AI’s Core Players Could Outlast the Semiconductor Selloff

SPEAKER_1 (0:00)

Let's bring Marlee back into the conversation, turn our attention to the AI trade medals and private markets with Dr. David Stubbs, Chief Investment Strategist at AlphaCore Wealth Advisory. David, thank you so much for your time today. What a week, a big rotation, Sammy's got a gut check, we got a triple whammy on inflation with the CPI, the PPI, the import prices. Obviously, we've had earnings kicking off and have set a very high bar when you look at the reactions to what have been good reports. What have you made of it? What has the price action told you this week?

David Stubbs (0:32)

Well, great to be with you. I think it was a challenging week because the market was caught in a pincer between fears that the AI boom had gone a little far, the pressure on the memory names, for example, and then obviously the resumption of some of the things which have wide the market, for example, the rise in energy prices in that way. So initially, bonds acted as a safe haven.

We did see some flows in there. And I do think that especially in short and maturities, if you offer people over 5% on US treasuries, there's going to be a lot of demand there. But that's where I think the market, you kind of didn't really know where to go this week. And then on top of it all, we've got flying cars as well. So there's clearly some innovation out there.

SPEAKER_3 (1:17)

And so as we look at all of this, David, I mean, we've got yields that are above 5%.

They're getting a closer look now. They're seemingly more attractive. They're attracting some buyers, perhaps even moving some money away from equities. But we have this very interesting divide in the economy. If we just even look at this week, as we saw AI investment and productivity get a big question mark over it, even though that's been supporting most of our growth. We've also got these higher rates and energy prices that you just mentioned. I mean, how sustainable is this balancing act that we have going on?

David Stubbs (1:51)

I do think it's reasonably sustainable. If you look at what people are questioning with AI, it's either where there was the biggest of all bottlenecks and scarcity, which was the memory trade. There's lots of discussion about new players in that industry coming out of China, for example, pressuring the large memory chip makers. And then also a concern about maybe the highest, you know, leveraged, most aggressive plays. We saw that with the Neo Clouds this week.

That still leaves the huge bulk of the AI ecosystem, right? It still leaves the GPU makers, it still leaves the hyperscalers, it still leaves the large companies which are starting to implement AI. So, the bulk of the AI ecosystem, I don't think, has been questioned. I think the two questions are really on the area of greater scarcity and of greatest leverage. Having said that, we are now at levels in terms of both energy and interest rates, where, you know, parts of equities are going to struggle. And I think if you look at the de-rating you've seen in the vast majority of US stocks in the last month or six weeks, it's been related to where interest rates have gone. And that's why we're going to see continued turbulence here, if we get ongoing pressures through energy, ongoing pressures through interest rates into the end of the year.

SPEAKER_1 (3:25)

I mean, the semis have got absolutely smoked this week. I mean, you've got the stocks obviously that's down for eight days now. I'm just wondering, even with good demand and numbers out of ASML and TSMC, how much of what we've seen in the AEI trade resets the earnings expectations, do you think? I mean, do you think this lowers the bar for some upside positive surprise than even a couple of weeks ago before we started to see this major sell-off?

David Stubbs (3:55)

I think by definition, it does, yes. And obviously, this has been an earnings-driven market for a while now. We've seen multiples decline in recent quarters because earnings are going faster than the stock market. I think the big question is, how far away from the core of the AI trade do you want to go?

If you look at the largest chip makers, if you mentioned ASML, if you look at the core parts of the manufacturing ecosystem, I think that people will continue to believe that they will be buoyed by the build-out of AI and its adoption. The question is how far do you get down into the rest of the players? You mentioned the SOX index there. That's actually quite a broad and diversified semiconductor index relative to some other ones out there which are more concentrated in the larger names.