NVDA, AVGO, LRCX and MU: Picking Winners in the AI Trade

SPEAKER_1 (0:00)

I do want to broaden out our conversation though. Welcome in our next guest. Joining us, Glen Smith, the CIO at GDS Wealth Management. Glen, great to have you with us this morning. I'd love to get your thoughts here, kick things off here with the rally that we're continuing to see in October. I mean, are you looking at this as us bucking historical trends? I was talking about October phobia earlier this month, and I haven't said that in about a week here.

Glen Smith (0:25)

Yeah, typically October can be a bit rough. This October and the rest of the year is shaping up to be quite good. Companies are continuing to hit their earnings expectations, and it's going to be interesting. An interesting fact you're probably familiar with is every time since 1950, there's been a midterm and there's been 19 times this has happened, the stock market's up at 12 months later, on average 15 percent. So we think this isn't going to buck the trend.

We think this is going to be another strong 12 months, leading up to the midterm. And I don't think you want to get too focused on which party may win more seats, or what's going to happen at the end of the day. The stock market since 1950 hasn't cared too much 12 months leading after the midterms and leading into it.

SPEAKER_1 (1:15)

And so Glen, as we look at earnings being the primary driver behind the continued rally, how are you looking at the AI earnings? Because expectations keep moving higher. We watched a lot of the estimates rise as we came into Q3. But now there's a lot more conversation and concerns swirling around the AI trade than we saw in Q2. So does that then in theory leave more room for disappointment?

Glen Smith (1:42)

I agree on a couple of fronts. So I think there's a lot to look at, not just earnings.

Are these big tech companies gonna hit their earnings? But even more important I think going forward is the guidance. What guidance are they gonna give going forward? It's not enough to beat it, but now you have to say you're gonna beat it again and buy quite a big margin. Everything's pretty much priced to perfection. One thing I would add though is I think a lot of people are brushing AI and tech just with one broad brush. You gotta be very careful when you do that. Look at companies like Microsoft or Google. Yes, they're making a ton of money off AI, but that's still a relatively small part of their overall revenue.

Microsoft is still making a ton of money on the cloud. Google is, or Alphabet, I should say, on advertising. You can't compare them to a company that CoreWeave was down 25 percent last week, down about 12 percent on Friday, and its issues are completely different. They're trying to fuel their growth with debt, and that's a problem in a rising interest rate environment. They have $35 billion of debt on the books, and if rates continue to go up, that's going to put them in a bit of a pickle. So I would say that some of these big tech companies, the Nvidia, Broadcom, Lam Research, I think they'll continue to do very well. But if you're relying on debt, I think you want to be very careful, especially with whatever the Fed does here in December. I don't think we're going to raise cuts in October, but I'll be a little bit worried about December.

SPEAKER_1 (3:15)

You highlighted something that is the thing everyone wishes we had a crystal ball for right now, is when are these higher rates going to start slowing down? Some of these incredible capex numbers that we're seeing. Glen, where do you stand in terms of the guidance? Is this a quarter where we could potentially start to see a slight pullback or we not quite there yet?

Glen Smith (3:38)

I don't think anything's going to happen in the month of October. I think in December, either rates will go up a little bit or stay where they're at. At the end of the day, the Fed needs more data, which will come out in November. If inflation drops a tiny bit, they'll help them not be forced to raise rates. Or if the job numbers, which weren't very strong recently, if they continue to weaken or deteriorate, we could have no rate cut and maybe a long shot even a rate cut in December. So I think it's kind of a wait and see on what the economy does. There's certain stocks out there that of course are going to be the beneficiaries of rates if they do get cut. And a lot of these big blue chip companies have been doing well with elevated rates and most likely continue.