Forget the AI hype. Buy the infrastructure.

[00:04] Yahoo Finance. I am Kenny Pulcari, your host. And today we're talking to Kevin Man who's a CIO at Henyan and Walsh and we're talking to Willie Lee who is a principal at Neoellar >> Capital which has been renamed from Suro

[00:18] Capitals. Gentlemen, thank you very much for the conversation. There is a lot to in the last in the first six months. It's going to change again over the next six months. There's a lot going on in terms of earning season and and the Fed

[00:31] and now we have renewed geopolitical tensions. But let's start with uh Kevin Walsh and the Fed. Let's talk about kind of where he's at because he's just announced this uh this these five new committees to kind of do some

[00:43] introspection in the Fed, kind of how it operates, why it operates the way it means not only for the Fed, but then what what's it mean for the investor? >> Sure. Uh, I keep going back and forth, Kenny. Whether he's a hawk in doves

[00:57] clothing or a dove in hawks clothing, I can't figure it out. What I do know is >> actually is not such a bad thing. >> It's going to be great for the market. communicate. He's going to change the way that they operate and he's going to

[01:12] Hopefully getting more accurate data to holding out hope that this is going to you, [laughter] but we were around

[01:24] during the Allen Greenspan. Same world, >> right? We're in the same world. So, we Fed. And so, for me, it's kind of like a takeback to what it was like. I mean, crisis happened, I get it. It was all this anxiety and nervousness around the

[01:38] world legitimately. And so, the Fed needed to change kind of the way they >> Yep. >> But I don't think they need to do that anymore. >> Transparency isn't a bad thing. Too much

[01:50] >> Yeah. It creates chaos and volatility for no for no reason, right? For correct unnecessary anyway. >> And specifically now of all times, I things going on almost true transparency where things are changing moment to

[02:04] moment can be I think difficult for the markets to digest in any given any given minute. But I think the other thing is that he's going to pull back on on how circuit. Yes. And go out there and talk about their own views, which I think

[02:18] the markets. >> Yeah, without a doubt. I mean, I think if you just take away the other voting members ability to speak, and I don't >> No, right. >> punitive measure, but it creates

[02:30] confusion in the markets. If they only put out the dot plot chart, and I know but at least we'd see where their views on interest rates are. When they add dot plot chart? >> He didn't say that was a definite just

[02:44] >> Yeah, but you know, but the dot plot, remember, that's literally you take a number two pencil and you draw part a dot on a graph on a piece of graph >> That's what it is. When we talk about the dot plot, it's really a dot plot.

[03:00] And boy does the media run with those. Right. Right. And they interpret it and everybody like, you know, when he'd have the press conferences, you know, he'd sit there'd be 50 journalists in the room and he'd say the sky is blue and

[03:12] >> right? They never heard the same thing. And so therefore, it was always open to meant. That's not what he meant. >> Even his first meeting, they came out from that meeting saying he was more hawkish because nine voted for 125 basis

[03:26] that eight voted for nothing and one voted for they were trying to sell which look I get it but I think that the I think less >> I agree. Yeah. Absolutely 100% agree. >> Right. I think it's going to be I think

[03:39] less is more not only for kind of the Fed in terms of boxing themselves into a the market. Yes. >> Right. Because remember when Alan Greenspin used to come out Yes. and he'd make the announcement he stepped out

[03:51] behind the door he opened his folder. He said the Fed did this. He shut it and he and >> take questions. figure it out. >> Yes. If Kevin War starts carrying around

[04:03] a briefcase though, I'm going to give you a little bit nervous. [laughter] one way the other, which now leads us to, okay, where are we? Where are we? Because the market is now at least it's on the table that they're pricing in a

[04:18] are still on the table, but no one's really talking about them at the moment, a hike, but I don't think we're gonna get a cut either. I think we we hold >> Yeah, I'm in the same camp as you, Kenny. I don't think there's any

[04:32] movement with interest rates for the balance of the year unless the straight of Hormuz closes for an extended period of time. Barring that, we're kind of in a Goldilock state of the economy right now. But we don't need any interest rate

