Fidelity’s Jurrien Timmer on AI Spending, Bond Yields and the Next Phase of the Bull Market

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Jack Forehand (1:02)

Hi, Jurrien. Welcome to Excess Returns.

Jurrien Timmer (1:05)

Good afternoon. Good to see you.

Jack Forehand (1:07)

Nice to see you too. You spend a lot of your time at Fidelity helping investors break through the clutter using history, market cycles and data to make sense of what's happening in the markets. And there's certainly plenty to talk about with you today.

It's been two days or a few days since the midterm elections. Markets are sort of trying to digest sort of some of the changes that are coming politically, but also the questions around data centers and AI. And so let's maybe start there. I mean, we're going to work through a bunch of your great charts that you spent time putting together. And that's kind of the meat of the discussion, I think. But I think we'd be remiss if we didn't at least get your thoughts and opinion on, you know, what we've seen in the market over the past few days and kind of how you frame that and the way that you think of markets and macro, how you would suggest investors be thinking about what we're seeing.

Jurrien Timmer (2:03)

So in a way, and obviously I have no particular political expertise, but you know, markets tend to regulate and or get regulated either by market conditions or by regulations like as in politics. And the markets were already the AI side of the trade, if you will, was already getting regulated by the markets itself, right? I mean, the AI names, whether it's semis or memory or data centers or hyperscalers, they hadn't really gone anywhere since early June and actually were correcting for now five months on. And so the markets were already doing the work themselves because the capex, the demand for capital from the hyperscalers and the frontier labs is so vast that the markets were struggling to just absorb that need. And of course, this happens at the time where one of the big frontier labs, of course, is about to go public. So the markets were already asking questions about the viability and the sustainability, not of the technology, but of the financial model, right? And that's not new. I mean, the same thing happened with the Internet boom, the same thing happened with real roads in 1873 And so the markets were already kind of going through that process.

And of course, during the midterm or following the midterm elections, the answer is now perhaps even clearer that the growth needs to be regulated or will be regulated in some way. And you can argue that's bad because we're going to lose the race against China or whatever. But I would argue that it's actually good because if you slow down the development a little bit upfront, you avoid crashing or going off the rails later. And I think the signal we saw for instance in CoreWeave bonds, we're already heading in that direction.

And so I think of it more as a glass half full. And also the incumbents in the space, the big hyperscalers who have very solid businesses, aside from data centers and AI, will actually probably benefit from this because they are the incumbents and they have very generous cash flows. And maybe if they spend less of that cash flow on capex, the market actually will like that. So I think the markets will survive this and they will be okay, but there is a lot of rotation going on, of course, and we're seeing that in real time.

Jack Forehand (4:49)

Yeah, it's a good point that leading up to this, there was some cracks that were forming in different parts of the market. And then it just kind of went over the cliff in the last couple of days, but that's how markets sort of work sometimes.