North American Equities: November Volatility Chronicles

Transcript

Good day, all. It is December 1^st, 2025. Pete Hofstra here with an update on North American Equities. Oops, there it is. The volatility that we typically would get in either September or October showed up in November, so we certainly had a bit of a correction mid-month, recovery toward the end of the month. TSX actually outperformed the S&P again, so certainly a strong year for the Canadian market, predicated on strength in the material space, so gold and other precious metals continuing to work, driving the TSX much higher, but the question we keep getting asked  and maybe you'll address here, is AI a bubble? Are we due for some sort of bigger correction? I'll throw a few things in the pot and then maybe sort them out. At the end of October, actually, when you had a lot of the Mag-7 reports, certainly the Amazons, Alphabets, Microsoft had reported, Meta and all, the commitment to spending on artificial intelligence just continues to rise and they can't build fast enough. They're all telling us there's just a line-up to get access to the compute and we can't get enough chips to service the demand that exists. So NVIDIA finally reported, November 19^th, I believe it was, phenomenal numbers, I mean everything you want as an investor or holder of the stock. They beat all expectations. They increased expectations going forward. We're talking about a 500-billion-dollar backlog, I mean just absolutely staggering, yet this stock went nowhere. It was actually up in the aftermarket and the premarket and then on open [INDISCERNIBLE 00:01:32], it was actually lower maybe the next day and has not done a whole lot to the end of the month and so this narrative has developed that it's circular financing, this is the ‘90s, there's way too much risk here and so we started to unpack some of that. Number one, these stocks – again, Alphabet, Microsoft, Amazon, Meta, NVIDIA – all trade at kind of mid-20s earnings, plus or minus a bit. So probably the best analogy, if we're going to talk to the ‘90s, is Cisco Systems would probably be the closest thing to NVIDIA is today, so both were the hardware providers to a booming industry, right. Cisco was the switches and routers to the internet build-out, of course, NVIDIA the GPUs to the AI build-out. At the peak, Cisco traded at 130 times earnings versus the mid-20s that NVIDIA and the others are trading at today, so certainly from a valuation point of view, it's not looking bubbly and from a growth expectation point of view, which can certainly relate to the earnings, it looks like they cannot achieve those growth expectations. So I don't think of the big, the mega caps in the public market, probably not bubble, but that doesn't mean there aren't some things that are bubbling and as we have pointed more to the private market, so if you want to find an overvalued startup that’s just burning through cash like wildfire, that would be OpenAI, so certainly they've become or worked themselves to become a cornerstone of this industry, so certainly there's risk associated with that business. As they do burn a lot of cash and have made a lot of commitments, they're going to have to raise a lot of money in the capital markets to come through on those commitments to Oracle, to Stargate, which is a big build-out of data centers and so on and NVIDIA has got money in the game there, but that risk is certainly real and we see other private market companies, with just a lot of capital chasing, not enough opportunity and so you are seeing crazy valuations in the private markets. You know, private equity is supposed to be doing things like rolling up dental offices and buying car dealerships and doing things not well correlated with the public markets, but that doesn't seem to be the case. Everyone is sort of chasing that one risk factor, whether that's even private credit sort of lending to the data center build-out, so certainly I think there are some things to keep an eye on, but if you're looking at the hard data, growth rates look pretty good. Valuations are not crazy with the big mega caps, so I think if you're concerned, that's probably a better place to be. I think AI likely holds together. I think one thing that is one of the many perks of being an investor is trying to unwind the narrative from the facts and what can happen with something like an NVIDIA is that the market is actually quite narrow in terms of, you know, there's some big buyers and sellers that control a lot of the volume within the market, so on any given day, whether it's a capital group, or a Fidelity, or somebody can wake up and say, “Oh, we're a bit too overweight NVIDIA, let's take it back to benchmark rate to finish out the year.” That can create enough sell volume that's hard to offset on a given day and the stock will go down, just more sellers and buyers and then the narratives start, right, that this is a bubble, this is circular financing, that NVIDIA is just funding their own GPU purchases, which they're not. They have invested across the ecosystem, but they're not the ones renting compute from an OpenAI or a Microsoft, right. So, a lot of business-to-business interaction is that lineup for compute, so there is revenue coming in from outside of the circle and so you have to be careful with these narratives that pop out after a stock moves versus causing a stock to move. So, I think NVIDIA, certainly, my own inclination, frankly – and again, if you talk to all our portfolio managers, they all are encouraged to have their own view – but it feels like that the narrative could be faulty more than the business itself. The last piece I'll maybe put out there is maybe end of the month, some of you, if you follow this space, heard about Alphabet or Google's TPUs, so Tensor Processing Units, which is frankly the first real competition to NVIDIA's GPUs. I mean, AMD and Intel both can make GPUs and were at different points rumored to be real competition, that has kind of waned substantively, but this is certainly more substantive. Alphabet has developed their own processing unit to run the artificial intelligence models. They've been working on it for over a decade and now it's certainly starting to prove its worth. Gemini 3 looks fantastic as a large language model and what Google has done, which is the difference, is they're going to make these TPUs available to other data center build-outs and Meta sort of the first one in line to take a good look at that, so that certainly creates a different dynamic. So, the thing to keep an eye on, is this bad for NVIDIA? I mean, it's certainly just not their game anymore, so this is certainly real competition, but we believe the overall demand is so strong that certainly there's room for a couple of players and that's what we have to keep an eye on. Does this overall demand remain as robust as it is? And again, the data we see now indicates yes, demand is holding up just fine, but certainly a new dimension to that. Maybe a couple of quick things. We've got a Central Bank decision in the U.S. coming up next week, Wednesday, I believe, so you don't get a big market correction unless you're seeing rate hikes or there's some external event that just completely disrupts the market, so the likelihood is that the Fed does cut. There's rumors that Donald Trump has already made his decision for who the next appointee will be to chair the U.S. Federal Reserve, likely someone that would be very dovish and so even if Jerome Powell, the current chair, is a bit cautious or hawkish, meaning he would not make more rate cuts, it may not matter if everyone believes the next chair is going to be far more receptive to Donald Trump's influence and try to do more to sort of boost economic growth by cutting rates, so it will be an interesting dynamic as we head into the end of the year. Consumer looks okay. I think Microsoft put out some early data from Black Friday, kind of up mid-single digits, so not phenomenal, but okay. So, do we get a bit of a Santa Claus rally? I think a lot of us would just like to just lock the gains in that we've got and not do anything too disruptive as we head toward the end of the year. I was going to talk a bit about Bitcoin, but you know what, this is getting on long enough, so I'll save that, other than to say Bitcoin itself is a risk asset. That's how it trades. That's how, frankly, it's always traded. It's not behaved as gold, but we'll talk more on that. If you're not a Bitcoin believer, it's important to look outside North America for the use cases and if you're a Bitcoin diehard, it's a good reminder to be careful, to be cautious in how much you weight into this future asset because yeah, it's certainly treated as speculative and the demand for compute is going other places, so the cost of being able to mine Bitcoin has certainly gone up, so it needs a higher price to be sustainable, so there's certainly risk too, but maybe we'll spend more time on that later on. At this point, yeah, I won't connect with you again till the new year, so happy holidays to everyone. Wealth, health and happiness to all of you, have a great New Year's and we will connect in 2026. Be well.