Longevity of the AI Boom

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Bloomberg May 27 08:38 · 12.9k Views

Scott Chronert, Citi US Equity Strategist, tells us that AI is the new growth driver in town, driving markets.

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Transcript

  • 00:00 So give us a sense of what we think you saw this week.
  • 00:02 As I say, it's saggingly and it came back at the end.
  • 00:05 What's going on,
  • 00:06 right.
  • 00:06 So I think what's going on is the market continues to navigate where we think we are regarding economic conditions and the read through to Fed policy, OK.
  • 00:15 So we're back and forth between stronger economic data, which would signal a higher for longer Fed versus signs of softening and ongoing deceleration and inflation, which gives a little bit more confidence that you get a Fed pivot.
  • 00:28 So we're back and forth between this ongoing debate and the data.
  • 00:32 It tends to be supportive
  • 00:34 on a transitory basis on both sides.
  • 00:36 In the meantime, we continue to have this new growth driver in town.
  • 00:41 We're now a year into this generative AI craze, if you will, and it was reinforced this week.
  • 00:47 So a number of things going on in both the macro and then let's call it the the micro and new growth paradigm
  • 00:54 approach as well.
  • 00:55 Well, Scott, as I listen to, I wonder if that's a little bit of microcosm of the year so far.
  • 00:58 Because if we go back and look, the first quarter, the equities were really on the March at the S&P 500.
  • 01:03 Then it dipped at the beginning of the second quarter and it's come back up again.
  • 01:06 Now we went into the year expecting, what was it, 6 rates cuts and now we're down to maybe one 1 1/2.
  • 01:11 Yeah.
  • 01:12 So it's really interesting the way the market is navigating this,
  • 01:16 the, the way we tend to think of it and the data tends to show this
  • 01:19 is that
  • 01:20 the growth profile and the growth influence on equities can often outweigh the interest rate influence
  • 01:27 as it, as it pertains to the discounting mechanism and expectations for
  • 01:32 economic activity.
  • 01:34 What's been happening is that growth has been winning as more and more companies are now getting on this, this generative AI
  • 01:42 phase and and really going more aggressively down the path of investing in
  • 01:47 future opportunities that should support longer term growth drivers for the broader
  • 01:53 U.S.
  • 01:54 equity markets.
  • 01:55 And what about your views?
  • 01:56 Because you are, I'm delighted to say one of our elves, as we call you the Bloomberg Elves here, one of the analysts, you set it out the year toward the top of the pack of elves and now you're sort of toward the bottom.
  • 02:04 Did you move or did the rest of the pack move?
  • 02:07 Essentially what's happening is the rest of the pack has been marking with the market move and is leapfrogging us a bit,
  • 02:14 which is fine.
  • 02:15 I think the way we're looking at it is that we're still expressing a very constructive view
  • 02:19 on the fundamental set up for US equities at this point, particularly the S&P 500.
  • 02:25 But we do have to recognize that a lot has happened pretty quickly from a performance perspective.
  • 02:30 And more recently, our ongoing panic euphoria model is tripped into euphoria, which is usually not a great sign for forward performance.
  • 02:40 At the same time,
  • 02:41 we've seen valuations move higher to a point where the implied growth expectations supporting this market are getting pretty aggressive.
  • 02:50 So put us in
  • 02:51 a ongoing fundamentally constructive view.
  • 02:54 But shorter term, we think the risk rewards pretty balanced right now.
  • 02:57 David, what about the breadth of the market going into the mid year?
  • 03:00 We were really concerned it was so narrow.
  • 03:02 There was some hopefully broadening out.
  • 03:04 Is it broadening out from that Magnificent 7 or whatever you want to call
  • 03:07 them?
  • 03:08 I think it is, but not in the way that many were expecting.
  • 03:10 We began talking about a fundamental broadening last summer where we thought we'd see more sectors contribute to the underlying index
  • 03:19 growth rates.
  • 03:20 That's still unfolding.
  • 03:22 But from a performance perspective,
  • 03:24 off of the rally that began last November, we saw areas such as industrials
  • 03:29 and financials participate quite strongly
  • 03:32 as this year unfolded.
  • 03:34 Then as we hit the middle part of this year thus far, we began to see other areas.
  • 03:40 Energy kicked in for a period of time,
  • 03:42 and more recently it's been utilities.
  • 03:44 So while tech communication services are still your leading sectors, you are seeing different pockets of the market kick in at different times and it ends up supporting this broader index move.
  • 03:56 So Scott, you mentioned actually a year ago, you pointed out it was just a year ago that a company, I know you don't talk individual companies.
  • 04:01 I'll name the company.
  • 04:02 NVIDIA came out with those blockbuster numbers.
  • 04:04 We had some more this week, but it's spread out from NVIDIA.
  • 04:06 There are some other companies as well that seem to be along for the ride.
  • 04:10 Give us a sense of that investment in AII mean it's good for some companies who are making these microchips.
  • 04:15 At the same time, a lot of other companies are spending money right now.
  • 04:18 They're investing money.
  • 04:19 So why does that buttress their stock because they actually have an expense coming in?
  • 04:24 Yeah.
  • 04:24 So I think the way this is setting up, we're spending a lot more time now talking about capital expenditures.
  • 04:29 And I think one of the dynamics that is at hand right now is that you're seeing a lot of the investment into
  • 04:36 AI and related applications
  • 04:39 and the semiconductor
  • 04:42 component of that fills that quite directly as does the software component.
  • 04:47 But and so we're watching this
  • 04:49 AI narrative unfold through two paths.
  • 04:52 The 1st is you're going to have companies that are directly exposed.
  • 04:55 These tend to be your Mag 7 or Big Seven components where we're going to be measuring.
  • 05:00 Directly on the way AI is feeding their fundamentals in the months to come.
  • 05:05 On the other hand, the bigger picture and perhaps the more important longer term picture
  • 05:10 is that now as more and more companies embrace the opportunity in generative AI,
  • 05:15 they're putting
  • 05:17 a lot of
  • 05:18 effort into
  • 05:19 establishing their own
  • 05:21 ways of
  • 05:22 of benefiting from AI.
  • 05:24 What this is going to mean over time is that the investment
  • 05:27 and spending that's unfolding right now
  • 05:30 should translate into
  • 05:32 various forms of productivity enhancement, perhaps margin improvement.
  • 05:36 And ultimately what we really want to see is profitability, profitability enhancement, which in turn leads to higher valuations.
  • 05:43 All told, the setup is very clear right now.
  • 05:46 It's going to play out over as I mentioned months and perhaps in some cases over the next couple of years.
  • 05:52 But what it's doing is providing the broader market a,
  • 05:56 as we mentioned at the outset, a very compelling longer term growth opportunity that is taking fundamental expectations over and above traditional economic sensitivities.
  • 06:07 How much time do we have for
  • 06:09 before they have to deliver on that productivity?
  • 06:12 It's going to vary.
  • 06:13 We think for some of the more direct beneficiaries they need to start showing it
  • 06:17 in the in the months and quarters to come for companies where it's going to be more of a productivity enhancing application, we're going to be watching for that I think probably as 2025 kicks in and beyond.