[04:45] Federal Reserve for help. Do >> you agree? going to hold flat for the rest of the year. I mean, you can see the dual and they're pulling in two different directions. It just makes sense that you

[04:58] that tells you otherwise. >> Well, it's interesting and I don't know who it is, Morgan Stanley or Bank of America. Somebody's calling for three rate cuts this year. And I think to myself, what are they smoking? Because I

[05:10] >> Yeah. >> Right. I mean, if you look at, again, perhaps the forecasts go away, but they still believe the economy is going to grow at 2% or more this year. They think the unemployment rate is going to stay

[05:24] relatively where it is right now, 4.2 to 4.3%. Yes, historically stays elevated, >> So, they don't need to cut interest rates, and they certainly don't need to >> No, they don't. But I think the idea that the the the rate hike is on the

[05:40] table is actually I think that's a good thing, right? To leave it out there that aren't just going to keep going down down that there is a reality. Which I want to move on to the next to the next topic. But

[05:54] can Walsh force a rate cut? And if he does, how does the market take it? >> That's a good question. I mean Kenny, I think I don't know if he can force a rate cut. He can certainly push for it

[06:06] >> but I think the markets especially for where Neostellar invests especially in private markets along AI infrastructure spending in that area is not slowed down. People see ROI despite the volatility and cost of capital people

[06:21] are still deploying you know tens hundreds of billions of dollars against what they see as very high ROI opportunities. And so I don't think, you know, whether it's a rate cut, flat hike, you know, people are still

[06:33] going on, >> right? And I would agree with you. And so therefore, I don't think I think he holds them steady. I think he leaves I >> but I think he holds them steady. >> I mean, the last I checked, he's only

[06:46] one vote on the committee. There's 18 other votes. Does he have influence? Perhaps. Is he leaning more dovish? Perhaps. But right now, he's seeming >> Yeah. You know, is he leaning more dovish? Because yeah, he may want to cut

[06:58] >> shrink the balance sheet. >> Right. So So that's not that's not dovish. That's actually trying to maintain. Yeah. So you can say the front end is lower, but he's shrinking the

[07:10] >> And if he shrinks the balance sheet, that's means he sells longerdated bonds and that pushes up those yields. And that's not exactly what President Trump >> which brings us to a whole another conversation, right? But let's not go

[07:23] They're on the table. They start this week in full force, right? We're going to get the banks. Okay. But really, I think what everyone's listening and memory chip. They want to know the software stocks, the chip makers, the

[07:37] know because that's where, you know, kind of the focus is, right? It's all bubble? We're not in a bubble. I don't think we're in a bubble. Do I think stretched 100%. Do I think we'll start

[07:50] already seen it, right? This rotation over the last month has come out. So talk to me from your perspective where you think the AI trade is in terms of bubble no bubble. >> Look, I think what we say on our end is

[08:03] >> Look, I think what we say on our end is just absolute demand for compute that is far outstripping the supply that any company can provide. I mean there's like I said tens hundreds of billions of dollars going in there. And I think what

[08:15] you saw in the beginning times with Nvidia when this started to ramp up is everybody taking a very close eye on Nvidia, seeing if their earnings were going to be good or bad or if they were going to miss. I I think what you're

[08:27] Nvidia, they kind of already know what's going to be said that they blew it out of the water. Demand outstrips supply and you're going to continue to probably think people are starting to take a finer tooth comb is if you look at some

[08:41] of the mega spenders of like Amazon, Google, Meta, any of these guys, I think you're starting to see deviations in the performance. Like Google for example, 12 months has been great. But if you look at Microsoft, not as great. So I think

[08:56] nuance to what AI spend looks like and ROI looks like. Do you think Microsoft is down from 520 or something worth trading at 390 385 something like that?

[09:08] Microsoft. business anytime at all. >> And do you think co-pilot will eventually cure some of its ills and be a widely accepted AI productivity tool?

[09:22] handful of very think so. I don't think Microsoft is going down without a fight and I don't spend. >> Right. But so let's talk speaking of

[09:34] just that kind of theory. Let's talk about this open AI trade because now they've put that they've put that listing off I think until the new year >> you're kind of scratching your head but then this headline came out about this

[09:47] whole Apple Yes. >> Uh this whole Apple uh uh >> accusation. Yes. So tell me what you think now about what does does it dampen does it dampen the whole AI thing or does it dampen the open AI?

