked about private credit, you talked about private equity, but you didn't talk about infrastructure as an example. Infrastructure is very interesting because it's uncorrelated with everything else we talked about.