Investor patience, Mag 7 shakeup, Fed dot plot: Market takeaways
Yahoo Finance Head of News Myles Udland joined the Live Show to share his top three market takeaways for the day.
"Trust the process," Udland advises investors, despite the uncertainty surrounding Federal Reserve rate cuts. Udland points to the continued tech rally and market capital gains as sources of optimism.
As heavyweights such as Apple (AAPL) and Tesla (TSLA) experience significant declines, lagging behind other "Magnificent Seven" names, Udland identifies Eli Lilly (LLY) and Costco (COST) as potential contenders to replace these stocks. Costco, he highlights, continues to benefit from the premiumization of consumer habits.
Udland also stresses the significance of next Wednesday's dot plot release from the Federal Reserve, dubbing it "the most important dot plot ever." He explains that current market reactions are based on the expectation of three rate cuts by the Fed. However, this pivotal dot plot will either validate or refute those predictions, shaping market dynamics moving forward.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Angel Smith
Video Transcript
JULIE HYMAN: Myles, what are your top takeaways?
MYLES UDLAND: You guys were just talking about the first one, which is if you look at the print we got on CPI this morning, and then the reaction we got in the market to continue these sports adjacent theme, I guess, of this program. Trust the process as some of our viewers might remember.
And I think that investors right now are essentially continuing to believe, I guess, for themselves, I guess, for their clients just for the general 2024 story, which is that the Fed will cut rates, and it will end up being fine. And a lot of what worked in '23 will work in '24. Well, that continues to play out.
And I think you see that really in the sector action with technology doing all of the work today. And the market cap gains that we've seen over the course of this year, obviously, make the skew there, let's say, on a sector basis even more important for the index level move.
JULIE HYMAN: All right, I'm curious about the second takeaway there with the real Magnificent Seven.
JARED BLIKRE: Here we go. This is a fun part.
MYLES UDLAND: All right, so Jared and I were talking about this a little bit earlier. And he crunched the numbers. So we have a little divergence within real Mag Seven.
But I think over the last few weeks, we have all circled this idea that Apple and Tesla are kind of out. Like they have been laggards. I mean, Tesla is down for the year.
They have been laggards relative to the guys in the Magnificent Seven doing a lot of the work, which is really NVIDIA, Microsoft, and Meta at this point. So I am proposing two new entrants to the Magnificent Seven. Eli Lilly, which is now I think what the eighth biggest company in the S&P, something like this.
Bank of America's note last week at $1,000 bucks a share. Had it basically at $1 trillion market cap, about $950 billion.
And the second is Costco. Now, Costco is I think 22nd right now in the S&P 500 on a market cap basis. But the reaction that we saw on Costco last week to that revenue miss which was a small revenue miss.
I think stock was down 7% to 8% in a day. And that was a day where all the 2024 trades cooled off. And Costco has been at the center of like, don't worry, just buy it at 50 times earnings.
It's fine. Everyone loves Costco. And it has taken on like mega caps are now, I don't want to say meme stocks. But there's a meme of like just buy this mega cap theme.
Costco continues to benefit from this premiumization, I guess, of consumer habits. And it's just a safe place that you can put money, and you can tell someone we're now overweight Costco. And everyone that is your investors can be like, that's great. I love Costco.
JARED BLIKRE: I love how you're stuffing a consumer staple in the Magnificent Seven.
MYLES UDLAND: It doesn't act like a staple. Look at the stock.
JULIE HYMAN: It just feels wrong to me to have Costco in there with those other companies.
MYLES UDLAND: So I was looking at this. I think there's also a discussion to be had about where Alphabet fits within the Magnificent Seven. I know the Magnificent Three is kind of where it's at.
JARED BLIKRE: It's flat on the year. So where does it go? Yeah. I don't know. I will say this.
When I was crunching the numbers, looking at the disparity between the old Mag Seven, the new one with Costco, and Lilly, it makes a difference. Going back to our chart, if you go back to the beginning of 2020, the Mag Seven original is up 155%.
If you switch Costco and Eli Lilly, and it's up 171%. 171. But the mag 4 is at 187%. So it just goes to show you we don't need Costco, we don't need Eli Lilly. We need more concentration.
We need the Mag One. And maybe that's it. And that's where you go. That's how you take this to its illogical extreme conclusion in case you were wondering.
MYLES UDLAND: Exactly.
JULIE HYMAN: The last takeaway that I should mention here is the last point on your screen, which was the most important dot plot ever. Is that since the last dot plot, or are you being-- Are you not being-- wait-- are you, Myles Udland, not being facetious?
MYLES UDLAND: I think next Wednesday's dot plot is the most important dot plot the Fed has ever released. And the reason why is that when they came out in December, and they said we're going to cut rates three times in 2024, the market said, all right, we'll buy that. We think it's going to be 6.
And over the last few months, there's been a convergence. The market is now at 3 to match the Fed. In that time, the S&P is up 7% or 8%. We're just talking about all the action in the Magnificent Seven for, however, many stocks.
All those memes are still in play. Now, you're getting softwares rallying. Chinese tech stocks. Like everything's great in the market.
On the condition that the markets still believe the Fed will cut rates three times. If they come out next week, and they say we're going to cut rates once, I think you are then having a conversation about, are we getting to the June dot plot and discussing rate hikes or no cuts this year?
And I think a lot of what the market has become comfortable with in the last few weeks is that this is delayed gratification, not removed reward essentially. And if the Fed comes out and suggests that there's a wholesale change in how they're approaching rate cuts in 2024, then you could be like, all right, maybe we've got a problem here.
JULIE HYMAN: Just one quick note on that, too, that I think is interesting. Jay Powell really downplayed the dot plot at certain times in the past. But it feels like maybe that was the wrong call because it turns out the dot plot actually was the more accurate read.
MYLES UDLAND: And if you look at his testimony last week, he did the same thing. He's trying to downplay it. And I think the reason he's trying to downplay it is because he knows that it has only risen in importance.
Like the thing is if you look at '23, the Fed's dot plot told you they were going to be more aggressive, told you they were not looking to cut rates. And while he wants to back away from that, it has been a pretty good guide in the last couple of years.
So what they say next week, markets correctly will probably infer. It's going to be a guide for what happens in balance of this year.
JARED BLIKRE: I like your thinking. We had some fun earlier. But that's some serious deep dive thinking that--
MYLES UDLAND: I know the whole thing is like I'm always kidding. And I don't mean it. But like, I actually think some--
JARED BLIKRE: This is how you got to head of news.
MYLES UDLAND: For whatever that is. I mean, is that title serious? I don't know.
JULIE HYMAN: Yes.
JARED BLIKRE: All right, thank you, Myles.
