Even More Reason to Be Bullish? And the Beaten Down Sector Setting Up For Gains 6/17/24

0:02Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast by breakout, why one Wall Street firm is putting it on the buy list and says the stock is poised to surge higher from here. The details coming up. And later, using AI to try to make lemonade out of lemons, the story of how a slumping insurance company is using machine learning to mitigate risk and create coverage options for Gen Z and beyond. The CEO of Lemonade will be here with us on set. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Guy Dami, Julie Beal, and Chris Verone, head of technical strategy at Strategas, a Baird company.

0:51And we start off with a possible reason to get even more bullish. Yes, even more bullish on the market, if that's possible. The S &P and Nasdaq both notching fresh all-time highs today. The benchmark S &P now up nearly 15 percent this year, posting 30 record closes along the way. And that kind of run has Wall Street analysts rushing to play catch up. Goldman Sachs' David Koston upping his year-end target for the S &P to 5 ,600, more than 2 % higher from here. And Evercore's Julian Emanuel going from a year-end forecast of 4 ,750 to a whopping 6 ,000, making him the new biggest bull on the street.

1:26Congratulations, Julian. So is this a case of analyst FOMO, or is there really even more upside for stocks? Guy, what do you say? Well, I mean, I could only be more bullish having not been bullish at all. So number one. Good point by you. No, but number two, I mean, Julian, 4 ,750, raised it to 6 ,000. You saw Mike Wilson, not similar, but he capitulated a month and a half, two months or so ago. J.P. Morgan, the other side of Marco Klonovic, I mean, they actually made some positive comments. Goldman Sachs, they're, I think, the outside of their range, 6 ,300. If everything lines up, they talked about all this money coming in the market in July.

2:02So the momentum is clearly there. But in my opinion, just again, just my opinion, the concerns that I've had for a while have not abated. They clearly have not manifested themselves in the market. But I think this is the time of year where people who are behind the eight ball are starting to play a little catch up. Yeah, I think at that point, I think you're beginning to see that catch up. Let's remember the average target on the street. I think there's 28 strategists who submit their targets is still 53.50. S &P trades above it. We've done a lot of work looking at what do the forward market returns look like when the S &P is actually still above that average target.

2:34They actually tend to be quite good. You want to get uncomfortable when the average target begins to really surpass and leapfrog. And what's one of those features of the end of a market cycle? You have the sell side tripping over each other to put the highest target on the street. I think we're still a little bit shy of that ebullience or euphoria just yet. Well, let me let me pick up on two things you said. I mean, you know, end of the cycle, hard to know where we are here. And again, that's also the economic cycle. I mean, we might be, you know, frankly, mid cycle in terms of the economy. But but the term uncomfortable, you can also say, is it is attached to people, you know, folks in the market, strategists, people that frankly have been holding on to a dynamic where they felt the market multiple didn't make sense.

3:15They felt like the backdrop of volatility and also then dynamics around both the Fed and stuff that's yet to play out. And what we all know is when the Fed starts to steepen, that's actually bad news historically with the inverted yield curve. But what I think at least a very fascinating part of what's going on here is that these strategists are all more comfortable with a higher multiple. David Costanette Goldman said, you know, 19 and a half to I'll take that to 20.4. Julian said, at least on a trailing basis, he's at 25 times. And he doesn't think it's it's it's that extraordinary, at least given where we are in the cycle right now.

3:50But it is about people accepting that the breadth in the market has narrowed and that you are no matter what, when you add up the market as a whole. You've got five companies that are giving you the kind of growth that warrants this kind of a multiple. So it's fascinating with$6 trillion in money market assets on the sidelines and people still say, you know what, that money probably will come in, especially as rates come lower. Not all of it. I'm not sure I agree with that. There's arguments both ways, but there's a lot of money on the sideline. A lot of money on the sideline, which has not come in so far.

4:19And people are comfortable with the leaders in the marketplace, Julie. I mean, there is an argument to be made that when people actually get off the sidelines, they are comfortable going to an NVIDIA and an Apple. What did we see today in shares of Apple as well as Broadcom? We saw extraordinary volume on those names, more than two times the daily average volume mid-session with big percentage gains. Yeah, I think a lot of investors, I think what you're actually seeing in the narrowness of the market and the slowness in strategists to update their forecast is this discomfort with the narrowness.

