What happens when AI has to make money?

[00:01] we are exiting the second quarter with some big gains at S&P 500 and NASDAQ. Can these gains continue? >> I think they can, but I think that the narrative is going to change a little bit. This is less about the earnings

[00:14] bubble in Micron. God bless those traders. I hope it lasts for another three, four, five quarters. But I think investors are starting to talk about and why we have the mag seven becoming the lag seven is what are people getting for

[00:29] buying all those pickaxes and shovels. Microsoft is down, you know, over 20% for the year, about 35% from its high watermark because it is the most important company in the world. Because if Microsoft can't turn co-pilot and

[00:43] Azure AI into accelerating profits, we have a lot bigger problems going into 2027. They're the poster child of if we're going to get return on, you know, hyper scalers. So, I love that the market is broadening out, but eventually

[00:59] hitting hospitals, manufacturing, banks, and small businesses. I think it can, but the proof is in the pudding. We haven't seen that yet. here. What stood out to you in this quarter? I look, there were a lot of

[01:13] developments, companies coming out with an amazing array of whiz-bang new takeaways is memory prices. I mean, these things just keep going through the >> Yeah, obviously that's kind of the the big to-do right now.

[01:28] build-out. I mean, you can't have one without the other. You know, we're seeing consumers now taking some hits on doing a piece now on what this means for IT spending going into the the

[01:40] couple of quarters ahead. You know, whether or not we saw companies purchase before this was all supposed to land. We've seen companies like laptop makers, smartphone makers, they're buying early, bringing shipments

[01:53] over to get ahead of this so that they wouldn't have to raise prices or at least take that that price bump and then that potential sales destruction. So, thing. The other obviously from the quarter is, you know, I mean, it doesn't

[02:06] impact what's happening necessarily, but the confidential filings for OpenAI and Anthropic, you know, now according to the times, OpenAI may delay its public debut till next year, but we're still waiting on Anthropic. They could

[02:21] that's something that really is is worth watching. And then obviously, you know, the the big kind of now overarching story is what happens with Q2. You know, you kind of you guys were kind of alluding to is,

[02:34] you know, okay, so we have all these these big sales going on with with the What does this mean for for the actual software too? Are people getting the productivity they want? Are we seeing these companies that sell the software

[02:46] growth look like? Because look, they've they've had growth there. We've seen Platform grow. AWS. But what what is the direct impact of AI on that? And then how are other companies using it? So, not just it's

[03:02] being purchased, but is it being used and then that's helping companies become more productive or are they purchasing it and saying, >> Peter, another quarter where AI investments have been really going with

[03:15] reckless abandon. And we come out of this quarter with a lot of these big cap capex than they would when they planned coming into the year. What has been the influence of these investments on the US economy?

[03:27] >> Well, it's been been a very stimulative both because the capital spending itself has supported the economy, but more importantly from the wealth effect, US households currently hold around 75 trillion

[03:40] at the peak of the dot-com bubble in 2000, they held 12 trillion in equity wealth. So, we've gone from 12 trillion to 75 trillion. As a share of GDP, that's about 100% higher today than it was back

[03:56] then. So, households, these those who hold that stock, are feeling emboldened to spend more. Uh the savings rate has fallen to very low levels, and that's held up the economy even in the face of very very

[04:10] stagnant real income growth. Year over year, real income growth is actually year, real income growth is actually flat. Consumption is up about 2% largely >> Here, we've seen and I thank you for doing this because you teed me up for it

[04:23] doing so. Uh the K-shaped economy uh continues to be a focus for a lot of investors where, you know, the higher income is is getting wealthier, lower side of the K. It's not looking good. Does that K-shaped economy continue into

[04:37] should you know, what would that mean to the economy and to the markets if it does? >> Yeah, I mean, keep in mind that that the >> Yeah, I mean, keep in mind that that the wealthiest 1% of US households hold 50%

[04:51] of the stock. So, there are large segments of the population that aren't really benefiting that much from AI. In fact, you can argue that they're being memory when they buy a phone, they're paying more uh

[05:04] for electricity uh because of that data usage that uh data centers require. So, that's that's a problem. And if you look at consumer delinquency rates, they're actually not that far off from where they were at the peak

[05:19] in the Great Recession. That's true for credit card loans, it's true for auto loans. So, large parts of the population are struggling. If the AI trade were to that's going to happen imminently, but if it were to happen, then there's a

[05:33] real risk that this K-shaped economy will end up with an like a looking like an L-shaped economy where both sides of the K are looking very very weak. maybe I shouldn't be amazed. We've been doing this for a while. Uh how the how

[05:47] second quarter, at least if you look at the Nasdaq S&P 400, and it's ignoring income shoppers that throughout the second quarter dealt with higher gas, higher food prices, you name it, and it's just remained so fixated on the the

[06:02] high-income consumer. How long could this last before the market pays population? >> Well, I think it's you know, you come down to is the market structure there. How what size of market cap is Dollar

[06:16] General and Walmart and McDonald's of the the general economy. I would say that when you start looking at it, it might appear structurally that the lower spenders have less exposure to publicly traded company earnings, say in the S&P

[06:32] 500, but eventually this is going to start pressing on us. I think the more important thing versus the lower end consumer, which I think is I think the you're going to need those people to adopt AI. You know, you're going to need

[06:46] those people to keep spending on subscriptions, the things like Netflix and whatever the 20 bucks that you know, that what new AI service they they need to get everybody to spending on to make this stuff profitable, but I think the

[06:58] big issue is going to be the rate hikes at the end of this year. And even if we don't get that, eventually people are going to realize that the Fed is not going to be cutting aggressively. I think we all know that,

[07:12] when you look at companies that were thinking about getting interest rate relief that's going to accelerate EPS going into the end of the think that that's going to be a real issue. Also, we all know that the AI

[07:28] productivity boom is going to be disinflationary, but again, we're slow. Microsoft, as I mentioned earlier, they haven't been getting that uptick in those revenues just quite yet. So, I think interest rates are going to

[07:41] be where it's at and that slowness to see the dishes disinflationary effects. just this week, I got to buy a new laptop for my daughter. I'm wealthy. I could pay 200 bucks, 300 bucks more, but you look at the average consumer trying

[07:57] to buy a new computer for the kid to go to college and they get a 20% hike because, you know, Micron is in an earnings bubble. I think that's really of year. >> Hey, why don't you buy me one while

[08:09] couple bucks. >> I got an expense account.