AI to Lead the Market for Years: Defiance ETFs’ Jablonski

Key Concepts

• Market Sentiment: The overall attitude of investors towards a particular security or the market as a whole.
• AI (Artificial Intelligence): The development of computer systems that can perform tasks typically requiring human intelligence.
• Federal Reserve (The Fed): The central banking system of the United States.
• Consumer Spending: The total money spent on final goods and services by households.
• Corporate Earnings: The profit a company has made over a specific period.
• GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
• Nvidia: A leading technology company specializing in graphics processing units (GPUs) and AI.
• Magnificent Seven: A group of the seven largest and most influential technology companies in the US stock market.
• ETF (Exchange Traded Fund): A type of investment fund that holds assets such as stocks, bonds, or commodities, and trades on stock exchanges.
• Quantum Computing: A type of computation that harnesses the collective properties of quantum states, such as superposition, interference, and entanglement, to perform calculations.
• MicroStrategy: A company known for its significant holdings of Bitcoin.
• Bitcoin: A decentralized digital currency.
• ROIC (Return on Invested Capital): A profitability ratio that measures how well a company is using its capital to generate profits.
• Hodler: An investor who holds onto their cryptocurrency, typically for the long term, regardless of market fluctuations.

Market Outlook and AI's Economic Impact

The discussion begins by questioning whether market sentiment will shift positively. Barring external factors like geopolitics and tariffs, the current trend suggests growth, particularly driven by the nascent but rapidly developing field of Artificial Intelligence (AI). Despite news of spending cuts, AI is still in its early stages, and its impact is expected to "pile into the economy" and benefit various companies and sectors over time.

This positive outlook is further supported by the expectation that the Federal Reserve (The Fed) is likely to cut interest rates, especially with a new Fed chair potentially aligning with presidential predictions. The market is keenly anticipating this.

Economic Indicators and Corporate Performance

Several economic indicators are cited as evidence for a potentially good market:

• Labor Market: A slightly weaker labor number is noted.
• Consumer Spending: Consumer spending is holding up.
• Corporate Earnings: Corporate earnings were described as "arguably great," with over 80% of companies beating expectations on both top and bottom lines. Double-digit growth continues, and the GDP outlook is positive.

Nvidia's Dominance and Political Influence

Nvidia's CEO, Jensen Huang, being seen on Capitol Hill, entering the US House Speaker Mike Johnson's office, highlights the intersection of technology and politics. The question arises about how political tailwinds or headwinds might affect companies, particularly concerning access to China.

Nvidia is presented as having a "monopoly on AI and chips" for now, although other semiconductor companies are improving and gaining market share. Despite this, Nvidia remains the "clear leader." The "trillion dollar club" companies, including Nvidia, are most affected by policy changes, as policy impacts them first.

However, when the market falls, investors often seek defensive names. The argument is made that these high-quality, trillion-dollar companies with strong balance sheets tend to perform well over time, and investors do look to them for investment. The fact that 400 out of 500 stocks participated in the bounce-off from the last pullback indicates a "rough expansion" (likely referring to breadth expansion). The speaker believes tech will continue to lead markets for years to come.

Diversification Beyond the Magnificent Seven

An interesting point is raised about a large-cap ETF that excludes the "Magnificent Seven." Despite the speaker's belief in tech leadership, there has been an increase in flows into this ETF. This is explained as a strategy for average investors who already have significant exposure to the Magnificent Seven through ETFs or direct stock holdings. When the market pulls back, investors seek to diversify and broaden their exposure. This ETF allows them to "participate in the breadth and the broadening of the rallies." The strategy is likened to an equal-weight approach, where winners are still allowed to win, and market caps can rally within the fund.

Quantum Computing: A New Frontier

The discussion shifts to quantum computing, with a mention of a Nobel laureate suggesting China is "just a nanosecond behind the US" in quantum compute scale and innovation. This raises the question of investor interest in the quantum side.

The speaker posits that when the US perceives other governments as leading in AI or technology, the US government and corporations tend to invest more to catch up. This competitive dynamic is a significant reason for investor focus on quantum names.

Positive developments in quantum computing are noted, including:

• HSBC: Advanced bond pricing models.
• D-Wave: Good results around annealing.

Several top quantum companies have performed well for investors. As quantum computing becomes more commercialized, increased flows into the space are anticipated, and it is considered a "longer term hold for investors."

MicroStrategy and Bitcoin Exposure

The conversation then turns to MicroStrategy, which has seen recent volatility. ETFs are now offering both long and short exposure, and even leveraged positioning, to MicroStrategy.

The question is posed whether Michael Saylor, a prominent figure associated with MicroStrategy and Bitcoin, might have to sell Bitcoin at some point, implying he might not be a "complete Hodler." The speaker frames this as a "business decision for their firm" regarding how best to generate ROIC and be profitable.

The existence of long and short funds for MicroStrategy is presented as a way to "democratize hedge fund like products" for tactical and knowledgeable investors seeking short-term exposure opportunities. The firm providing these products does not necessarily have an opinion on MicroStrategy's view but aims to provide the "right tool." The performance of these funds is directly tied to Bitcoin's price movements: if Bitcoin rallies, the long funds will do well, and vice versa. Flows into these leveraged funds are expected to match these movements.