4:50I think many strategists just don't feel great getting out ahead of their skis in terms of market multiples and the rest of it until there is more breadth. And the breadth is not so much just about the stock performance. It's actually about the earnings performance. And so when we take out the performance of beneficiaries of AI, it's still not great. It's fine, but it's not great. And I think that is the hesitation that strategists are having in terms of getting very enthusiastic about this market. I think until we see earnings improve, particularly in small cap, it's hard to get super enthusiastic about the long-term trends.

5:25But then we will have missed what has been an extraordinary market run so far. So how do we grapple with that? We all want to see better breadth in the market in terms of sector representation, right? But yet, here we are. This is the market we have, and it's taken us up 14%. Yeah, and let's not forget how long this can persist. Breath peaked in fall of 1998, and you had 14, 15, 16 more months of what in hindsight became a narrow market that was leading you to some type of a top. I think what the big question here is going to be, we've been using a 55-50 target. We're 75 points from there. The market is getting externally oversold, overbought here.

6:04I want to be mindful of that. If this is a market that consolidates into the summer or into July or August, what do the other 490 stocks do? Do they use that breather with the big ones to actually exert some leadership? Because there's a lot of actually oversold industrials, oversold discretionary names that might just be starting to perk up here. Yeah, the S &P is trading 1 ,250 basis points over the Dow Jones Industrial. So, I mean, we know what's working and what's not working. So if you're measuring the market, you are measuring five stocks and you are measuring at least. I remember I probably said a year and a half ago, I think the weighting of the top five stocks in the S &P has peaked.

6:41I think it's gotten higher. And by the way, NVIDIA now at 7.1 percent of the NASDAQ, but probably 6.2 percent of the S &P. If you're breaking down the attribution for the market overall, that NVIDIA is two-thirds of the markets of the S &P's performance. It doesn't mean that if you look throughout semis. And that's the place I think you stay excited about, the market, because you see that the NASDAQ over the last two days has made fresh all-time relative highs to the S &P. You can't tell me if the NASDAQ isn't cruising. It's not just semis. It's the entire NASDAQ of which semis grow and grow every day.

7:14But you can't tell me this market's in trouble if we've got new leadership out of the place we got the original leadership. So what do you say to that? Well, the market's not in trouble. I mean, you know, I've thought the underlying economy is in trouble. I'll stand by that. I mean, there are things out there that are absolutely concerning. The market is not in trouble at all, given money flows and given everything that Tim just said. I mean, some of the superlatives, I mean, I think technology is the biggest part of the market now since the dot-com year. You know, we talk about all these stocks there.

7:40basically the contribution to S &P 500 earnings, 40 % of it in the form of three or four different names. I mean, all those things are great on the way up. You know, it has to be concerning what happens when that flips the switch. And if the economy ever becomes the market, it's interesting, you know, if, again, not to be political, I mean, this is just the numbers that are out there, but if the economy was, in fact, the stock market, then the president's approval rating would be at all-time highs instead of all-time lows. So that suggests to me that the chasm between the two is probably about as wide as it's ever been.

8:12If the economy does turn, though, Julie, can you still be bullish? I mean, if you are a believer that the economy is going to turn or is going to show some cracks, the consumer is going to be under duress, that the unemployment rate is going to tick higher eventually, can you still be bullish this market?

8:28We lost Julie. So I'll ask one of these guys here for that same answer. When you look at the last couple of weeks, I think if there's a blemish out there, it's that we've seen rates come down and it hasn't necessarily catalyzed the parts of the market you would expect to respond to. Whether that's small caps or that's regional banks, which frankly don't trade particularly well here at all. We've always looked at things like biotech as a proxy on rates and that hasn't really responded. So you could start to put together a story that this market does not like or is not responding to the move lower in yields as it did back in November, December, January.

