Stock Rotation Hits Tech Giants as Small Caps Rise

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1:37Carol Massar:Bloomberg Audio Studios. 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 Business Week Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. We just want to get a check on kind of how we ended up today and as we get ready for some more big mega cap tech earnings. We're talking about Alphabet and Amazon coming our way over the next couple of days. Eric Wiener is in the house back with us.

2:20Carol Massar:Senior Editor, Equities Americas at Bloomberg News here in our Bloomberg Interactive Broker Studio. A lot coming out of investors. Certainly we watch for headlines that impact the trade here. Is it still really, though, largely about earnings for the most part? Although some policies, like we saw with the home builders today, certainly impacted by some things that could come from the White House. Well, right now, as far as today is concerned, Anthropic really freaked out the market. And software has been selling off. Software stocks, in particular within tech, have really done poorly. I mean, if you look at like the Magnificent Seven, you can see Microsoft has really come down more than the others.

2:58And that's spending on AI and that's also software. So today you got a lot of movement around what is at risk? Who is going to survive AI? Who isn't going to survive AI? And as these tools come out and they take the place of other, you know, data providers, you saw like the Lemon Stock Exchange down. You saw S &P Global down. Yeah, really weird reactions. And it's because people are afraid that they're going to be replaced. That's different than the big mega cap earnings where you got Google coming in. Google, well, Alphabet, they're up like 10%. They were the best performer last year. The question is that they're within spitting distance of NVIDIA, of passing them as the biggest stock in the world.

3:51Yeah. So, I mean, it's will they will they justify that rally?

3:57Carol Massar:Wait. You know, speaking of this and we're watching earnings so closely, just want to mention, Eric, Supermicro computer crossing the Bloomberg terminal. We are seeing the stock pop initially here in the aftermarket. Let's go to the outlook. The company talking about seeing third quarter net sales of at least 12.3 billion. That is way above the street estimate of 10.25 billion. Sees third quarter adjusted EPS at least 60 cents a share. That's eight cents better than what the street is forecasting. And what's always key is what we're seeing in terms of margins. And right now, we're looking back at the second quarter, adjusted gross margin, Tim, 6.4%.

4:34Carol Massar:That was a little light, 6.52%. But nonetheless, check in Supermicro, up about 9 % here in the aftermarket. Yeah, the company's seeing third quarter net sales at least$12.3 billion, beating estimates of$10.25 billion. Eric, before we let you go, does this report from Supermicro, a sigh of relief after volatility like today? Sure. I mean, and we're seeing examples of this. Today may have been overdone. I mean, that is a lot of what we've heard from analysts, what we've heard from traders. It could have been kind of a deep seek moment where people initially react and then sort of come back to the table and think, well, maybe that was overdone.

5:12Carol Massar:And we should say, our Mandeep Singh of Bloomberg Intelligence said, you know, software's not all going away. And he said some of it could have been a valuation story as well. Exactly. So, I mean, and you saw like Palantir did really well. They haven't done great this year, but they got a bounce today because of their earnings. So, you know, it's sort of a moving target when you're talking about AI with winners and losers. And we're just still in the very early innings. Eric Wiener, senior editor, Equities Americas at Bloomberg News. We wanted to talk to you for longer, but we had a busy show.

5:43So please come back again. We'll do it.

5:45Carol Massar:They told us to expect change. They warned us about the transition. But honestly, they forgot the best part. This is the chapter where we finally focus on us. LifeMD delivers expert menopause and midlife care right from your home. From hormone health to holistic wellness, LifeMD helps you feel your best for the best years of your life. Life MD, it's just getting good. Visit lifemd.com slash goodlife. Hello, hello. I'm Malcolm Gladwell, host of the podcast Smart Talks with IBM. I recently sat down with IBM's chairman and CEO, Arvind Krishna, and I asked him, how can companies use AI to its fullest potential to create smarter business?

6:32My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side. For example? If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind. If anybody is not using AI to make their developers who write software 30 % more productive today, with the goal of being 70 % more productive, so we are not asking our clients to be the first experiment on it we say you can leverage what we did we are happy to bring out all our learnings including what needs to change in the process because the biggest change is not technology it's getting people to accept that there's a different way to do things to listen to the full conversation visit ibm.com slash smart talks

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8:07You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern.

8:14Carol Massar:Listen on Apple CarPlay and Android Auto with the Bloomberg Business App, or watch us live on YouTube. Well, our MarketsLive blog today pointing out that Neil Dutta of Renaissance Macro notes that something typically goes wrong in the stock market when a new Fed chair takes over. Years that saw a Fed leadership change also saw big S &P 500 drawdowns, an average of 17 % to the downside for the past four chairs alone. Dutta writing in a note today that, quote, if past is prologue, I would not be surprised to see the new Fed chair tested, especially given the circumstances of his ascension to the job.

8:50A newfound policy dove tasked with convincing those around the FOMC likely suspicious of the motivations to his position. Neil joins us now. He's partner and head of economic research at Renaissance Macro Research. He joins us from New Jersey. Neil, good to see you. You also write in the note that you've been tracking how Warsh's sentiment has changed since his time as a Fed governor during the great financial crisis, 2006 to 2011, I believe. What did you find? Well, good to be with you. I found what you'd expect, which is he's been hawkish throughout his entire public career up until about six months during which he's been interviewing for the Fed job for a president who calls himself a low interest rate person.

