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Tech companies, especially those connected to AI, have been among the big winners in this latest stock market rally. Justin Flowerday, Managing Director and Head of Public Equities at TD Asset Management, speaks with MoneyTalk’s Greg Bonnell about the tech sector’s outlook and other sectors that may provide opportunities.
Transcript
Greg Bonnell – Well, the performance of big tech stocks like Nvidia (NVDA, NVDA:CA) has helped push the markets to new highs this year. But can that run continue? And if not, which sector does the baton get passed to? Joining us now to discuss, Justin Flowerday, Managing Director and Head of Public Equities at TD Asset Management. Justin, welcome back to the program.
Justin Flowerday – Great to be here, Greg.
Greg Bonnell – All right, so we’re not quite at the halfway point, but people are thinking about summer vacations. We’re getting into that kind of mindset, and we have seen new highs set. AI is still all the rage, tech’s all still the rage. How do you read this market, and where do you think we might be headed?
Justin Flowerday – Yeah, so look, obviously, AI themes have been carrying the baton thus far and have driven the markets to all-time highs. And look, there’s reasons to believe that there’s potentially some legs left to go with this move. If you think about what’s led the tech sector, I mean, it really is kind of AI and semiconductors and then internet.
What hasn’t been kind of moving as strongly has been in other areas, like software and services. And if you had participation and had those sectors join the leadership basket, that would absolutely help with the moving tech higher. The other reason I would point to, to be optimistic, is just overall earnings per share revisions across technology remain really, really strong. And you have line of sight towards, the back half of this year, continued positive revisions.
And then the last thing I’d say is when you think of this revolution, this AI revolution, this is a once-in-a-lifetime thing that’s happening. And if you think about the size of the opportunity and what’s happened, I mean, you have a $1 trillion install base in the data center. And right now, NVIDIA is selling about $100 billion. That’s the run rate of revenue every single year. So still early days in terms of replacing the install base in the data center, which is going to need to be enabled for AI.
The pushback you’re going to hear is all around, OK, but what’s the killer app? We’ve had–
Greg Bonnell – Is that why the software is lagging? Because that’s where the killer app would show up.
Justin Flowerday – That’s right. That’s right. And so this is the question everyone’s asking. OK, what’s the killer app? Because we haven’t had one. And we’re going to need one in order to justify the spend in hundreds of billions of dollars that people are making in CapEx to build out these data centers.
And in terms of passing the baton, look, I think there’s a few sectors that could be interesting, but it’s not one big, big theme. It’s just a mishmash of different ones.
Greg Bonnell – Let’s get into the mishmash then. I know that at TD Asset Management, from some of your colleagues, I’ve been hearing about industrials, perhaps, not getting some of the recognition in terms of what they’ve shown us so far.
Justin Flowerday – Yeah, so look, industrials is a very, very interesting sector. And it’s a really great sector for the colleagues that end up covering it– analysts Juliana Faircloth, Terence Chung. There are a number of themes in industrials which are going to continue to power certain areas of industrials higher.
One of them is aerospace and defense. Aerospace and defense has been the beneficiary of a return in passenger airline travel and the backlog of planes that need to continue to get built. There’s electrical equipment. So with the buildout of all these data centers, you need a whole bunch of different components to go into building data centers, helping power the grid to allow for the new power consumption that’s required.
And so, look, there’s going to be continued trends there. Some of the other sectors around– some of the early cyclicals, right? We saw PMI data last week. It really wasn’t that strong in terms of goods. We’re seeing some sluggishness across different sectors that are traditional end markets, like automation and even rails and transportation.
I think there’s the chance for some of those to improve if we do see a bit of a return in terms of the shorter-cycle PMI activity.
Greg Bonnell – All right, some interesting areas that might actually show some strength and help out with this rally. What about the weakness? I mean, I think we’ve been watching pretty carefully the consumer for a long time now, trying to figure out how in a high-inflation environment that we lived through, and then a high borrowing cost environment as a result, how are they hanging in there? Are we seeing some weakness?
Justin Flowerday – Yeah, the consumer situation is an interesting one. And everyone’s watching it to figure out, all right, is the consumer going to crack? Have they been spending too much and have depleted their excess savings? And I’d say, look, there’s been a general, I’d say– I wouldn’t call it weakening, but just slowdown in terms of, I’d say, overall confidence of the consumer.
And then when you look into different pockets of the consumer, there is cohorts that are not doing as well as others, right? So the lower-income cohort, which has depleted much of their excess savings, we’re seeing delinquencies in credit cards start to go up, delinquencies in auto loans start to go up. So there is a cohort of consumers that are finding it a little bit tough these days.
And so when thinking about it in terms of investing, I mean, there’s a slight trade down that’s taking place in terms of consumers shifting their consumption bucket to something maybe in the more value-oriented bucket. Companies that can offer really, really good value for the products that they’re selling and run their operations really efficiently stand to benefit.
On the other end of the spectrum, you have a group of consumers that really don’t care about price and really just want to go out and buy what they want to buy. And they’re not sensitive to price. And so when you think about investing there, there’s some great luxury brands. Companies with really, really strong brands are going to continue to do well.
Greg Bonell – Now, of course, one of the big events of this week will be another inflation report out of the United States, another Fed rate decision. No expectation that the Fed’s about to move anytime soon. But the market, obviously, is so sensitive to any of these data points that could feed into what the Fed is thinking.
I just think of last week. You talked about weak PMIs. And the market couldn’t decide whether the bad news was good news, or the bad news was bad news, or the good news was good news.
Justin Flowerday – That’s right.
Greg Bonnell – I feel like the market translation machine right now is trying to figure out what should be spitting out the other end.
Justin Flowerday – Yeah, that’s right. And we’re in that phase of the market where people really are looking forward to some easing in the interest rate environment to allow some pressure off of balance sheets. And that’s going to help improve consumer confidence at the same time. Anytime you ease, you’re easing for a reason. And it’s because the economy, the outlook for the economy has weakened.
So yeah, it’ll be really interesting as we head through this summer and start to determine when the next– when the first rate cut is going to come from the Fed and when the next rate cuts are going to come from other central banks around the world.
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