9:01What that means, I think we'll learn in time. But to fight the trend here, yes, it's an overbought market, but there's not a lot of big top formations out there. There are stocks that have corrected. I think the big test over the next couple of weeks is can those names that have come in, can they respond to those oversold conditions? What do you think that means that we're not responding anymore to lower rates? I think it's a concern for the growthier part of the economy that's not in tech. In other words, if you want to see industrial growth or transports, Dow theorists will tell you they want to see leadership out of the transports.

9:32You're not getting it. You haven't been getting it for months. So I think the jury is still out on this economy until we got that payroll number going into, you know, the middle and part of that week. It was a case where we were getting more data points that were concerning on the overall market. So I just, you know, I look at some of the moves and, you know, Microsoft quietly at all time highs again. And you look at other places, it does seem that semis have assumed the mantle. And then there are companies like Taiwan Semi that are up 40 percent in the last 25 sessions or so. So these are extraordinary moves at a time when people thought before these moves had made that they'd already had extraordinary moves.

10:09And that's that's the part of this that makes it feel like there is a pain trade higher that I still think continues. Julie, you're a specialist in small caps. So do you think that this area finally gets a lift or I mean, it has not. to Chris's point, they have not responded to the drop in rates that we've seen in the past few weeks or so. Bank of America last week said, you know what? The P.E. is in line with the long-term average on small caps at this point. So where do we go here from here? Right. It's all about, I think in this case, it's all about the E. And the E just really hasn't been there in terms of the earnings growth or the earnings stabilization, because the majority of these small cap businesses just have not been able to shoulder the weight of inflation, plus the challenges with labor markets, plus higher interest rates.

10:51And I think until that starts to change, you're not going to really see the benefits of owning small cap. That's sad. I think you can still find really great small cap businesses that haven't been so negatively impacted by all these other factors, but you have to be extremely selective in this space. All right, let's get to our next, Cassie. Thanks. The rally will broaden beyond big tech and AI heading into next year, into year end, I should say. Let's bring in Dan Niles of Niles Investment Management. Dan, always great to see you. Good to see you too. So where specifically are you looking then if it's not big tech and it's not AI because it seems unimaginable to look beyond those areas?

11:27I know it's AI all the time these days, right? I think that's part of the problem. It's AI all the time. And I think part of this is FOMO. And it's also underperforming versus your index. If you're a big portfolio manager and people don't talk about this, you're judged against your benchmark. And when your benchmark keeps concentrating down into fewer and fewer names, you're sort of stuck or you're stuck chasing it if you don't own enough Microsoft and Apple and NVIDIA. And so that just makes it worse. But at some point, it comes down to earnings. And guess what? In about two weeks, we're going to start, three weeks, I guess, we're going to start having these companies start to report numbers.

12:07And what we saw, which is easy to forget, because you talk about the market hitting new all-time record highs and all the rest of it, is you've had some very big companies talk missed numbers. And I'm talking Salesforce, Workday, ServiceNow, MongoDB. So companies that report off quarter, that reported their April results, those companies all came out and had issues. And these were some of the darlings over the last five, arguably 10 years, where software is eating the world, et cetera, and the demand for what they offer is insatiable. And all of a sudden, the numbers are coming down. And so the thing you have to ask yourself is, you've spent a lot on AI.

12:50Every company has to say AI 50 to 100 times on their conference calls. And by the way, those four companies did. But now you've got to show if there are results. And the spend that you've had about$50 billion or so, let's say, last year on AI, and the revenues you've generated, which is about$3 billion, according to Sequoia, which, by the way, was the early VC investor in NVIDIA in 1993 when that stock was valued at, let's say,$15 million, they put something out talking about this. So I think in a couple, in a few weeks, we're going to come to a Jesus moment. And I think that's when the broadening out starts, because not every company is NVIDIA.

13:33And it's a very short list of names that are having estimates go up. Their stocks might be going up, but the numbers aren't necessarily going higher. And so I think that's the trigger, which is earnings. For all the SaaS names that you mentioned, Dan, those results and the commentary about where their customers have gone and what they've been doing seems to underscore this notion that all the auction in the room is going to AI spend. So you think that already in a few weeks that cycle is going to start to crack? Because that seems like a very short amount of time for companies to say, I'm going to spend, spend, spend, spend on AI.