9:37Shocking, I know.

9:39Carol Massar:Isn't it like kind of baffling? I think when the name was announced, Neil, I was kind of like, wait, did I miss something? Like, so what do you think's going on here? Or do you feel like, you know, it's interesting. Was it Gavin Newsom who did a big interview with our Brad Stone and just said, you know, kind of the rule of law is in a part his view in terms of this presidency. But he said one of the things the president does pay attention to is financial markets. And do you think that was kind of in his thinking when he said, I got to get I got to put a Fed chair in that the markets respect? Yeah, I don't I mean, I don't know.

10:14I don't know how to think about that. I mean, I think the upshot to all this is that the Fed is bigger than any one person, right? It's an institution with lots of people. It's an institution that's driven by consensus building. And there are a lot of people on the FOMC that rotate it and out from the regional Fed banks, and they're no slouches, you know, like someone like Lori Logan or Beth Hammack. You know, their expertise, I think, is considerably stronger in lots of places than Kevin Warsh. So I don't think they're going to be intimidated by Kevin Warsh sitting around that table. So I think the upshot here is that the Fed is bigger than any one person, and that probably limits a lot of the sort of anxiety that you might get to markets.

11:02I mean, the real test of all of these positions, in my opinion, is really in times of crisis, you know, not so much when things are normal. So we're going to get to crisis in just a second. But first, I'm wondering if we're we're putting the cart before the horse at this point because of what we've heard from Senator Tom Tillis and the fact that he will not back a nominee until the probes into Jay Powell are settled. What does that mean for the for the outlook? Well, typically when you have, you know, the sort of changing of the guard, if you will, it takes about 90 days from the time the person is nominated by the president to when they're confirmed by the Senate.

11:45We'll see how long this one goes. You know, typically the hearing is scheduled before the committee is scheduled about a month after the person is nominated. Now, if Senator Tillis decides to kind of stick to his guns, I mean, he's got nothing to lose. he's not up for a reelection um you know we'll see i mean i you know i think as is the case with any nominee the longer they it's like a fish out of water right i mean what happens if a fish is out of water long enough it starts to smell and um and so i think that's uh that's the risk i think you run um if you uh if both sides kind of hunker down i mean the president has basically said let it go on for as long as it needs to uh you know but to get tillis to back down the president will need to back down from the investigation.

12:30Carol Massar:Hey, you know, I do wonder what a Warsh Fed will be like, Neil, having seen, like you, lots of different Fed chairs. And I remember a time where I feel like you didn't really hear from a lot of Fed speakers, and now it's just such the norm. Is he going to be a quieter Fed chairman so that we're not going to be able to pick up cues and speeches that he's going to be giving potentially if, again, he is indeed Fed chair, the next Fed chair? Yeah, I mean, I think that's been one of his sort of critiques of the Fed is that they talk too much. Do you agree? You know, sometimes, yes, I do. I mean, I think that there's something to be said for that.

13:08But there's also, you know, like with everything, there's a lot of incongruencies in what he's talking about, right? So, you know, during his time as a governor, you know, I don't really recall any meaningful speeches that Warsh gave on the economic and policy outlook. And he probably looked at that as a sort of form of forward guidance that he didn't really believe in. But, you know, he kind of is all about like use less discretion in terms of policy. Right. We should have more of a rules based framework. But I think what's interesting about that now is a lot of what he's talking about in terms of, you know, trying to get rates down, at least up front, is an appeal to discretion.

13:52Like how else would you describe the sort of golden age, right? The thesis that they have to kind of bring rates down, right? Like we're in an economic golden age. It's a productivity boom. Nehru's low. We can cut rates without stoking inflation. Obviously, that's an appeal to discretion at some level. So you're actually going to need a lot of data to convince the people around the table to kind of buy into that theory. You can't just will it into the Fed's policy. The other thing I would say, he's also a big critic of forward guidance. Now, one of the things we know about forward guidance, right, this is, you know, basically guidance on interest rates.

14:29Right. It is that helps move, you know, so that basically allows like movements in the front end of the yield curve to translate more into the back end of the yield curve, right? Because the markets anticipate what will come as a result of what the Fed's doing now. If you get away from Ford guidance, that kind of goes away, and it pushes up term premiums, which all else equal makes longer-term interest rates higher, which is something they've said they want to get down. You know, one of Warsh's big criticisms back in 2024 was that the Fed wasn't able to get the entire curve down in 2024, even though they cut interest rates.

