Tech isn't in for a rout, but it's a mixed bag: Strategist

US equities (GSPC, DJI, IXIC) are jumping on Friday as Big Tech seems to be rebounding after a week that saw many investors rotate to small and mid-caps. With new economic data, the Personal Consumption Expenditures Index (PCE), signaling inflation may be under control, many expect the Federal Reserve to make its first interest rate cut in September.

Catalyst Funds Co-Founder and CIO David Miller joins Catalysts to give insight into what recent economic data suggests for the Fed, the tech sector, and the broader markets moving forward.

"I think you're seeing some of this weak inflation data indicating inflation growth is actually slowing that that's giving the market more of an all-clear signal that the Fed is going to go ahead and finally do it and cut rates. So I think that's more of the response that we're seeing in equities today," says Miller

Speaking on rotation out of tech and whether or not it should be considered a "rout," he doesn't think it is, saying "I think it's pretty unlikely that there's going to be a rout. The only real weakness we saw, for example, with Google was on the YouTube numbers that came in at 13%. But you know, we're still talking about double-digit growth. The real weakness, I guess, whether you call it auto or tech, was really more on Tesla, where you saw two sequential revenue declines, you know, totaling about 7% and real delays on whether their self-driving car service is really going to happen any time in the near future. So I think it's kind of a bit of a mixed bag, but I don't think we're in for a rout."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video transcript

David Miller Catalyst Funds, Co founder and chief investment officer, David.

We love the name of your firm.

Welcome.

Thanks for joining us.

Glad to be here.

Uh So talk to me about this totality of the data.

Not to sound like Jay, but where do you find clarity in what could broaden your thesis on the market?

Sure.

Well, you really have two levers that are moving the market in opposite directions.

So you have one which is can the fed finally cut interest rates, you know, can they do, you know roughly about two cuts versus having to keep them steady uh to keep inflation in line and it looks like they can actually make those cuts and you know, seeing like 2.62 0.8% numbers on CP I and uh PC probably indicates they're safe to do that, especially now given that they've uh moving the goal posts, you don't have to hit a 2% inflation target anymore.

They're probably OK with something right around three.

it seems like they can safely cut interest rates at this point.

And that's because of the opposite moving lever, which is uh corporate earnings are coming in a little weak uh along with inflation data.

So those interest rates being lower.

Uh you know, when you have a numerator on the earnings and denominator on the rates moving that rate lower, especially when it's unusually high can justify higher valuation.

So it's always hard to evaluate which one is the bigger impact David.

I'm curious what you make of the market's reaction right here because we're seeing this leg higher on the heels of that consumer sentiment number right now.

We've got the S and P up just about 1%.

We were moving to the upside ahead of this print.

It's important to point out here, but we've really taken this leg higher.

What is the signal to you?

I mean, it looks like the market is growing even more confident with that September rate cut.

Is that the right rate?

I, I think the the market, well, you know, a couple days ago, we had that really unusual hit, which was the biggest hit we've had uh since 22.

Uh So that kind of gave us a little bit more room where we could bounce back.

And then I think you're seeing uh some of this uh weak inflation data indicating, you know, inflation growth is actually slowing that that's giving the market more of an all clear signal that the fed is going to go ahead and finally do it and cut rates.

So I think that's more of the response that we're seeing in equities today.

It's also coming on the heels of a lot of downward pressure that we've seen, particularly in the large cap tech space.

Do you think that what we're seeing over the past couple of days?

Is that a rotation out of tech or is it the beginning of a bit of a route in the tech space?

I, so I don't think it's a route in the tech space.

Like if you look at Google in particular, uh you know, they're trading it probably about slightly under 20 times forward earnings.

They're growing revenue about 14%.

They have like 29% earnings growth.

I think it's pretty unlikely that there's gonna be a route.

The only real weakness we saw like, for example, with Google, uh was on the, the youtube numbers that came in at 13%.

But, you know, we're still talking about double digit growth, the, the real weakness, I guess whether you call it auto or tech was really more on uh Tesla where you saw uh two sequential revenue declines, you know, totaling about 7% and real delays on whether their self driving, you know, car service is really going to happen anytime in the near future.

So I think it's kind of a bit of a mixed bag, but I don't think we're in for a route.

I, I think we can still move up a bit from here.

Are you a buyer of tech got some of these beaten down, quote unquote, beaten down certainly that they're not cheap on an absolute basis.

But when you look at how dominant these companies are and how high the margins are and the extent of, you know, what I'd call their monopolies, whether you look at like a Microsoft or a Google.

I, I think if you're seeing double digit growth and that's paired with about 20 times earnings, that's actually a pretty appealing valuation just given that are such impressive businesses.

From, from that perspective, you mentioned a couple of earnings.

I want to zero in on alphabet.

I know this is a stock that you look at in particular.

Did the streets reaction to alphabets earnings that your point were not that terrible?

Did that change your thinking on upcoming tech earnings and kind of where the bar is that for those other names?

I think Google is getting a little bit of unique pressure from this concept that maybe A I will replace Google.

But I don't think the data is really indicating that you're still seeing revenue growth, you're still seeing earnings growth.

You still see that they're putting a lot of their own efforts uh into A I, you see that the cost to compute for A I is so much higher than a Google search uh that I think it's more a unique issue specific uh to Google.

So I think it was a the the most recent reaction we had was more of a little bit of weakness on the growth in youtube outside of tech.

Where are you finding those opportunities?

And I guess what is your recommendation in terms of what investors need to keep in mind heading into next week, which could be a volatile week if it's anything like we saw this past week here with earnings.

I, I think the key thing for investors to keep in mind is nothing has changed that much.

You need to make sure you're focusing on those businesses that have extreme earnings power that have really dominant franchises that have big economic tailwinds and some of that is certainly tech.

But you also look at a company like a Visa or mastercard, uh extremely dominant franchises.

You have no choice but to work with these companies really high margins and inflation flows straight down to their bottom line.

So I think it's really focusing on those dominant franchises and you know, avoiding those that have kind of been long term uh stock money or even losing on when you look at things more like airlines or auto O ems things of that nature.

All right, David Miller.

Great to have you here on with us this morning.

Catalyst Funds, co founder and chief investment officer again.

Great name.