Consumer Check-In & AI’s Progress

0:01Travis Hoium:Is the consumer alright? Motley Fool Hidden Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Dan Caplinger. Guys, I think we've got a lot of AI news. There's interest rate news. But I want to start with something that's maybe a little bit more close to home for regular people. And that is, is the consumer all right? Consumers still drive about 70 % of the economy. Federal spending data, as Lou keeps reminding me, is not actually all that bad. But you start looking at consumer goods stocks and these earnings reports and things look a little less bright. Lennar said this week that their new orders were down for new homes were down 9%.

0:48Travis Hoium:And prices are actually down 30 % from a year ago. I know they may be able to build a building a little bit different houses. But there's a lot of things to go into that. But that's a pretty big number. Nike's sales were down last fiscal year, and both Hoka and On reported weaker than expected results and lowered guidance. And GM said sales have fallen 6.8 % early this year. Escalade sales are down 18%. Tahoe's down 8%. Suburban down 18%. Lou, it seems like things are a little weaker than we would like in the consumer space. Am I reading this right?

1:22Lou Whiteman:Well, I don't know how to read this because, for one, you have the whole macro micro issue. We'll get that in a second. But look at the data you just cited. The GM sales were the first half of 2026. That's not current. OK, it's it's not without value, but it's not current on holdings. Yeah, they aren't as doing as great as they were before on holdings. It's like two percent of the U.S. shoe market. Well, if you want to talk about Nike, they're they're a much bigger percentage and they're doing worse. Well, Nike, too. But yeah, but I mean, I haven't seen a lot of barefoot people, so I do think people are still buying shoes.

1:56Lou Whiteman:U.S. home sales, long running issues there. I don't think that is a new. It might be getting worse. But let me give some counterpoints to U.S. retail sales were up one point two percent in August. That's the biggest jump in five years. Bank of America credit card data shows household spending up four point five percent year over year. Now, some of that might be inflation. I'm not saying the consumer is healthy, but the point is that they are somehow able to spend more than they did. Labor market remains quietly solid, if not unspectacular. Always come back to this, but I think it's so important to say the consumer, we talk about the consumer, but the consumer is not one guy.

2:36Lou Whiteman:It's not one family. It is the aggregate of 130 million plus U.S. households. Some of those households are struggling. And yes, I'm guessing some of those households are struggling more than two years ago. And I don't want to be dismissive of that. We are not trending in the right direction. But as long as there is a critical mass among those 130 million households that are business as usual spending what they spend, the consumer is fine even with the stresses. So two things can be true. A lot of brands, especially brands that are selling premium products, are finding it harder to sell those products today.

3:11Lou Whiteman:yet the economy, the consumer is kind of somehow humming along.

3:18Travis Hoium:Dan, one of the reasons that I brought up the names that I did is Lou has been talking about this K-shaped economy for a while. And a lot of those brands that I talked about are the top of that K. They were the people that are supposed to be doing well. The people who are buying Escalades, the people who are, you know, and I use the SUVs because that's where the money is made in the auto business is still those, you know, big expensive SUVs and trucks. There's more deals on trucks. I talked about all the SUVs and sales are down. So it seems like if we have a K-shaped economy and the part of the K that's doing well is not doing nearly as well as it was a year ago, that's something.

3:55Agree. But I wonder if we're starting to head more towards maybe, I don't know what you'd call it, an E-shaped economy or something like that, where that top end of the K kind of breaks into a couple of different...

4:06Travis Hoium:Protect the rights on that E-shaped economy. A couple of different legs there, though, because I think that you have a decent number of people in the upper middle class who thought that they had secure jobs, thought that they still are at the upper end of the income spectrum. But they're looking ahead and they're seeing trends. We're going to get to AI later in the show, I think. But they're seeing things that might put that at risk. And I think that in some of those cases, that makes those folks kind of think twice about, OK, yes, things are good now. But do I want to really go out and get another big car payment?

