AI Is Driving Profits Higher, but It’s Not the Whole Story (ft. Nasdaq Chief Economist)

Zaid Admani (0:00)

Welcome back to The Rundown, interview edition. Today, I am talking to Phil Mackintosh, the chief economist at Nasdaq. In this conversation with Phil, we talked about why stocks have stayed so resilient, what the data says about earnings growth, and what's happening with the IPO market beyond the biggest names. This was an awesome conversation, and we recorded it at the Nasdaq studios in Times Square. I think you guys will really enjoy it, so let's get into it.

All right, guys, today we are talking to Phil Mackintosh, the chief economist at the Nasdaq. Phil, welcome to The Rundown.

Phil Mackintosh (0:34)

Thanks for bringing me back on.

Zaid Admani (0:35)

Of course. I'm really excited to talk to you today. Phil, so we're doing this interview at the Nasdaq in Times Square, and the Nasdaq 100 index is near record highs. I know it's down today during this interview, but it's still near record highs. Meanwhile, we have the 10-year treasury yield at the highest level in 20-plus years. Oil prices are over $100 a barrel.

I think a lot of people, including myself, are really shocked at how resilient the stock market has been. Why do you think the stock market continues to be so resilient despite all the headwinds?

Phil Mackintosh (1:07)

I mean, not just the stock market. Actually, the economy globally has been pretty resilient. So we were looking at some stats this morning. Almost all of the countries in the world are not in recession. They're growing slowly and sometimes growing quite well, despite everything that we've thrown at the economy. So I think we've been surprised at how resilient the economies have been. The stock market's an interesting case study because it's not just about the Nasdaq 100, even though those companies are doing amazingly. Like you said, that index is one of the best indexes in the world. It's got some of the coolest companies in the world in it. And they have been seeing really, really strong earnings growth, obviously because of the AI story.

But across the world, you've actually seen almost all of the country's indexes starting to grow earnings too. So it's actually been a broadening earnings story. Companies everywhere with lower interest rates and so lower wage inflation have actually been able to grow their profits. So it's a profit broadening story.

Zaid Admani (2:00)

So I want to touch on that actually. So what you said is interesting. I think a lot of people assume that most of the earnings growth is coming from the AI companies, but the top AI companies, we see that the index might be a little too top heavy from all the AI companies growing so much. But what you're saying is that the earnings growth is now starting to broaden out.

Phil Mackintosh (2:17)

Yeah, so I guess both are true. There is a lot of the earnings coming from the AI complex, but there's also earnings broadly across the small cap, across Asia, across Europe. So everything is turning up, being positive.

Zaid Admani (2:29)

So do you see a point where if the yields continue to rise, and we don't know if they will, but if they do continue to rise, some economists think that they will. Does it get to a point where that might be too much for these companies to overcome?

Phil Mackintosh (2:45)

So I think it's an interesting question, because typically when you raise interest rates, you often end up with a recession because companies' interest costs go up and they start to lose money because of the interest expense.

What's going on right now? Interest rates are going up because of inflation and because the economy is starting to recover, and the inflation is mostly energy inflation. So it's a lot of the Iran war that's pushing most of the inflation, and a little bit of electronics are starting to cost more because of chips. So it makes sense to put interest rates up a little bit. But when you think about what's going on with the AI complex, they have so much potential revenue ahead of them that a little bit of an interest rate change is actually not really going to make a dent in their spending. The capex next year is expected to be a trillion dollars.

We have a $30 trillion economy. It's a big chunk of our economy is being reinvested into data centers just here in America. So I don't think there is interest rate sensitive, but other parts of the economy could actually hurt a little bit more. So we've had a really slow housing market for a long time, mainly because a lot of people refinance mortgages when interest rates during COVID were almost zero. So they have two and a half and three percent mortgages. So now mortgage rates are seven and a half, and everyone's like, well, I'm not even going to move, right? Because I could get half the house, and I'll pay more than double the mortgage. So you're going to hurt the housing sector. You'll probably hurt some small cap companies that have been really hoping that they can refinance at lower interest rates as they watch the curve coming down. And we'd started to see their interest expense coming down. So for those parts of the economy, the interest rates could hurt. But for the AI sector, which is actually most of the growth in the US GDP right now, that's probably not going to make much difference.