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Meme stock favorites start the week higher, GameStop earnings in focus

Yahoo Finance's Myles Udland, Julie Hyman and Brian Sozzi break down how meme stocks are faring ahead of this week's inflation data.

Video Transcript

JULIE HYMAN: Well, as we look ahead to that inflation data, as we saw last week, markets abhor a vacuum, a news vacuum. And so one of the things that leapt into the breach were meme stocks last week and AMC in particular, as we saw that stock rise-- I think 86% was the final tally when all was said and done, even with a dip late in the week. the shares are up another 4.5% here this morning.

Myles, I'm sure you were doing some deep thinking on the meme stock front over the course of the weekend and whether we would continue to see a lot of this action. I don't know that we know what exactly sparked the rally that we saw last week or the renewed interest in it, but it doesn't feel like that it's necessarily going away.

MYLES UDLAND: No, I think the more that I think about it, the more that we cover these meme stocks as, really, the most interesting sub-story within the market-- because all the conversation we were just having with Brian and the direction of the economy, that's heady stuff. That is where the base of the trajectory for all of this is really formed. But the activity with meme stocks underneath the surface and the fact that it has now come up in essentially the same form a couple of times within three months-- and yet, as we discussed with Jared last week, and I'm sure we'll talk about as we get through this week, the lack of spillover between what's happened in the meme names and how sentiment within the broader market is reflected, I think, to me is the most instructive part of this story right now.

I know there were a few stories out from a variety of publications over the weekend about the index industry and how some of the rally in the meme names opens that up to distortions within the construction of the index. Because obviously, if you have a market-cap-weighted index or market-cap-weighted type fund, and AMC is now double the size that it was, quadruple the size that it was, it can move that index or fund around a little bit more. Of course, if you're talking about the Russell 2000 or you're talking about even a sector-level index, its weighting is going to be still in the fractions of percentage points.

And so it's not going to, and has not, shown up in those overall measures. And so Sozzi, I enjoy the story. I enjoy covering the story and I enjoy discussing the story because the meme names are an oddity unto themselves. And we are not sitting here saying, what's the existential threat to markets because AMC shares quadrupled? I suppose there is a point at which that would happen. But that it has not happened, I think, to me is so far the biggest takeaway of round two of this episode.

BRIAN SOZZI: Yeah, and also the spillover effect, Myles. You mentioned the Russell 2000. FTSE Russell, who obviously oversees the Russell 2000, Russell 1000, and many other indexes, came out over the weekend describing or laying out their reconstitution plans. Now, this happens every year in June. Reconstitution essentially means they will add and subtract certain companies in the index. They're noting that the Russell 2000, since last June's reconstitution, up 84%-- 84%-- to $3.5 trillion in terms of overall market cap. In large part, that is because of interest in these meme stocks at GameStop and AMC.

Now, the flip side of this those two names will probably be removed from the small cap Russell 2000 index because both the market caps-- GameStop is nearing, what, $18 $19 billion? AMC is close to $25 billion. A typical market cap in the Russell 2000 is $5 billion and under. So those names will probably be removed going forward. But again, it is having a spillover effect. And you have seen stories in recent weeks. A lot of investors who have invested in ETFs or the Russell 2000, they don't even know that they are investing in the meme stock trades. And they have benefited as a result.

And then secondarily, on GameStop, Myles, just reading over the weekend, you get a sense there are retail traders firmly entrenched. GameStop can come out here and potentially miss by $0.50 on earnings and fall $100 million short on revenue, and there will still be this entrenched crowd of retail investors in GameStop that is likely to come out and buy on any weakness. And that weakness could very well come from their latest earnings.

JULIE HYMAN: Yeah. And those earnings, by the way, I believe are scheduled for Wednesday. So we could have that news event, such as it is, in the meme stock coming on that day. But as you said, this is faith-based investing to some degree. You have some people who are just speculating and trying to make money on price changes. But there are perhaps a surprising number of people-- particularly with that GameStop story, I think, but also with AMC-- who do seem to believe in the fundamentals of these companies.

And we've made the comparison before, I think, of bears repeating to Tesla. In those cases, if people got in long ago enough-- not necessarily if they got in just this year, but if they got in a long time ago in Tesla, it has indeed paid off, that faith that the story was going to work out even when there were a lot of circumstances that made it seem like, on an objective level, that the deck was stacked against it. So you still have that element. And in these cases, we've yet to see if that faith will pay off with actual concrete returns.

MYLES UDLAND: Yeah. And on the Tesla point, Tesla obviously now a member of the S&P 500, obviously one of the largest companies in the market. How Tesla moves does impact overall indexes. But again, I just want to reiterate my view that this has not yet led to a big change in risk sentiment and how the indexes are acting. And Sozzi, I know some of that reconstitution stuff is coming up.

But I think much like the debate over active versus passive investing was had a decade ago, perhaps, or even longer, that passive investing was going to warp the markets and take away the true price discovery of markets-- on the margins, I think there is an argument that the indexification of everything certainly has changed the way that markets can trade over time. But this idea that the market is now manipulated or fundamentally distorted because of the method through which people invest I don't find as a super compelling argument in the aggregate.

And I think that the same kind of thing is going to happen here where on the margins, these meme names can change the indexes. They can change-- oh, your investment is affected by AMC. Yeah, well, 0.01% of your portfolio is a derivative claim on AMC, sure. But I don't think it really fundamentally changes the nature of markets. And that, I think, is what is most interesting at this point in time.

JULIE HYMAN: Yeah. The stakes-- unless you put a lot of personal money into these things on a personal level, the stakes are pretty low on a larger market level. It's just fun to talk about.