4:41Do I really want to spend money on another premium good that maybe I don't desperately need at this moment? So I think that you're starting to see some of those cracks in the armor kind of get a little bit bigger in an area that, like you point out, up until now has been kind of at the top end of the K.

5:01Travis Hoium:let's talk about those interest rates because i think that's another piece of this that is ultimately important and drives things like home sales which you know drives jobs in certain segments of the market as the same thing with auto sales that's that's a big jobs provider so lou interest rates up in the short term the federal reserve raised interest rates this week they're also expected to raise rates at least once more in the next you know maybe a few months. But we've also seen treasuries increase yields. I mean, borrowing costs is going up not only for companies, but for consumers as well.

5:35Travis Hoium:So this just seems like another headwind when we look at the consumer.

5:40Lou Whiteman:I'm not sure it's a headwind for the consumer, but the only reason why is I think the Fed is way behind the curve here. The Fed is just basically the Fed finally walked outside and got wet and said, hey, you know what? It's raining. That's what I think happened this week. The rates in the real economy are way out ahead of the Fed. And there's some good news there, because for that reason, I don't think rate hikes will do much to affect lending rates in the real economy. If anything, I think we were this close to the Fed's rate hike actually bringing down rates. And we can get into that if you want.

6:13Lou Whiteman:But a lot of it, I think there was a scenario just briefly until someone opened their mouth where mortgage rates actually traded down after the the Fed announced that? Well, because look, nobody is buying, or nobody is deciding to buy a 20-year treasury based on the Fed's overnight lending rate. That's just not how it works.

6:35Travis Hoium:Which by the way, is the one thing that the Fed controls, is that short-term rate.

6:39Lou Whiteman:Right, and the Fed can sort of influence the direction of rates there, but that is a market decision, and it's based largely on how much premium do I have to take on to accept the risk that I might not be paid back. And for most of our country's history, that has been a pretty low premium because treasuries get paid back. But over the last year, we have had issues about, you know, Fed independence, Fed credibility. And I think the Fed going against the White House and saying we have to raise rates and we were unanimous here, that helps credibility and could put pressure on rates. But then, of course, later that night, we had the president saying, oh, well, the chairman only voted that way because I told him to.

7:24Lou Whiteman:I don't think that helped things, but that's what's going on right there right now. It's, you know, the Fed can't set rates. Supply and demand for capital coupled with perceived payback risk is what sets rates. We've been here for a while. The economy has shown it can survive and some parts of the economy can thrive at these levels. I think, I mean, this isn't Goldilocks because there's a lot of pressure in a lot of areas, but for now, interest rates are something I'm watching, not something I'm worried about.

7:56Travis Hoium:Dan, what about the corporate side of things? Because, you know, corporations are affected by this as well. Profitability will be affected. Investment, if we're going to put several trillion dollars into artificial intelligence, that's going to mean a lot of borrowing and now those rates are going up to levels that maybe makes that a little bit more questionable. So how do you see these rates on a corporate side? It's true that those corporate rates should be going up, but a lot of corporations are finding ways to go ahead and borrow anyway. This past week, Axon Enterprise, ticker AXON, went in and went into the convertible corporate bond market.

8:33Travis Hoium:I've seen a lot more of those, yeah. Raised a billion dollars at 0 % with an equity kicker. So you can get around, if you have a company with growth prospects, you can get around the higher interest rates by giving people a piece of, hopefully, you're appreciating stock price. But yeah, we just haven't seen these higher interest rates slow down anybody who needs money, whether it's the big hyperscalers or even folks lower down on the technology chain. There's an arms race going on and whoever gets the finish line has the best potential to win. That makes short-term credit decisions pretty easy to make, especially you consider, yeah, interest rates are high, but they're only high relative to where they were in the 20 teens.

