With consumer inflation matching expectations for the latest month and producer prices as well as retail sales rounding out this week's state, Wall Street is taking Fed rate hikes off the table, at least for now.
But keep in mind geopolitical tensions are still in the background and big tech undergoing a rating.
So allocators are balancing valuation discipline.
Long term AI growth.
Now here to break down what all of this data means is David Bush, who is CIO at Tra.
David, good morning.
Thank you so much for joining us on this Friday morning.
Well, it has been quite the busy week for economic data.
So what is your take on inflation and what does this mean for the central bank?
Yeah, we, we're in a very unique situation in the economy.
I mean, one that I, um, don't recall that I've experienced across my career because we have several different things kind of converging at once.
One is inflation has remained persistently high, although it's starting to cool, um, and largely because of consumer demand pullback, um, although the price of oil due to the conflict in Iran keeps, keeps PPI and CPI headline inflation numbers higher, but we're also seeing a situation where the labor markets are starting to cool and economic growth is also slowing.
Meanwhile, the equity markets keep Hitting these new highs, almost, you know, it seems like week after week, and that's being largely driven by corporate earnings.
So, a very unique situation.
Yes, and of course I do want to get your perspective on US retail sales because we're looking at a contrast here if we're looking at the monthly versus the annual figure given this morning's data points.
But as you mentioned, inflation does play into this equation, and we'll be hearing from some major retailers next week, including Target as well as Walmart.
So any surprises in this morning's US retail sales data?
Well, uh, retail sales, uh, did come under expectations.
And so what that's showing is, is that, you know, consumers have, have really supported this economy through their demand over the last several months.
And what we're seeing is, is a potential pullback from the consumer, and this is likely due to inflation being persistently high.
And so with, with consumers pulling back, eventually that can slow the economy further.
And, and so you're right, we're, we're watching the retailers that are, that are announcing next week, which includes Lowe's and Home Depot, so we can see the impact on Uh, home builders, uh, construction as well as, um, you know, consumers that are kind of the do it-yourselfers, and, uh, you know, doing projects at their home.
But also we have Walmart and Target and TJ MaxXx.
So the interesting thing in my mind will be to see how TJ Maxx versus Walmart and Target, what their earnings look like and their forecasted earnings because Walmart touches almost every single um Income, uh, income class across the spectrum, whereas TJ Maxx, we can narrow in there and think about these are the, these are the, the consumers that are looking for those deals and those discounts.
So what we'll, what we should be able to determine is, is how much more room the consumer has and are they going to continue to spend.
Yes, and David, we will be looking closely next week when those companies report their results, but as you mentioned, another area that we're all paying attention to is geopolitics.
So between Middle East tensions driving energy volatility as well as recent market swings.
I understand that you're advocating a lean into quality, so can you tell us what specific balance sheet, as well as earnings characteristics that you're looking for, especially to whether potential geopolitical shocks that may be coming down the pipe.
Yeah, that's a, that's a great question.
And, and really, the way that I, I think is, is that you have sort of the first order effect, which is the headline and what's happening.
The second order effect is, is who benefits or, yeah, who benefits from Whatever the headline risk is.
And so in this case, because of what we're seeing with, with persistent inflation, the geopolitical risk, leaning into quality balance sheets with uh uh positive free cash flows and lower leverage and, and some of those sectors that can, that can benefit from the AI infrastructure buildout as well as You know, the energy producers and aerospace and defense contractors that are needed and required for this conflict with Iran.
And so it's, it's looking below the headlines and into that next layer and, and for, for most investors in, in my mind anyways, it's, you know, we're, we're going to have these, these headline shocks and there's going to be Periods of volatility around each one of these headlines, whether it's geopolitical, the Fed, or economic metrics.
And, and so, By choosing those companies that have those quality balance sheets and free cash flows and positive earnings and all those key fundamental metrics, that can help them, uh, that may help them withstand some of the volatility and, um, ultimately, it's, uh, being patient and thinking long term.
Yeah, and David, while I have you here, I do want to zoom in on artificial intelligence.
So you have noted that AI infrastructure players look better positioned than the hyper scaler spending trillions.
So can you break this down for us?
Yeah, so, so.
Investor patience may run thin with the, with the hyperscalers because as you mentioned, they are deploying significant amounts, significant amounts of capital towards the AI infrastructure buildout.
And at every single earnings release, investors are watching market participants, market participants are watching whether, you know, one, how, how much they plan to spend and what the impact is on their earnings.
And so with that capital expenditure, we could see the earnings multiples compressed because earnings may not keep pace in the near term to investor expectations.
But over the long term, those large cap tech, uh, names, you know, in my mind will be fine because this is a, a technology that is going, that is transformational.
Having said that, the beneficiaries, which is that second level or that second-order thinking, is who's catching the tailwind.
So this is all of the typical uh value uh sectors that have been out of favor for, for a lot of years, you know, the industrials, the materials, the energy producers, the utilities.
Because all of that's needed to build this AI infrastructure out.
And, and ultimately, we're, we're in a situation where fundamentals are, are becoming far more prominent versus just the expectations of this new technology.
Yes, and finally, David, before I let you go, I do want to expand on some of the swings that we've been seeing across mega cap tech in 2026, and it has been quite the year when it comes to the sectors within the S&P 500.
So can you tell us what you make of the broader market rotation and what your expectations are as we head into your end?
Yeah, I think, I think the broadening of the market is actually healthy.
And, and what I mean by that is that, you know, over, over the course of my career, especially in the last, you know, call it 15 years, large cap tech has dominated market returns, which is, which is, which is good because, you know, technology is, is the wave of the future.
The broadening of the market is actually, uh, healthy.
Part of this rally because now we're starting to see some of these other companies that are beneficiaries of it.
And, and ultimately towards, towards the end of the year, I would expect um volatility around any of these large tech, think of the mag 7 technology companies.
Uh, I would expect some volatility around their earnings.
I mean, we have Nvidia later on this month and so that's one that I'm watching.
But at the same time, um, diversification and diversifying across those sectors has been a real benefit.
And so that's one way to kind of avoid some of that volatility that, that we experienced with large cap tech.
Yeah, absolutely.
Nvidia is one that we will be watching for at the end of this month.
So I appreciate your time and thank you so much for joining us on this Friday morning, David.
Have a great weekend.
Thank you, Remy.
You do the same.