[10:01] >> I think it dampens the possibility of an open AI IPO this year. >> I think it may dampen the possibility for an anthropic IPO this year. >> Ah >> we also saw SpaceX

[10:14] >> we also saw SpaceX >> we saw SKHENX have these tremendous IPOs >> and overs subscribed and now we're out of their stocks. Yeah, >> I still think both of those companies are good investments, right? More so

[10:26] those two companies we just mentioned looked at that and said, "Well, maybe approach and Open AI right now is tangling with Apple and we'll see where >> and so I have that that news just dropped out, right?" And so it's this

[10:40] accusation that they've stolen all this intellectual property from Apple. Is >> Yeah. Yeah. I think look if you look at the headline and I can't speak to you know how how valid or not valid the accusation is but I think it speaks to

[10:55] where Apple feels a little bit threatened right where if you look at Apple they've been very successful over the last 12 months believe over 50% up in over the last 12 months and they've you know missed this first leg of the AI

[11:08] trade in a lot of ways where they didn't invest a lot in compute they don't have their own large language model they, you know, on self-driving they're they're missing on wearables, on AI wearables, they're they're missing a little bit,

[11:21] this first wave. And if you look at OpenAI, I mean, they and Google are probably the two that can really chip away at what Apple has really built as this huge barrier to entry to the consumer. But if you look at OpenAI, I

[11:36] mean, almost a billion or at a billion active users. I mean, they have the distribution to touch the consumers. is they have Johnny Ives who came from Apple, right? So I mean if I'm Apple and I'm seeing where I might feel threatened

[11:49] open AI. >> Okay. But if Open AI in fact stole intellectual property, that is an issue. >> Sure. Yeah. Right. That that's an issue. And so therefore that whole idea that I think I

[12:04] think that that IPO is I think it's been based just on the headlines that it'll be it'll be a 2027 event. It's going to be interesting to see if how if there's if it loses interest, right? If people lose interest in that particular model

[12:18] >> agree. >> Right. I mean, it's clear because to your point, SpaceX and SKHX were so overs subscribed, >> right? And we'll continue now. They just added SpaceX to the NASDAQ 100 after,

[12:31] you know, after a month of trading. Yeah. Right. If if even a month of the deal, right, when they went to NASDAQ, that was part of the deal. >> Yeah. just and and I believe in the space trade, the returns are going to be

[12:43] out of this world, right? Pun intended. But if you look at SpaceX, I mean, they had an operating loss of $4 billion as recently as last year. And then you look at other spaceoriented companies, Redwire, you have Helmet Aerospace, G

[12:57] profits, right? >> If you want to invest in space, there are companies that do it. You don't need to throw money at SpaceX now. Wait till they develop their business plan. But I said the same thing with Tesla and look

[13:11] >> Yeah. But you know what? It's a it is exciting and it's Elon Musk, right? >> right? >> So, let's talk now about this earning to start with the banks this week. It's expected I think topline's expected to

[13:24] grow about 20 or 23%. Revenue is going to grow 11%. Or at least that's the to grow 11%. Or at least that's the estimation, right? Um and so I think the market is and it's a high bar this this quarter, right? And I think the market

[13:37] is priced to perfection. And so I wouldn't be surprised at all if you're going to kind of see this sell the sell the news type of event. >> Even if even if they come out with great news, look what they did in Samsung.