9:20We're really just back historically to kind of a relatively normal level. And there's a bunch of, you know, my parents would be laughing at me saying, oh no, mortgage rates at 7%. I mean, come on, put a, put a, put it, make it 17 and maybe they start having the conversation.

9:36Lou Whiteman:Yeah, that is so important to consider right now because, right, it doesn't make things any less painful for those having to borrow when you could have borrowed a two and a half percent a few years ago. But historically, we have seen that we can survive and be OK at these levels. And I think that that is what we're seeing. I mean, look, corporations are basically paying the same thing on debt now that they were paying three, six months ago, and that hasn't slowed the momentum. Again, there's so much right now going on, so many moving parts. Bottom line is, I don't see any easy way out of the current rate situation.

10:14Lou Whiteman:And in fact, I think that the target rates that the Fed sets are kind of weirdly low. So I think everything's going to be inching up. I think we just have to find companies that can long-term survive and do okay with these rates. And I'll say, Dan and I talked about this on the Motley Fool livestream earlier in the week. In a period of 0 % interest rates, a lot of companies that in hindsight, I don't want to say frauds, but just weren't great business plans, were able to continue on and kind of deceive investors because look, when money was free, they used that money and they kept going. there's actually a useful filter as an investor to having money cost something and there to be a cost of capital and actually to filter out the companies that can't survive that and you know so again it's a different environment it's not as easy as it was there's downside for those trying to get mortgages but i think it's actually a healthy environment right now so i'm not too

11:14Travis Hoium:worried about a lot for investors to think about in the back half of 2026 when we come back we're going to catch up on AI this week. You're listening to Motley Fool, Hidden Gems Investing.

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12:29Travis Hoium:Welcome back to Motley Fool, Hidden Gems Investing. My big question for you guys is what did we learn about artificial intelligence in this multi-trillion dollar market that is driving over half of the S &P 500. We started the week. It was, remember, just five or six days ago that we were all worried about an extinction level event coming from AI. The market seemed to really be impacted by that on Monday, recovered by kind of late in the day. And Tuesday, we had completely forgotten that that was a thing. We're getting more deals signed, more debt taken out, like Dan alluded to earlier. Dan, what is really going on here?

13:05Travis Hoium:Is this all just kind of normal course of business now? with AI? I just don't think safety was ever going to be a change to the investment proposition for the same reason that nuclear Armageddon was never really a change to investment propositions. There's risk out there and maybe it happens. If it does, the last thing anybody's going to be thinking about is their investment portfolio. So you just kind of set that aside and say, okay, yeah, it's there or whatever. But in terms of regulation, you have the US government more than happy not to provide regulation. And that's the kind of market that I think AI investors are most comfortable with because it lets everybody do their thing.

13:46It lets everybody try to attack the opportunity, try to take their view, pick whatever niche they think they can execute best in and kind of move forward with that. And so I think it refocuses investors on the long-term question, which is still the same. It's are companies, are consumers going to adopt AI? At what level will they do that? And how will the companies that have made these AI products, how will they monetize that? So I think that's the question that we're refocusing on now. And at least for now, things look generally good in that area.

14:22Lou Whiteman:You always see the world through the prism that you've set up for yourself. But my cynical, I guess, look of this is that I don't see a lot of economic value from the frontier models. I just don't. I think what we're seeing so far is, is that lesser models, the ones that we aren't spending a quadrillion dollars and hiring, you know, people for a hundred million dollars to develop. That's where a lot of the actual enterprise value and, you know, just economic value is being generated. So if I was the CEO of one of these companies that is promising, imaginary friends and artificial intelligence forever, you know, like general intelligence.

15:02Lou Whiteman:And suddenly I realized ahead of my IPO that a lot of the actual revenue is coming not from the frontier where I'm spending all this money, but on lesser models. I would think of ways to both save face, but also redirect the business towards where the revenue is. And, you know, maybe I'm maybe I'm way off here, but this is a pretty convenient way. Like we have to slow these frontier models, not because we're losing trillions on them and there may not be the value that we thought. They may be more science projects than businesses. No, we're doing it to save humanity. Okay. And that's kind of, I mean, I don't know, maybe, I mean, look, I don't discount the fact that one of these could do something.

