Newscasts - Market Talk: Fed may balk at October rate cut, jolting Wall Street

Total Soft Bank

02/10/2025 21:47

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Source: 'Reuters - Business videos'

Description: Brian Mulberry, client portfolio manager at Zacks Investment Management, explains why the U.S. government shutdown has thrown a "wild card" into investors' expectations for an October interest rate cut from the Federal Reserve. Lisa Bernhard has more.

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Video Transcript:

OpenAI hits a $500 billion valuation. Brian Mulberry of Zach's Investment Management is here to put that in some perspective for us. Brian, the current and former employees of Open AI, that's the company behind GPT, of course, sold roughly $6.6 billion worth of shares to a consortium of investors including SoftBank and T. Rowe Price, valuing the company at $500 billion. What is your reaction to that figure?

Well, Lisa, I said, Zach, it all comes down to the earnings and the revenue. And when I look at the growth rate of OpenAI, last year's revenue is somewhere $12 billion and $14 billion, but projected out to be over $120 billion by 2030, that 10 times revenue growth does support the valuation. Also, you're starting to see them participate in a really big way in a lot of the CapEx spend that's going on, investing in themselves, but also taking investments from companies like NVIDIA.

Well, let's talk about all that CapEx spending that we're seeing from the Mag 7, from Oracle, from the chipmakers. What concerns, if any, do you have about that?

Well, if we take all of the public statements that we know about so far and aggregate them and then look out the next three years, we're at $2.8 trillion in CapEX right now that we know about. What bothers us about that amount of money is that it's being traded amongst really those same 10 companies. We've known for years that Google pays Apple $20 billion in cash to make sure that their search app stays on the iPhone. But now, We have NVIDIA investing $100 billion in Open AI. Open AI is in turn investing $300 billion into Oracle, and we have now this capital carousel that's going on, and it means that in this next three-year period, if anybody pulls back from their commitment, the carousel stops. This market and the way that it's valued right now is totally dependent on that carousel still turning, not too fast, not too slow, just making sure that everything goes the way that it's been publicly announced, and we can continue this rally.

So, speaking of this rally, it seems like it keeps on going no matter what you throw at it, including a government shutdown. So, what other than that carousel pushes it even higher?

Well, the market is totally dependent on rate cuts at this moment in time. It was really interesting. We got the first rate cut that we wanted a couple of weeks ago, and then the dot plot came out and the 10-year treasury yield immediately went down below 4%. And then Chairman Powell had his Q&A, and the language is a little bit different than the dot plot. So, the markets went to immediately pricing in the next two rate cuts because that's what the dot said. But now, as we've had a little bit of distance from that meeting and some other fed speakers publicly, I'm not so sure that we're going to get the next rate cut, and there might be this wild card with the government shutdown, since there's no data and the Fed is data dependent, they might have to pause the easing cycle until they get more data. The market is not ready for that. They want this easing cycle to continue. We are still where rates are restrictive on capital formation at this point in time. They need to continue to go down to support the positive momentum that's baked into the S&P 500 now over 6,700 points.

So, what do you ultimately see as the potential effect of this government shutdown? Should it be prolonged on markets and on the economy?

I did a little bit of homework, you saw this coming a mile away, right? And so, I went back and looked at 21 different government shutdowns just since the 1970s, and the returns on the S&P 500 were split pretty evenly, half positive, half negative. When I look at the longer shutdowns, because at the moment, at least doesn't feel like we're anywhere near some type of an agreement. Last shutdown was 2018, 2019, 35 days long. The S&P actually went up because in that moment, interest rates were going down. So, markets didn't really care too much about the shutdown itself. It was the fact that rates were going lower, that they kept equity prices going higher. That could be the same backdrop, but it also could be the reverse. If we don't get that rate cut and the government is still shutdown, again, some of this very positive momentum that's built into this valuation could simply go away. And I get a lot of questions about, well, where would it go? If I look at the S&P 500 right now, it's trading at 23 times next year's earnings of about roughly $295 per share. But if I look at the equal weight S&P 500, it's only trading at 18 times the same earnings. That spread of five points is very high. Historically, over 80 years, it should be about 0.5. The valuation spread between the equal weight and the market cap weighted S&P 500 is ten times bigger than it should be, any loss of momentum would mean we would probably just go back down to where the equal weight is valued at 18 times earnings or more or less test the April lows that we saw earlier this year.