[13:49] Crushed it and they sold it. MU crushed it and they sold it, right? Not because all these trader types saying, "Let me lock in some profits." Still, >> you didn't see I didn't see long-term investors blowing out, but you saw a lot

[14:03] of algorithmic and trading action. >> Yeah. I mean, look, I think you see a lot of investors who've made a lot of money on some of these names. And so, you know, if unless there's something that's even above and beyond what the

[14:15] expectation is. I think it makes sense that some people are taking some profits >> Take some. I wouldn't take them all. It's okay to take some off the table. I that's a mistake. >> Yeah. I mean, sometimes in life, Kenny,

[14:27] that's going to be the tail of this earning season. >> More records and you're still going to get the sell offs and PMs like us are going to sit there and wait for it to come back to attractive levels and buy

[14:39] to be it's because it's going to be very interesting. I'm I'm very anxious and I going to happen like with the banks. It's going to it's going to be in the tech space. Any one of them, you know, software, the chip makers, the memory

[14:51] that's where you're going to see that action because actually you've already over the last month you've kind of seen this rotation out, right? And I keep rotation versus liquidation because if it was liquidation, they'd be selling

[15:04] throw it all out the window. They're not doing that, right? They're taking money it into financials, healthcare, basic materials, industrials. >> But if they start to question the infrastructure buildout, I think they're

[15:19] going to miss out on some tremendous opportunities. the MCORes, the ACOMs of the world, the the data centers themselves, the REITs like a digital realy, the cooling solutions, the verdives, the mod manufacturing because

[15:31] They're getting an ROI today whereas the hyperskalers won't get an ROI for years to come. So, if investors start to poke at that AI bubble and now look at the >> all right, so >> I think they could be missing out,

[15:44] >> right? Okay, so here's the next question just to get it off the table. >> Is it a bubble? No, absolutely not. >> I agree with you. I'm just asking the >> I think I think what is happening and why you see these elevated prices for

[15:57] some of these assets where they're trading, you know, on future revenue is because everybody is trying to get a piece of the AI ROI, which is happening what we're seeing. We're seeing companies effectively doubling, you

[16:11] know, ARR monthtomonth, right? So, if you're looking as an investor to say, hey, there's all this AI spend. Where is the revenue coming? And you don't seeing lot of it is happening in the private markets with some of these companies

[16:25] that are trying to fill in the gaps of where the LLMs are are not taking >> what's interesting though, you can get that exposure with almost any company >> The banks, healthcare names, you can get that that exposure. You kind of get it

[16:38] in a, you know, it's it's it it's kind of like a different derivative, but >> You can get that exposure, but you can't get the growth, craving. I think and that's why I think Google has done extremely well compared

[16:51] to a lot of the other the other folks. I think when you look at Google and their whether or not they're the third best LLM or not, but they're clearly showing some signs where they can be a competitive LLM in the space and people

[17:05] see that as an opportunity to potentially get exposure to AI revenue or LLM revenue compared to, you know, a lot of other stocks out there. To your point though, Kelly, take a sector like the utility sector, big old boring

[17:18] utility stocks, right? And then I think about a company like American Electric Power stocks up over 20% year to date. They got a yield of 2 and a.5%. customers in 11 different states. And one of the states is Virginia, the data

[17:31] center capital of the world. So they've become a backdoor play into the AF revolution without the volatility. >> Yeah. Right. Right. And it kind of in utility >> utility stocks. No, I want to be in the

[17:43] AI trade. Well, guess what? The utilities are now part of the AI trade. That's the same group. I mean, every sector can be part of the AI trade. Just depends on which derivative, right? To your point, you know, some sectors give

[17:55] you more of direct access. Other sectors kind of give you that, you know, that back door entry like you know like uh through the utility play. Um, okay. So let's talk about uh the the rising geopolitical issues now that once again

[18:09] have come to the surface because you know then Iran's not playing nice in the sandbox uh and now wants to force his trade. I think a lot of it you know look the midterms are now four months away. Uh clearly they understand that uh they

[18:24] going to be good for Trump. Yep. >> Um and so that's a potential issue. >> Yeah. I mean, look, I think there's a lot of geopolitical risk that's uncertainty, but I I just go back to what I was saying before of, you know, I

[18:38] it's status quo, right? And I think especially on the AI piece, people continue to invest their massive sums of money despite volatility and cost of capital because people see so much ROI in that opportunity,

[18:51] >> right? Yeah. I I I well I think they're going to see ROI long-term ROI like you and I right are in that long-term game correct as wealth managers right um I think you're right and when you see that pullback right if

[19:04] you see this kind of sell the news type of reaction in the market yes you know I >> that's like a gift >> yeah and I think that investors maybe aren't even looking at the geopolitical situation I ran right now a status quo

