Bull market has 5 more years to go, strategist says

Key Concepts

• Bull Market Milestone: The three-year anniversary of a bull market is historically a positive indicator of continued growth.
• AI Revolution: The ongoing transformation driven by artificial intelligence, with significant infrastructure investment expected.
• AI Infrastructure: The foundational elements supporting AI, including data centers, power solutions, and cooling systems.
• Valuations: The current assessment of asset prices, which are noted as stretched in certain AI-related sectors.
• Federal Reserve Interest Rates: The potential impact of the Fed's decisions on interest rates on market performance.
• US-China Trade Policy: Geopolitical factors influencing market stability and growth.
• Diversified Portfolio: The strategy of investing across various sectors within the AI ecosystem to mitigate risk and capture opportunities.
• Follow the Money: An investment theme focused on identifying areas of significant spending and growth.

Bull Market Milestone and Historical Performance

The discussion begins by highlighting that the current bull market has reached its three-year anniversary, which is presented as a historically positive milestone. Research going back 50 years indicates that on five previous occasions when a bull market hit its three-year mark, it continued to move higher. The average total duration of these past bull markets was eight years, suggesting a potential for five more years of growth. The shortest duration observed was five years, implying at least two more years of upward movement. In two instances, bull markets extended into double digits in terms of total duration. While acknowledging that past performance is not indicative of future results, the speaker notes multiple tailwinds supporting continued market growth. However, a key perspective is that the sectors leading the first three years of the bull market may not necessarily lead the subsequent years.

Risks to the Bull Market

Despite the positive historical precedent, several risks are identified that could potentially disrupt the bull market's trajectory. These risks are categorized as forming Kevin's "wall of worry."

• AI Bubble: The speaker dismisses the notion of an imminent AI bubble burst, suggesting that fear of it is misplaced or premature and could lead investors to miss significant returns.
• Federal Reserve Interest Rate Policy: The actions or inactions of the Federal Reserve regarding interest rates are a primary concern.
• US-China Trade Policy: Geopolitical tensions and trade relations between the US and China are identified as a significant risk factor.
• Valuations: Current market valuations are described as "stretched," particularly in areas experiencing significant investment, such as semiconductors and chip plays related to AI.

The AI Revolution: Early Innings and Infrastructure Focus

A central argument is that the AI revolution is still in its "early innings" or even "batting practice" phase, not yet at its peak. This perspective is supported by projections from Jensen Huang, CEO of Nvidia, who anticipates between $3 to $4 trillion in AI infrastructure investment by the end of the decade, compared to the current approximately $700 billion.

Investment Opportunities in AI Infrastructure

The significant expected spending on AI infrastructure is seen as a key investment theme. This spending is projected to flow into:

• Data Centers: The physical locations housing AI computing power.
• Power Solutions: The infrastructure required to supply electricity to data centers.
• Cooling Solutions: Systems necessary to manage the heat generated by AI hardware.

The speaker emphasizes that the returns from AI algorithms and hardware/software plays are further down the road, requiring patience from investors. The current focus is on the foundational infrastructure.

Market Divergences and Investor Strategy

Recent market performance shows interesting divergences, such as Alphabet's strong performance while Meta and Oracle have experienced declines. This is interpreted as investors beginning to "draw harder lines" and actively picking winners within the AI revolution.

Navigating the AI Ecosystem

The AI revolution is characterized as a long road with potential "potholes," similar to previous industrial revolutions, where there will be more losers than winners.

• Losers: Defined as companies that either overspend or underspend in the AI race.
• Circular Financing: The current trend of financing within the technology sector is described as a "survival of the fittest" scenario.

The recommended strategy for investors is to invest across the entire AI ecosystem, including:

• Data Centers: As mentioned previously.
• Utility Companies: Those supplying power to data centers, including those involved in nuclear power generation (small modular reactors or traditional plants).
• Power Solutions: Companies providing energy infrastructure.

This diversified approach is believed to increase the likelihood of identifying winners and avoiding losers.

Federal Reserve Policy and Market Reaction

The discussion turns to the Federal Reserve's upcoming meeting and the market's anticipation of an interest rate cut.

• Market Sentiment: The market's jitters and subsequent positive reaction when the probability of a rate cut increases suggest that the market "wants" a cut, though not necessarily "needs" it.
• Potential Selloff: A selloff could occur if the Fed does not cut rates, as indicated by the current 71% probability of a cut in December.
• Cash on the Sidelines: However, any potential selloff is expected to be met by cash flowing back into the market from the sidelines, likely targeting the same areas that have driven the market higher, leading to a strong year-end close.

Investment Picks and Themes

Kevin provides specific investment recommendations based on the "follow the money" theme for the balance of 2025 into 2026.

• AI Infrastructure (Cooling Solutions): Vertiv Holdings is recommended for its role in supplying cooling solutions to data centers.
• Power Solutions: Nextera Energy is highlighted for its ownership of power plants, including nuclear facilities, aligning with the theme of power solutions for AI infrastructure. The US government's interest in acquiring nuclear power plants is also noted.
• Biotech (M&A Activity): The ongoing trend of large pharmaceutical companies acquiring smaller biotech firms is identified. Lima Pharmaceuticals, focusing on breast cancer treatments with drugs in the FDA approval pipeline, is mentioned as an example.
• Aerospace and Defense: Trillions of dollars are expected to be spent globally on defense. Aero Environment is recommended for its focus on unmanned autonomous aircraft, seen as the future of the sector.

Conclusion

The summary concludes that the bull market's three-year anniversary is a positive sign, supported by historical data and ongoing AI infrastructure investment. While risks related to Fed policy, trade, and valuations exist, the AI revolution is still in its early stages, presenting significant opportunities in infrastructure. Investors are advised to diversify across the AI ecosystem, including data centers, power solutions, and related industries, and to "follow the money" into areas of substantial spending. Specific recommendations are provided in AI infrastructure, power, biotech, and aerospace/defense.