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The AI trade keeps on spinning as Big Tech names continue to defy expectations and show they may have even more room to grow. These AI plays aren't only driving market indexes higher along with hardware demands, but also the need for energy to power this next generation of tech.
Hennion & Walsh CIO Kevin Mahn joins Market Domination to give insights into artificial intelligence themes, why it has much more room to grow, and whether investors should start to consider utilities (XLU) as the next long-term play for AI.
"No one's looked at utilities for the better part of the last three years as [interest] rates have risen. Guess what happens as rates come down? All of a sudden, that utility that pays 4.5, 5% looks pretty attractive again. And it's also another way to play the AI game, remembering that these data centers that power all of these massive algorithms in AI, they rely upon utilities that supply the electricity solutions that they need."
He follows that sentiment up by stating: "So I think there's another good way to play in those areas of the market that still are trading at attractive valuations, pay good dividends, can weather an economic slowdown, and will offer more upside, perhaps even more so than what we've seen from technology already."
Today sell off. Let's welcome in Kevin Mann, the chief investment officer at Hennion and Walsh. Kevin, it is good to see you. So listen, let's start there. You know, as you heard us, Kevin, we're trying to this stock rotation. We're seeing together has a lot of people talking, and we're trying to figure out if what you see here today, Big Tech slipping, but listen, those interest rate sensitive uh sectors they're working, Kevin. Small caps, cash in a bid. Do you think it's a one-day move or no? This is something bigger, it's broader, it's going to stick.
Yeah, Josh, I think the rotation out of large cap technology stocks may have begun today. And that rotation is going to be led by cuts and interest rates in addition to earnings growth beyond the Magnificent 7 technology stocks. And to put them in the perspective, let's remember that over the course of the last 12 months, 83% of the earnings growth in the S&P 500 has been driven by the Magnificent 7 technology stocks. We also know that through the first two quarters of this year, the market was up by 15%. Pull out the mag 7, it's only up 4%. Now, while that's an average year for the markets, it certainly doesn't sound as good as up 15%. So the market needs to see earnings growth from those other 493 stocks this quarter. And the good news is, according to fact sets, it's forecasting that earnings growth will reach around 8.8% in the second quarter. If that holds true, that's the best quarter year over year earnings growth since the first quarter of 2022.
The irony is, I couldn't help but thinking this, you know, if if we two years ago had gotten a day when rates were dropping, when the yields were dropping, tech would have been up, right? So there's been this big sort of shift that tech is now a haven, which is sort of ironic. But I do wonder as rates do start to come down, if the Fed does start cutting, will those companies also benefit? Will you continue to see its rotation, or will it just be a buy everything kind of market?
Yeah, but tech trade isn't dead by any means. And in fact, I think there's going to be years more of growth opportunities related to the AI ecosystem. But what areas of the market really haven't taken part in this rally that started in the beginning part of last year. How about areas like industrials, aerospace and defense, consumer staples, healthcare, and even utilities? No one's looked at utilities for the better part of the last three years as rates have risen. Guess what happens as rates come down? All of a sudden, that utility that pays 4 and a half, 5%, looks pretty attractive again. And it's also another way to play the AI game, remembering that these data centers that power all these massive algorithms and AI, they rely upon utilities that supply the electricity solutions that they need. So I think there's another good way to play in those areas of the market that still are trading and attractive valuations, pay good dividends, can weather an economic slowdown, and will offer more upside, perhaps even more so than what we've seen from technology already. Not that you should trade out of your technology stocks altogether, but perhaps take some of your gains and redeploy to other areas of the market.
Yeah, I mean, you totally interesting Kevin, because you got, you know, strategies coming on, and they they like utilities because they feel like you've got kind of a little bit of offense and defense in that in that sector. You heard Julian I talking about small caps there too, which is interesting. I mean, it's sort of big big tech slipping a bit, but small caps catching a bid. Do you tell your clients, yes, you want to be in small caps here?
I believe you want to stay diversified. And a lot of clients out there right now who saw that through the first two quarters of this year, the market was up by over 15%. Last year, the market was up over 26%. And they were parked really in short-term CDs and treasuries earning 5, 5 and a quarter percent, relatively risk-free. Smart way to play. But guess what? Add those two together, you've missed out on a pretty significant upside that's taken place in the stock market. My fear right now, Josh, those investors come off the sidelines, they look to move into areas of the market like large cap technology, they're going to get in at the highs and they should consider being more diversified. Look to small cap, look to international, look to some of those other sectors that I mentioned as well. Have your allocations to large cap technology include the Mag 7, but consider equal weighting as opposed to being market cap weighting.
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This post was written by Nicholas Jacobino