North American Equities: The Trumposphere and the AI-Verse: Two Forces Driving Today’s Markets

Transcript

PETER HOFSTRA: May the 4th be with you. We're back baby. Pete Hofstra here with an update on North American equities. How about that S&P 500? Up 10%-ish in April. Got to go back to November 2020 to see that kind of number. Canada did just fine, up 3%. So underperformed, but it was financial, so a little different from the materials or energy-led rallies we've seen over the last year or so. Actually, I think materials were down and energy slightly positive, but presumably strong views of our economy led to good returns in the financial sector. And of course, tech is what led the U.S. recovery. So I think two big themes, we know this, but to put a label on them, we're dealing with the Trumposphere and the AIverse. So two very big themes that play out in the market, kind of independent of each other, but no question that they could collide. And like the Trumposphere is everything we've experienced for the last, whatever it's been since, I guess, election in 2024 to January 2025. So whatever we are into this, 50 months, 60 months into this, the most recently being this war with Iran, it was a ceasefire. Markets seem to look through it. The moves of the market and the moves within the market are just incredible. I mean, there's a huge supply chain disruption. Even if the war stops now, it's going to take a long time for everything to get working again, to get all those ships, whatever they've got, fertilizer, natural gas, oil of whatever flavor, it's going to take a while to get everything going again. And look, this could trigger a huge reinvestment. And you build your house on a sand in a hurricane zone, just because you go a couple of years without a problem does not mean the risk is gone. So the Strait of Hormuz has been a risk for a long time. I guess it took a President Trump to really sort of indicate how big a risk that is, and maybe we should do something about it. So this could trigger a whole new series of pipelines to be built. Some of the refining capacity moved to other places. We'll see. We'll see how all of that plays out. But that's certainly a dynamic that has huge impact on the market. But let's jump over to the AI-verse, which looked incredible. So we had a number of results come out, actually a bunch of names reported within a couple of days at Amazon, Microsoft, Alphabet, Meta. Who am I missing? Apple, right? A lot of the big names all reporting within a couple of days. And the summary is the spending on AI is robust, is as strong or stronger than whatever optimistic bets had been out there. This is just a new world order. AI is going to proliferate products in all kinds of different ways. And there are some leaders who are hosting the compute to do it. But it's really to distinguish between different opportunities. Alphabet, which used to be known as Google, had a great quarter. But when you think about the different elements of this, and this is what we tracked. Maybe I'll share some thoughts with you on it. It’s who's going to get the value down the road, right? Where does that accrue to? Is it the big model builders? Is it an OpenAI? Is it an Anthropic? Is it Gemini within Alphabet? Is it Grok? Elon Musk? Is that where the value is going to be? Or is it the guys who host all this compute? So is it that Microsoft? Is it Amazon? Is it Google, who are the big hosts of all of this? Or is it the guys who have the use cases for AI that can really help and drive improve their business? So when you think about Alphabet, they have all three, right? So they host compute. They have Gemini. So they have their own leading edge model. And they have a great use case in their search business for that model. Whereas you compare that to Meta, it sort of has two of the three. It has a model and LAM. We'll see if it gets back to leading edge. But they have a good use case. They actually drove a really good revenue number using AI to really enhance that advertising business. Right? Then Microsoft, of course, doesn't have a model. Amazon doesn't have their own model. So you've got different dynamics. But the Alphabet approach of really having that vertical integration seems to be the winning formula right now. But those are the types of things we track. But the broader theme within that one element that's playing out in the market looks fantastic, right? So everything looks gangbusters. People are trying to guess on where the component shortage is going to be. So which is the next group to run? What I would maybe caution everyone is, look, we certainly like the spend and the opportunity. But businesses don't change what they are just because the demand is outstripping supply for a while. So the memory business, this is computer memory, is a tough business. It's a commodity business. It's capital intensive. It's all the things you're taught not to invest in. All the stuff that Warren Buffett, now retired Warren Buffett, would tell you not to touch. But demand is outstripping supply. So things look really good. And so we look at that. So the nature of the business hasn't really changed. They're just in kind of a sweet spot. So there's stuff like that that you do want to be careful with. The stocks can rip, they can look good. But these are things you really want to be careful how much exposure to have. You want to be careful chasing them because the character of the business hasn't changed. So the sustainability isn't there.

So anyway, look, there's lots of optimism, but we don't want to ever get drunk on this stuff. And then, of course, back to the Trumposphere and all the chaos that that's bringing. Again, they're pretty independent. So you saw phenomenal results. But where they can collide is if this disruption to energy, in particular, does spike inflation, does take share of consumer wallet, all has to go to energy and can't go to other places, that can ultimately lead to a cut in corporate spending. And therefore, even this investment on AI could have to slow down. We don't see that, but that's sort of the things where these two worlds could collide. Of course, Jerome Powell not leaving the Fed. I mean, there's just all kinds of interesting dynamics that the Trumposphere has brought upon us, new things to digest and try to understand. Anyway, I think we'll leave it there maybe for this month. It is what it is. AI looks great. Let's hope this war gets settled and we don't have to worry about that again. That's what the market's discounting. Let's hope the market is right. But so far, the trend in the spend is looking pretty robust. That's it for now. We'll check in with the month. Be well.