Luxury consumer can not continue to bail out the overall economy, says BCA's Doug Peta

Brien Sullivan (Reporter) 00:00.150

meantime it was yet another day where the AI narrative had the market swinging back and forth so as we head into twenty twenty six how should investors distinguish what's a move LED purely by an AI headline and what's a real concern for the market joining us now are doug peta he

Brien Sullivan (Reporter) 00:14.350

is chief US investment strategist at BCA research and matt stuckey chief portfolio manager at northwestern mutual wealth management guys welcome let's see matt how should investors treat this AI turbulence in a market that still richly valued on the expectation that the AI

Brien Sullivan (Reporter) 00:34.990

economy will actually materialize i'm thinking about some mature investors who are less diversified than usual historically leaning into stocks and perhaps growth

Matt Stucky (Chief portfolio manager) 00:46.780

look i mean i think the recommendation from from our firm is the same regardless of whether or not you know this continues on in twenty twenty six and twenty twenty seven in terms of the ongoing investment into AI it's that don't put all your eggs into one basket i think

Matt Stucky (Chief portfolio manager) 00:58.940

diversification we think is is the best recipe for uncertainty for the ongoing build out of AI and it's it's starting to spill over into other areas and other sectors of size just technology just look at kind of what chapter robinson was discussing with their investors in the

Matt Stucky (Chief portfolio manager) 01:13.380

most recent earnings call just the productivity unlock that this technology is is disseminated across the economy we think is a powerful factor that probably is a little bit underappreciated in other sectors other asset classes besides just us large cap technology however there

Matt Stucky (Chief portfolio manager) 01:28.070

are you know additional reasons to to be optimistic for kind of what AI looks like next year scaling laws from gemini three as well as chatgpt five point two continue to be intact which provides the incentive for hyperscalers to continue to invest and you just saw with the the

Matt Stucky (Chief portfolio manager) 01:43.240

the earnings announcements from micron that's that's having a benefit to their business i mean gross margins that are twelve and a half points above expectations for the second quarter we think is is just a remarkable feat and you know that puts you know a a run rate earnings in

Matt Stucky (Chief portfolio manager) 01:56.950

the picture of thirty dollars plus and so it's it's it's interesting to see just this continuing to play out but diversification again is is your best friend in these environments

Brien Sullivan (Reporter) 02:05.190

doug backing up and looking at the overall economy what's the role of the consumer especially the working class consumer we talk about the K shape of this thing can the the three consumer continue to bail out the rest of us in

Doug Peta (Chief US Investment Strategist) 02:22.500

my view the luxury consumer cannot continue to bail out the entire economy in our view and you mentioned the K shaped economy in our view the lower leg of the K when it comes to the bifurcation among consumers is more important than the upper leg of the K we always have the rich

Doug Peta (Chief US Investment Strategist) 02:43.950

daddy warbucks according to a little orphan annie cartoons did quite well during the depression and i imagine his fellow club members did as well but we still have the depression it is the lower leg of the K that is the marginal consumer if you break the american households into

Doug Peta (Chief US Investment Strategist) 03:04.670

their five income quintiles in our view what matters the most is those middle three quintiles and they are increasingly struggling so what i think in in terms of the K is that the ranks of the lower leg of the K are growing with each month that we have soft payroll status soft

Doug Peta (Chief US Investment Strategist) 03:26.710

job creation and therefore that lower leg is getting more and more important and i do not believe that the upper leg of the K can carry the banner for the overall economy so in

? (Reporter) 03:36.630

light of that doug are you concerned that the labor market could tip the economy into contraction i mean we heard from fed governor chris waller earlier today on CNBC he was dovish he tends to be dovish perhaps more dovish than expected today but he again talked about his

? (Reporter) 03:51.990

concern about the softening of the labor market and the fact that he has that case or is making the case that we should continue to see steady cuts back down to a neutral rate that's lower than where it is now

Doug Peta (Chief US Investment Strategist) 04:05.540

i think governor waller has been right on the money in terms of suggesting to his fellow fomc members that they look through the one off impact of inflation from tariffs and that they focus more on the full employment mandate because i do think the full employment mandate is a

Doug Peta (Chief US Investment Strategist) 04:23.620

threat because just as you suggested yes i do believe the labor market could tip the overall economy into contraction could spell the end of the expansion we have incredibly concentrated job growth as much as we talk about the equity market being led by just a handful of issues

Doug Peta (Chief US Investment Strategist) 04:46.630

when we talk about how narrow the breadth is in the equity market the job creation so far this year it has been all about health care and social assistance that has been the really the only game in town year to date and in particular the only game in town since payrolls growth

Doug Peta (Chief US Investment Strategist) 05:06.200

slowed to an anemic pace beginning in may and unfortunately those jobs don't pay real well the only other sector that has contributed since may has been leisure and hospitality which also doesn't pay well so what we have is all the job creation is in two spaces that don't pay

Doug Peta (Chief US Investment Strategist) 05:26.150

well