14:05Oh, but hold on. I need to figure out the ROI. Well, but that's my point, right, is that you have an Amazon Web Services or Microsoft Azure or Google Cloud. cloud, they have companies coming to them and putting workloads on those clouds because they thought they were going to get some return money. Now, if all of a sudden you go, well, the return's not quite what I thought it was, could you see some moderation in spend? And so let me be completely clear on this because I've put out written pieces on it. If you go back to the internet build out, which you could say started with the launch of Netscape Navigator at the end of 94.

14:44That continued for over five years. Cisco never had a down quarter, sequential, during a six-year period of time. But the stock went down 26 % in late 95, 38 % or so in 97, and then another 37 % or so in 98. And that was because revenues went ahead and started to slow down sequentially. They never declined, actually. But that was because you were going through some period of digestion over that big ramp up. And then the stock wrecked it. And so that's all I'm saying I think is going to happen is that the rate of growth is going to slow down from the torrid rates we've seen, because you're going to have to look at, well, am I getting any return on investment?

15:32And we've had four very large software companies, which all, by the way, were touting the benefits of AI, cut the numbers. Let's get a little granular. I think Apple was your biggest holding May into June. Congratulations. Finally joined the party. Apple did after a year and a half of sideways underperformance on huge volume. What are your thoughts on it here at 219 or so? Yeah, I mean, it's funny, but I think that it may actually be the best of all the magnificent seven between now and year end, And partly because if you look at it from a revenue basis, it was the worst of all of them over the last three years.

16:10Revenues for the March quarter that they reported were down 4 % versus a year ago. And if you go back three years ago, they're up a whopping 1%. And to put it in perspective for the Magnificent Seven as a whole, which includes Apple, they're up 90 % on average over the last three years. And even if you take NVIDIA out, they're up 45%. And so with Apple saying, look, we're going to give you all these AI features, but you're going to have to have an iPhone Pro or later to actually use it, which is less than 10 % of their installed base of about 1.2 billion iPhones. That, I think, is going to get on the margin some people to say, you know what, I'm going to go ahead and upgrade because I want to be able to have those capabilities.

16:54And that's enough to get the stock, I think, going. The multiple makes no sense, obviously, in the low 30s relative to the S &P at 23 times. But as we've seen in this market where you've got things like GameStop and every stock going up, people aren't really focused on the multiple if the earnings or the prospects look particularly good, which I think in Apple's case is probably the best they've looked in over three years. Hey, Dan, speaking of bro or speaking of, you know, the chasing GameStop and whatnot, but let's talk about the professional community is really where I'm going with this. And I'm not sure that that is what's going on in GameStop.

17:29What's your sense within the hedge fund water cooler conversation? How crowded are these trades? I mean, I know what the trade, you know, I know what the numbers are from the prime brokers and whatnot. But I'm wondering how many people have been short some of these big winners. And I'm wondering how much chasing you think and how much anxiety there is, especially in, you know, long, short hedge funds that are mostly long, but have been driving with the brakes on with a couple of these names whose valuations didn't look so good. How does it look from inside the hedge fund community? Well, I mean, general underperformance, because if you haven't been massively overweight, a few of these names.

18:05And remember, hedge funds, by their definition, have longs and shorts. And so if you're short the wrong stuff at the wrong time, if you were short Apple all the way up to May 2nd or so when they reported, it was great. It's fantastic. If you were short it from any second to now, it's a very different picture where you've gotten absolutely buried. So I think you've had to be nimble. You've had to be able to adjust your thinking quite quickly. And also, the one thing you haven't brought up in your prior segment here is how much of what happened last week is due to something you guys haven't talked about, which is Europe, where if you look at last week, France's market was down about 6.2 % during the week relative the S &P up 1.6.

18:49That is the widest spread since Russia invaded the Ukraine, you had COVID, and after 9-11. So how much of the performance in the US stock market is people fleeing Europe? Coming into the US, whether it's bonds, by the way, bonds in France had the widest blowout relative to German bonds in quite a long time as well. And so what if that starts to get unwound? Because the The EU is having a meeting right now, the 27 leaders there to talk about who's going to run different institutions and what they're doing about France. And what if that starts to reverse? So that's why last week we picked up some stuff in Europe.