15:07I think what that misses is the fact that longer-term rates fell into the cut. right had they not had forward guidance that wouldn't have happened in which case they may have had to cut even more um yeah so look i mean there's a lot of like interesting little nuances that we can talk about for for hours frankly well one nuance i want to ask you and maybe it isn't

15:29Carol Massar:just a nuance but i do wonder about the connection with stanley drunkenmiller um we talked about this with our Eric Schatzker and the ties that he has, famed investor, well-known on Wall Street, certainly to the Bloomberg audience, to you, that he has ties to Besant, the Treasury Secretary, right, Scott Besant, as well as to Kevin Warsh. I think the FT even talked about the Financial Times about the rise of the shadow Fed chair, meaning Druckenmiller. Just got about 30 seconds. Is that maybe something that could be a reality very quickly? I mean, I don't know. I think a lot of this sort of enthusiasm for a Treasury Fed Accor is quite misplaced.

16:11Okay. You know, I'm not sure I buy into that. Again, that goes back to this issue around QE. Like, why did the Fed have QE? Did they do it to bail out the federal government, or did they do it because the federal government wasn't doing anything? I mean, if you go back to that time, Carol, we were talking about how the government was doing a sequester and austerity. And, you know, I think that kind of gets the causality around policy backward. All right.

16:35Carol Massar:Listen, we always appreciate when you jump up on Bloomberg. So thank you so much, Neil. Have a great week. Neil Dutta, he's partner head of economics at Renaissance Macro Research, joining us from New Jersey.

16:58listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg 1130. Bloomberg News real estate reporter Pat Clark joins us here in the Bloomberg Business Week studio. What did you find out? How would this work? Well, there are details still to be negotiated, right? But it would be what's typically known as a rent to own or pathway to home ownership program where private investors acquire homes from home builders. These could be homes potentially that are sort of built, tailored for this program. So maybe built on the smaller side. So not built yet. Not built yet.

17:34And they could be built for this program, acquired by private investors who would then rent the homes out. And then with some sort of opportunity for renters to convert into owners, usually the way that's worked is there's some sort of help, or at least in more recent iterations on the model, there's some sort of program to help renters save a down payment. Some of the talk around this is that, you know, would there be a role for federally backed mortgages? You know, does Fannie and Freddie get involved in some way, bring down the cost of, you know, cost of interest payments when you actually go and buy the home that you've been renting?

18:11Carol Massar:So private investors, Pat, provide the money up front for home builders to build? And then who gets all the permitting and all that good stuff? That's always so much fun. Well, the builders have to build the homes. But I think the way one person described it to me is like builders are in the moving business, not the storage business, if you indulge that cliche. And so the builders know how to get the homes built. And then they give them to someone else who can hold them on a balance sheet and figure out how to manage them. I mean, managing these kinds of properties is not necessarily— That's been the pitfalls before in this rent to own.

18:50Carol Massar:You report it in your story. It's one pitfall. It's complicated, right? Who's supposed to take care of the home during a period of time when ownership is sort of transitory? So that's certainly one thing. It should be easier with newly built homes, right? If you're doing this the way this has been done in the past, usually, is you buy an existing home, which could come with all sorts of deferred maintenance in it, whereas these homes, you would imagine, could even have a builder warranty on them. And so So that should be easier. The hard part really is coming up with a scheme that lets people convert and buy the homes.

19:27Another challenge, I think, and I'm no real estate expert, but I'm told the three most important things when it comes to real estate are location, location, location. I've heard that before. Where are these homes going to be built? Because it kind of doesn't matter if you create a million homes in places where people don't want to live. Sure. You know, I think that seems like the less hard problem to solve to me. Because that's where, to Carol's point, the permitting comes in. Because a lot of the challenges with the affordability crisis is zoning. And the fact that a lot of these places that are highly desirable with expensive home prices, you can't build because of density issues.

20:05Yeah, I guess that could be an issue. I mean, there's also, like we're talking about, lots and lots of newly built single family homes. These have to go in the suburbs. They have to go where there's land to build them on.

20:17Carol Massar:But is that where people want to live? Like that goes, I guess the argument, Pat, because we've been talking about affordability. You know this better than we do, like for decades. And so you have so many people working in these major cities, be it New York, be it LA. And the ability to live close so you're not commuting an hour or two hours or three hours or whatever the heck it is, you know, it's difficult. So to find that affordable housing that is close to where the jobs are. Is that where this, I mean, if you're buying, if you're building single family homes, that might not be the case. Sure.

20:51That's fair, right? It's like, can you actually find a market for these kinds of properties? I mean, there's, it's not as though there are not homes being, you know, homes are being built in the suburbs, right? Some of them are built, you know, a lot of capital is formed around this idea of built to rent, which is homes that are built for the purpose of renting out very often in communities, you know, in whole communities. Sometimes people call them horizontal apartment buildings. I think those are renting. I mean, it's possible that not every project has rented as well as the developer thought it would when they started because that happens too.

21:25And I think any time you think about building at scale, there's a real estate cycle to contend with. But I think that there are plenty of markets where you could find demand for this kind of product. I'm wondering about the companies that could benefit here. Lennar is up 3 % in a day when the broader market is lower. We're seeing home builders in general higher, apart from just a handful. Who are potential winners here? Yeah, I think anyone in the new home space, right? Like builders, building supply. You know, I wasn't able to unearth a lot of details regarding investor, you know, who is forming the capital to do this, right?

22:09And who gets to invest in this and on what kinds of terms. But, yeah, you certainly see opportunities.