15:41Lou Whiteman:I mean, most technologies have had unintended consequences over the years, so I don't want to be too dismissive. But I feel like the narrative here, the kind of the take is, is that maybe open AI and Anthropic kind of de-emphasize some of that and emphasize on where they're making money. And maybe that turns them into better or more palatable investments once they're finally public.

16:05Travis Hoium:Dan, this is the thing that I keep thinking about with this AI space. There's so much money going into it. And yet the two leading companies, Anthropic and OpenAI, the question I think this week was, do they really have a moat? And is there a real profitable business underneath or do they need to invent something like this to sort of get regulatory capture? So, you know, we talked, Lou and I talked about these AI moats earlier in the week. But how do you think about investing in this space and what the potential competitive durable advantage is? Because it seems like the market is saying everybody's going to win right now.

16:42Travis Hoium:But historically, that's not the way that this works. I don't have a great answer for that just because history has been kind of up and down on that question. I mean, certainly when dawn of the PC generation, you had Microsoft jump into the software market. It was a dominant player in the software market, but it was not the only player in the software market because other companies came in. They attacked specialty problems that needed specialty software to run. And so now you have thousands of different companies operating in the software space. It doesn't mean that Microsoft didn't find a way to succeed in the long run.

17:21There was more than ample opportunity for that to happen. And so I think on a positive vein, maybe that is an answer for the AI frontier model companies. It's like, yeah, they may not have a long-term competitive moat in the areas where they are concentrating now because they're just building the foundation. But once they have identified those competitive threats, then they can say, OK, yeah, we're going to need to let this one go. But we still feel like we have expertise in some other area that can be the seed that grows the business into kind of the second phase of its existence.

18:02Lou Whiteman:Right. And that's the thing. I mean, another word for mode is who is definitely going to win here. Right. You know, who is going to predict the future? And the real issue, I think, isn't the fact, I mean, there's definitely a there there with AI. There's definitely a lot of value. But right now in the U.S., we have 13 companies valued at over a trillion dollars. One of them is an AI company. We have two more that hope to go public and are talking trillions. So these are the best of the best. A lot of forward revenue is priced into that trillion, correct? I mean, they're not worth it today. The idea that I am forced to assume all three are going to be big winners is, I think, the real sticking point for the markets right now.

18:47Lou Whiteman:One of these companies, maybe two of them, are likely to be worth a trillion dollars or more or to be among the top 15 companies in the world. To invest in any one of them right now assumes that that is definitely a winner at this valuation. And that's a tough assumption to make.

19:03Travis Hoium:And the other thing you're assuming is that the existing big tech companies who are also spending trillions of dollars are going to be losers. You know, I think this week has been Google and Alphabet. You know, where are they? Right. Muse came out out of nowhere. That's great product. We're in the world. We may be talking next week about Google taking over AI because they introduced Gemini 4 and a new great product on top of it. So we will see when we come back. We're going to see where Dan and Lou are seeing value in the market. You're listening to Motley Fool Hidden Gems Investor.

20:02Lou Whiteman:We'll see you next time. trade brilliantly. Learn more at schwab.com slash trading.

20:08Travis Hoium:Welcome back to Motley Fool and Gems Investing. At the top of the show, we talked about weak consumer numbers and some of the numbers that are coming out of companies that don't look all that great. And that means that their stocks, a lot of them are down significantly over the past year or two. So I wanted to get an idea where Lou and Dan are looking at values and what sort of factors they're looking for if you're looking for values in some of these beaten up areas of the market. So I'm going to give you a group of companies. I want you to pick your top stock in this group and tell me what is attracting you about those specific companies.