Remy: Well, today's capital market segment is brought to you by Alpaca. We are looking at Wall Street turning mixed in midweek trade. Traders are wasting no time digesting the latest earnings from tech bellwether ASML ahead of Taiwan Semiconductor's report tomorrow morning. And of course this morning we're keeping an eye on Fed rate hike expectations following that hotter than expected core CPI figure. Well, when it comes to the AI trade, we have been keeping an eye on circular financing fears as well as data center spending skepticism. So are we seeing the start of tech reasserting its dominance amid geopolitical risk and in turn bond market volatility? Well, joining us live to defend his bull case is James. Great to have you back on the show. Thank you so much for joining. Well, it is quite a busy morning as well as busy week for earnings as well as economic data, so we can't forget the fact that geopolitical risk is a key part of the overall equation for both corporate earnings as well as inflation. So I understand your year-end S&P target is 8100, and this does hinge on progress in the Strait of Hormuz. So walk us through this.
James: Yes, it is 8100, and I think investors have been concerned, particularly in the AI trade, around a lot of things that have nothing to do with earnings, right? The pushback on data center buildout, the concerns about AI sort of getting uncontrollable, which are all valid, but we just haven't had earnings. I think ASML, as an example today, with that amazing report of great profitability and revenue guidance going forward, should give investors confidence as we go through this quarter, and that can drive us to 8100. It's not just the AI trade. I think it's the whole market. I think what we need is this earnings season. I call it show me the money earnings season. We need these companies to remind investors we are in the midst of a global economic accelerating expansion, and that's why the CPI number came in hot.
Remy: Yes, and you mentioned ASML, and we got the results out this morning, but we have to keep in mind when we're talking about some of the gainers or leaders in the AI trade, the valuations are also part of the factor and equation. So why cling to some of the expensive leaders instead of, say, hunting for bargains and downstream AI beneficiaries?
James: I think investors can really do both. One of the things with the quality market leaders is they're always going to have a little bit of a higher premium of PE, and that's worth paying for. I think investors should really be reminded of that. And keep in mind, in the last four or five months, these stocks, many of them haven't gone anywhere, so even the highest-tier quality, the PEs have been compressed. In many cases, the PEs are 50% of the growth rate. That is the opposite of a bubble. That tells you that we're still in the middle of the AI cycle. Now, on the other hand, yes, should investors for 2027, I think one of the best recipes is let's go to that third derivative. Who's going to be using these AI chips to further their profit growth? I think biotech is going to be a great place to be. Healthcare in general, great recipient of that.
Remy: Well, while I have you here with us, Wall Street has grown restless about circular financing between tech giants and also mega-cap data center checks and when we will actually see ROI. So why should investors be looking past the capex payback skeptics right now? And what are your thoughts on that?
James: Yes, I think that that's the key here. As a veteran of the '90s internet technology bull market, the key is to keep an eye on circular financing. We're certainly at the early stages of that relative to where we've been in the past. I don't think that's a concern. Keep track of valuations again. As I mentioned earlier, PE versus growth, still very attractive. And look at the ROI, which means investors like myself, and that's why I educate investors in general, let's make sure we're listening to those conference calls. Is the profit margin expanding, staying, remaining? Is there ROI? I think we've got to continue to be diligent about that so that we don't get to the point where the prices are just accelerating way above where the ROI is right now. That looks, we're still very early in the cycle. That's why we think the cycle lasts another four years if it's not derailed by something else.
Remy: And of course, when we're talking about artificial intelligence, it does make sense to mention risk. I understand you're making a call that top-tier AI names carry less risk than the broader stock market because growth-adjusted valuations look as attractive as they did in 2023. But given the fact that when we take a step back, bond yields are indeed sitting near multi-decade highs, how can premium tech carry less risk than defensive value?
James: That's a great point, Remy, and I think that investors sometimes connect higher rates to lower technology stocks. That can happen in a 2022 scenario where the Fed is really aggressive, but you have to remember here, investors need to recognize rates have gradually, I know it sounds like they've gone up a lot, but it's been a gradual increase, and it should continue to gradually increase as the economic growth continues to accelerate. When you have rising gradual rates, tech stocks can do wonderfully, and that's exactly what we saw in the '90s. In fact, in the '90s, we got the 10-year to 6%, so that's far from where we are now, and the bull market rode all the way through it, and that's because rates rose gradually. The Fed nudged them up slowly over time. I think that's what we're going to see certainly by the end of the year and into the next few years.
Remy: And finally, James, before I let you go, I do want to get your take on agentic AI, especially as bank earnings are rolling in, and we're paying attention to what the C-suite from these banking giants are saying. And JPMorgan chief Jamie Dimon says he's blocking outside AI agents from accessing accounts, citing cybersecurity risks. But what do you think is really going on here?
James: Well, I think that we're getting a consciousness, all of us on the planet, and particularly those in the technology space, particularly those in the technology space, because all their profits rely on this all being released in a safe fashion. So there's a huge appetite for more use cases in AI, agentic specifically. And I think it's going to be incumbent on those companies making it to make sure that we're regulating it. And also, Jamie Dimon has a good point. Let's not let that in until it's considered to be much safer than we expect it to be now, and that's how we will slowly, in a very healthy fashion, allow this amazing technology to drive our global economy.
Remy: Well, James, always great talking to you. Thank you so much for joining us on this Wednesday morning. Appreciate your time as well as all of your insights.