[19:17] but it's over it may not be over today but it's going to be over so we don't hate to use the term, but maybe the inflation that resulted from higher oil prices is transitory and that will be behind us. So, let's get back to

[19:30] infrastructure buildout where all the money is being I do think that the rise in oil prices is transitory. I mean, because it's right? We saw what happened two weeks ago. Oil was trading back at 67

[19:43] >> right? Is it back to 80? >> 80. Hit 80. Brent crude hit 80 before >> 80. Hit 80. Brent crude hit 80 before Brent crude WTI 75 75 right but but I think that's a once again I still think that's temporary but the problem is the

[19:58] more unsettling >> that should be the headline for this segment [laughter] it just becomes more unsettling right um which is okay so before we before we uh tie this up because we're running out of time I just

[20:11] half of the year just tell me uh just tell me where you think the second half of the takes us in terms of do you have a target for the S&P? I know like Tommy Lee at Fund Strat I think has an 8,000 target on the S&P which I think is a

[20:24] little bit rich. I'm in the 757600 which is right where we are. So that means as this sideways action. >> Yeah. I mean if we do get to 8,000 what's that 6% from here. A little over 6%. That doesn't seem entirely

[20:38] >> But we're already up the S&P is already up 9 and a half% right. So that would be >> Correct. Not out not out of line, >> not unrealistic, but I think we're going to see a lot more choppiness first and foremost. But I think if you continue to

[20:52] of dollars are being spent, Kenny, that's AI infrastructure, that's aerospace and defense, that's power, and now it's become healthcare through >> That's right. >> $236 billion of announced M&A activity

[21:05] in the healthcare space. First half of this year, 90% increase over last year, the most since 2021. Start a year. >> There's other opportunities out there. over the last couple of weeks because you've seen that rotation and where the

[21:18] >> That's right. No, I agree. The 7576 is >> I am so impressed that you and I are on the same page. I love that. Come >> Exactly. I think you're going to see some of this risk off people rotating.

[21:33] a lot of rotation going on in the market where you just have these huge gains in to see it in other areas. People are to rotate in areas where they feel like it's underappreciated like you're saying

[21:47] power energy some of these areas that maybe aren't as sexy of an industry and but they're becoming extremely essential right they do offer because utilities are it's a boring group I get it

[22:01] consumer stables is a boring group but you know they're underperforming and if that shift right you'll see money come out and and and uh and uh move into >> there's midterm elections coming up that might add some black. I don't know.

[22:15] >> Well, okay. So, which is, you know, now brings us to uh there's a lot going on, right, with the death of Lindsey Graham now creates more kind of anxiety in what's going to happen there. But look, I think the midterms um I'm in the camp

[22:31] going to flip, but the Senate's going to remain. So, therefore, we'll have this gridlock, right? That's what the market prefers. Um, uh, Joe, are you in that >> Yeah, I'm in the same page. I think, and like you said, I think the markets just

[22:45] wants the stability. I think there's a lot of volatility and uncertainty going calm to the markets where >> it's not, right? Because the market wants as much certainty as it can get, right? The thing that creates all the is

[22:57] that people don't know what to do and the algorithms don't know what to do and volatility. That's right. But when you know, you can have bad news or you can have rates at 4 and a.5%. But if the market knows those are the rates then it

[23:09] >> and when we have that uncertainty and if there is a divided congress >> that's good for the markets and perhaps we rally from November through the end >> and if we pull back enough we get back to 7500

[23:27] going to pull back to like this 73ish hundred area and then rally back yeah right 100% you would be a buyer right uh I think at that point because I don't unless unless again something happens that none of us are none of us are are

[23:41] factoring in right and I'm not really sure what else could happen other than don't think it's going to do >> because I don't think all those other right they're done with the with with >> unless there's another geopolitical

[23:59] because we're going to run out of time now it's been a half an hour already but going to back to Jess. We're going to recircle around and you know maybe at conversation and kind of see where it's all turned out, right? Who was right?

[24:14] [laughter] >> In any event, until the next time, take >> In any event, until the next time, take good care.