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Technology companies, especially those related to artificial intelligence, have been among the biggest winners in this recent stock market rally. Justin Flowerday, Managing Director and Head of Public Equities at TD Asset Management, talks with MoneyTalk’s Greg Bonnell about the outlook and growth of the technology sector. Other sectors that may provide opportunities.
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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 this race continue? If not, which sector will the baton be passed to? Joining us now to discuss is Justin Flowerday, Managing Director and Head of Public Equities at TD Asset Management. Justin, welcome back to the show.
Justin Flowerday – Great to be here, Greg.
Greg Bonnell – Well, we’re not quite there, but people are thinking about summer vacation. He was Get into that kind of mindset, and we’ve seen new highs. Artificial intelligence is still king, technology is still king. How are you reading this market, and where do you think we might be headed?
Justin Flowerday – Yes, AI themes have clearly been carrying the baton so far and pushing the markets to all-time highs. And look, there are reasons to believe that there are probably some legs left to make the move. If you think about what’s driving the technology sector, I mean it’s really kind of artificial intelligence and semiconductors and then the internet.
What wasn’t moving aggressively was in other areas, such as software and services. If you have participation and these sectors join the leadership basket, that would definitely help in raising the level of technology. The other reason I would point out, to be optimistic, is that overall EPS revisions across technology remain really strong. And you have a line of sight into the latter half of this year, continued positive reviews.
And the last thing I would say is when you think about this revolution, the AI revolution, this is a once-in-a-lifetime thing. And if you think about the size of the opportunity and what’s happened, I mean you have a trillion dollar installed base in the data center. Currently, NVIDIA sells about $100 billion. This is the revenue run rate each year. So, we’re still in the early days in terms of replacing the installation base in the data center, which will need to be AI-enabled.
The response you’ll hear is everywhere, okay, but what’s the killer app? We’ve had–
Greg Bonnell – Is this why the show is so late? Because this is where the killer app will appear.
Justin Flowerday – That’s right. correct. This is the question everyone is asking. Well, what is the killer app? Because we didn’t have one. And we’ll need one to justify spending the hundreds of billions of dollars people are making in CapEx to build these data centers.
In terms of passing the baton, I think there are some sectors that could be interesting, but it’s not a big, big topic. It’s just a mixture of different ones.
Greg Bonnell – Let’s get into the mix then. I know that at TD Asset Management, from some of your colleagues, you’ve heard about industries that, perhaps, haven’t gotten some recognition in terms of what they’ve shown us so far.
Justin Flowerday – Yeah, look, industrials is a very interesting sector. And it’s a really fascinating sector for the colleagues who ultimately cover it – the analysts Juliana Faircloth and Terence Chung. There are a number of themes in industries that will continue to boost certain areas of industries even higher.
One of them is aerospace and defense. The aerospace and defense sector has benefited from the return of airline passenger travel and a backlog of aircraft that need to continue construction. There is electrical equipment. So, as you build all these data centers, you need a whole bunch of different components to go into building the data centers, which helps power the network to allow for the new power consumption that’s required.
And so, look, there’s going to be ongoing trends there. Some of the other sectors around — some of the early cyclicality, right? We saw the Purchasing Managers’ Index (PMI) data last week. In fact, it was not strong in terms of merchandise. We are seeing some slowdown in various sectors that are traditional end markets, such as automation and even rail and transportation.
I think there’s an opportunity for some of those to improve if we see a little bit of a return in terms of shorter cycle PMI activity.
Greg Bonnell – Well, some interesting areas that might actually show some strength and help with this rally. What about weakness? I mean, I think we’ve been watching consumers very carefully for a long time now, trying to figure out how they’re surviving in the high inflation environment that we’ve had, and then the high borrowing cost environment as a result of that, how are they hanging in there? Are we seeing some weakness?
Justin Flowerday – Yeah, the consumer situation is interesting. And everyone is watching to figure out, well, is the consumer going to collapse? Have they spent too much and exhausted their excess savings? And I would say, look, there’s been a year of, I would say — I wouldn’t call it weakness, but just a slowdown in terms of, I would say, general consumer confidence.
And then when you look at different consumer segments, there are groups that don’t perform as well as others, right? So the lower-income group, which has used up a lot of their excess savings, we see delinquencies on credit cards start to go up, delinquencies on auto loans start to go up. So there is a group of consumers who find it a bit difficult these days.
And so when you think about it in terms of investing, I mean there’s a little bit of a decline in trade as consumers shift their consumption bucket to something in maybe the more value-oriented bucket. Companies that can offer really good value for the products they sell and manage their operations efficiently will really benefit.
On the other end of the spectrum, you have a group of consumers who don’t really care about price and just want to go out and buy what they want to buy. They are not price sensitive. So when you think about investing there, there are some great luxury brands. Companies with really strong brands will continue to do well.
Greg Bonnell – Now, of course, one of the big events of the week will be another inflation report from the US, and another interest rate decision from the Fed. There are no expectations that the Fed is about to act anytime soon. But clearly the market is very sensitive to any of these data points that could feed into what the Fed is thinking.
Just thinking about last week. You talked about weak PMIs. The market could not determine whether bad news was good news, bad news was bad news, or good news was good news.
Justin Flowerday – That’s right.
Greg Bonnell – I feel like the market translation machine is now trying to figure out what to spit out on the other end.
Justin Flowerday – Yes, that’s right. And we’re at that point in the market where people are really looking for some easing in the interest rate environment to allow for some pressure on balance sheets. This will help improve consumer confidence at the same time. Anytime you dilute, you dilute for a reason. This is because the economy, and the future outlook for the economy, has weakened.
So, yeah, it’s going to be really interesting as we head through this summer and start to figure out when the next one will be – when the first rate cut will come from the Fed and when the next rate cuts will come from other central banks around the world.
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