19:29We picked up some small caps. And by the way, the Russell is down very slightly for the year relative to the S &P. And we're going, OK, there's got to be other stuff that's driving this. And if that starts to reverse, I'm willing to take advantage of statistical anomalies to try to make money off that. Dan, always great to speak with you. Thank you. Thank you. Dan Niles. All right. So he said Apple looks like the best of the Mag 7, quote unquote Mag 7, to a year end. What do you think? Technically? I think technically the breakout on, as Guy says, on big volume certainly means something. But it's hard to say one's better than the other.

20:06You have Microsoft at new highs here. Google's right there as well. Meta looks like it's reinflected. I mean, you can go back to the old FAANG acronym. Netflix is right back on the highs here as well. So within that kind of broader tech landscape, it's still relatively broad there. And it's interesting to hear Dan talk about how the hedge fund community has had to be nimble, but adjust their thinking. I mean, this sounds like a strategist that, you know, whoever they are, I don't want to name names. But, I mean, can you go and, you know, upgrade your target by 20 percent? Well, you had to have adjusted your thinking.

20:35It's not just a function because these guys are smart guys. They're not necessarily, markets are higher, I have to go higher. The adjusted thinking is an earnings profile for the weighted stocks. And you can get to an overall market weighting if you start to impute that. And that's fascinating because you've had to adjust. Still to come, guac and roll. Shares of Chipotle posting blowout returns this year, now up more than 45%. We'll go inside the numbers of this record-breaking run later. But first, some after-hours action in Lenar. Shares of the home builder dropping after its latest report. The numbers next.

21:07This is Fast Money with Melissa Lee right here on CNBC.

21:19Welcome back to Fast Money. We've got an earnings alert on Lenar. Shares of the home builder down after reported beats on the top and the bottom lines. The company will hold its conference call tomorrow morning. CNBC's Diana Olek has the details from the quarter. Diana. Well, Melissa, it was a nice beat for Lenar, the nation's second largest builder, but I'd emphasize the word incentives here in a big way. That may be what's hitting the stock as well as a slight miss on guidance. Lenar Chairman Stuart Miller said in the release, although affordability continued to be tested by interest rate movements and simultaneously challenged consumer sentiment, purchasers remained responsive to increased sales incentives, resulting in a 19 % increase in our new orders and a 15 % increase in our deliveries year over year.

21:59Now, this is not surprising, given that the average rate on the 30-year fix shot up significantly in April to the highest level since last fall and only settled back a little bit in May. The average sales price of a Lenar home was down 5 % from a year ago to$426 ,000. That's net of incentives. But that is down less than the 8 % annual drop that we saw in Q1. Guidance for deliveries was in line with estimates, but guidance on new orders was slightly weaker than expectations. And, Melissa, that may be adding to the trouble with the stock. Yep. Diana, thank you. Diana Olick, how does this chart look, Chris?

22:34Well, I think this is one of those names in one of those groups that it's really important. It responds to bond yields lower. And if you look at the home builders in aggregate, the group has essentially been sideways for basically the entire year as bond yields have bounced between 424.70, 424.70. They are oversold. They've paused now for six months. I would certainly want to see Lennar defend this 150 level. Let's see how that opens tomorrow. 200 days right there. My expectation is you want to be a buyer of these into these numbers. Theoretically, the Fed will cut rates. We've seen the highest rate on the 10-year yield, probably, unless you think, I guess.

23:08I think the Fed controls the front end. I'm not sure. But noted. I get it. You know, and Chris just mentioned the chart. Let's look at a little longer-term chart. You'll see we traded up to 172 beginning of April, sold off down to that 150 level you just mentioned, back to 172, short-term double top. In terms of what she was talking about just now, look at the new orders for the third quarter. 20 ,500, the street was basically at a little over 21 ,000. So Diana mentioned that. I don't know. You're starting to see maybe some weakness around the edge. But that 150 level will be, I think, basically defended in a major way.