'Tech or Bust' as Bonds Loom Over the AI Boom

SPEAKER_1 (0:00)

So let's talk about the broader markets. Now joining us is Jake Dollarhide, CEO of Longbow Asset Management. Good morning, Jake. S&P 500 and the NASDAQ it records this morning. Even with elevated yields, NVIDIA just hit another all-time high. What do you make of it?

Jake Dollarhide (0:15)

I think it's more an AI trader bust. Again, if you stripped out energy and tech from this market, you're down for the year. Just like if you stripped tech out last year, you're down for the year. So this is a market, like we saw with the hotter trade data this morning, it's about chips coming in from Taiwan. It's about feeding the AI monster.

This is a market that it's tech or nothing. This year, energy and tech are nothing. I think we will continue to see that play out in 2027 and beyond.

SPEAKER_1 (0:49)

What do you do about that? I mean, do you go in all in on tech and energy if that's the case? Because, while yes, we have seen the S&P 500 rallying to a new all time high now. It's first since, what was it, the August 18th or something. I mean, we have relied on just a handful of companies to get us there. I mean, namely the MAC 7, which has reestablished that leadership once again. But the last two days, Brett has looked supportive.

Do we buy into the broadening out thesis just yet?

Jake Dollarhide (1:22)

I think you always have a diversified portfolio. You just overweight tech or you overweight energy. I mean, look at utilities. Utilities is actually the worst performing sector on the year and it's the most obvious backdoor AI trade. But look at, I think what you saw with Alphabet and Constellation Energy this morning, what you saw with Microsoft repurposing Three Mile Island with its nuclear.

These AI companies, they need power. They can't get enough power. There's not enough time to get on the grid in a traditional way. You're going to see a lot more of these. So yeah, so broadening out, take advantage of a dip in utilities, take advantage of a dip in financials because of interest rates.

Maybe even though higher bond yields hurt existing bond investors, if you're a new bond investor, look, in January, the 10-year investment grade corporate bond, we're getting a 4 percent coupon and then rise interest rates. Then in June and July, I'm buying 10-year investment grade corporate bonds getting 5 percent coupons. Well, on Friday, I just bought 10-year investment grade bond getting a 6 percent coupon. Now, all those investors in January and June are underwater, but if you're a new bond investor, if you're an investor that doesn't own bonds, you own stocks and money market funds, you can now buy and your entry point into a bond portfolio is now 6 percent, and that looks really attractive to a lot of new investors, and that's going to put further pressure on treasuries, it's going to put further pressure on foreign debt, and it's going to put further pressure on stocks, I think.

SPEAKER_1 (2:53)

Yeah, it's a competition for capital, isn't it? I think as people are starting to dip their toes into duration when it comes to government bonds as well with the 10-year at 530-ish, I mean, there is a question as to at what level does that start to become an issue for stocks as well. What have you made of the fact that technology and higher yields can coexist for now?

And at what point do you think they won't be able to?

Jake Dollarhide (3:25)

I think what was a shock, higher interest rates was a shock in 2022 when inflation topped out 9.1 percent and the Fed started raising rates to combat it. I think the mentality then was interest rates have been at percent, interest rates have artificially been at percent coming out of the financial crisis for 13 years, from 2008 to 2021 And I think the market, through a temper tantrum, because oh my gosh, percent interest rates are going away. I think the difference now is, now that rates have been elevated for the past four years, investors are becoming, I think, better educated.

A lot of great articles have come out about this is just normal. Think about the 80s, think about the 90s. This is just normal. Interest rates being at 24-year highs, sure. But 24 years ago, the stock market did very well with these rates. I think investors are just coming to terms with the fact that interest rates don't have to be a percent for the stock market to thrive. Your question about tech and higher interest rates, three years ago, tech was completely immune to interest rates because they were flushed with cash with little or no debt. Now, they're issuing so much debt to pay for the AI data center build out.