Former NEC Director Gary Cohn: We've got a lot of really strong economic tailwinds
Speakers
Joe Kernen — Host
— CNBC Squawk Box co-anchor
Summary
- Hidden Stimulus: Consumers are receiving larger-than-expected tax refunds because withholding tables were not adjusted down despite tax cuts, acting as a significant economic tailwind.
- The "AI" Euphemism: Companies are using "AI" as a cover for headcount reductions to protect margins against high interest rates and input costs, rather than demonstrating true technological synergy yet.
- Market Rotation, Not Correction: The flat performance of the S&P 500 (market-cap weighted) masks a rally in the equal-weighted index; capital is rotating from Big Tech into traditional "real economy" sectors.
- Capex Bottlenecks: The reindustrialization of America is funded but slowed significantly by state and local zoning/permitting, delaying the speed of capital deployment.
Trade Ideas
Cohn highlights "really strong economic tailwinds," specifically larger tax refunds (due to unchanged withholding tables) and a massive "Capex boom" in reindustrialization. Larger refunds mean more disposable income for the average American (bullish Consumer). The Capex boom, though slow due to zoning, guarantees a long pipeline of work for construction and industrial firms. LONG sectors tied to disposable income and physical infrastructure build-out. Persistent inflation could eat up the tax refund windfall before it translates to discretionary spending.
Cohn notes that the "biggest companies" (Nvidia, Google, Microsoft) are seeing their growth numbers "reevaluated" by investors, leading to flat performance despite good news (e.g., Nvidia's earnings). The market has priced in perfection. Even "great reports" aren't saving these stocks right now because the capital is rotating out to fund positions in traditional sectors. They are sources of funds, not destinations, in the current cycle. NEUTRAL/AVOID. While not explicitly calling for a crash, the momentum has stalled as the market rotates. AI capex could accelerate faster than expected, proving the "reevaluation" wrong and sending these stocks to new highs.
Cohn observes a distinct rotation where investors are "reevaluating the growth" of tech companies and moving capital into "traditional companies in America" like Walmart, J&J, Exxon, and Verizon, which are trading near 52-week highs. As high interest rates and input costs persist, investors are seeking safety and realized value over speculative growth. The market isn't exiting equities; it is simply moving to defensive, cash-flow-positive legacy firms. LONG traditional value names as the beneficiaries of this capital rotation. A sudden dovish pivot by the Fed could reignite the risk-on trade in high-growth tech, causing these defensive names to underperform.
Gary Cohn
Vice Chair, IBM / Former NEC Director
Cohn points out that while the cap-weighted S&P 500 (dominated by Big Tech) was flat on the day, the "Equal Weighted Index" was up significantly (approx 6% recently). The market breadth is actually improving. The "pain" is localized in the over-owned mega-caps, while the average stock is performing well due to economic tailwinds. Buying the equal-weight index captures this broad strength without the drag of the correcting tech giants. LONG RSP to capture the rotation into the broader 493 stocks of the S&P. If the tech correction turns into a broader market panic, correlations will converge to 1, dragging the equal-weight index down with it.
