Balancing High-Conviction AI With High-Dividend Diversification

SPEAKER_1 (0:00)

To discuss investment strategy for this fall and into your end, let's welcome in our next guest, Kristy Akullian, head of iShares Investment Strategy for the Americas at BlackRock. Kristy, great to talk to you. Now, I read through your paper. My take on the central message is that the economy is healthier than investors may be appreciating right now. So how are you looking at the underlying economy?

Kristy Akullian (0:23)

Yeah, absolutely, and thanks for having me. It's great to be back.

Yeah, I think that that's a good read. If I could sum up our overall Investment Directions paper, which we just published, I would call it constructive, but not calm, necessarily.

So yeah, we, you know, in terms of growth, we see that as being a bit stronger than, you know, was expected earlier this year. We do have a view that inflation is on a relatively more benign path, maybe relative to market consensus. And even though, you know, we think that rates are going to stay higher, we don't actually think that the Fed is going to move into an aggressive hiking campaign into the end of the year. So put all of that together, and we think that it makes for a fairly constructive, again, outlook in terms of risk assets. And we're leaning into some of the highest, you know, highest revenue, highest earners, which are of course in the AI trade as well.

SPEAKER_1 (1:13)

So let's talk about the AI trade. I mean, we've had an enormous run in AI related stocks. So what is giving you the confidence that we are still in the early stages here of opportunity, rather than getting closer to an earnings or evaluation peak?

Kristy Akullian (1:29)

Yeah, absolutely. I think this is one of the most important questions for markets right now. We took a lot of confidence from Q2 earnings. And specifically, you know, I think that we saw a much more direct linkage between capex spend and profits.

And so if you think about the money that, you know, especially the hyperscalers put into the AI build out over the course of 2023 and 24 and 25, we're really seeing that come to fruition in terms of the incredible earnings growth.

And I do think that Q2 earnings was, you know, nothing short of incredible. We saw about 31% on the S&P 500 year over year. That's one of the highest levels ever outside of a recession. Right? So keeping in mind that last year wasn't too shabby either, that year over year earnings growth was really strong.

We saw that broaden out to about nine out of the 11 sectors grew earnings by double digits.

And really we are continuing to see the demand for compute outstrip supply. So there's lots of metrics that we're watching there. One quick example, I'll give those about 66 gigawatts of compute capacity that is in development right now in the US. Of that, which has not yet come online, 95% of it has already been contracted. So again, just one of the many metrics we see where we're just again continuing to see that demand for compute really, really move ahead of supply. So it's benefiting kind of the whole AI supply chain, something like BAI or BlackRock AI ETF. It really is making some of those active bets across the supply chain and seeing some of those really strong results from Q2 as well.

SPEAKER_1 (3:06)

And you said you don't expect the Fed to move into any sort of aggressive hiking cycle here, but we are likely going to be in a higher rates for longer scenario. You said you expect them to remain higher for longer. At the same time, in the note, you warned that AI CapEx, the heavy treasury issuance and competition for capital, could contribute to keeping our yields higher for longer. How long can long-term yields go and how high can they get before they start to, in some way, materially affect the equity market's outlook?

Kristy Akullian (3:40)

Yeah, absolutely. And in terms of the Fed, certainly CPI data that we're going to get tomorrow is going to be hugely influential in that. I will say we're a bit out of consensus and that we still think that there's a case to be made here for the Fed to be on hold next week, as opposed to necessarily needing to hike. But exactly as you kind of framed it, we think the more germane piece of information to the market is this higher reset and longer-term yields that we're seeing globally. I think there's kind of two ways for this to play out to answer your question. One is that I think the yields can be moving higher for good reasons, and that's typically kind of the way we're leaning into this as well. Stronger nominal growth should result in higher yields, and as you pointed out, there's just more demand for capital as this AI buildout requires so much capital to be sourced. So we're just seeing competition in the private sector and the public sector. It just means that yields are moving higher globally. What we would be concerned about in terms of the equity market and where those higher yields really start to bite is if they're moving up for the wrong reasons.