Can Big Tech make a comeback?

Key Concepts

• Value Rotation: A shift in investor preference from growth stocks to value stocks.
• AI Fatigue: Decreased investor enthusiasm for companies heavily reliant on Artificial Intelligence narratives.
• Net Interest Margin (NIM): The difference between the revenue a bank earns from its lending activities and what it pays out to depositors.
• MSCI Emerging Markets Index: A widely used benchmark for tracking the performance of emerging market equities.
• Capex: Capital Expenditure - funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.

Value Rotation and the Shifting Market Landscape

The conversation centers around a significant shift in market dynamics: a rotation from growth stocks to value stocks, a trend that began in November of last year (specifically after October 29th, when the tech sector peaked). Over a four-month period, value stocks (as represented by the Russell 1000 Value Index) outperformed growth stocks (Russell 1000 Growth Index) by 18 percentage points. Jordan Jackson notes this outperformance ranks within the top 2% of rolling four-year windows historically. This rotation is driven by several factors: “AI fatigue” – a waning of investor excitement surrounding AI-driven companies with stretched valuations; expectations of one to two interest rate cuts by the Federal Reserve, impacting the cost of capital for growth stocks; and, crucially, improving earnings for value-related companies. Analysts now project 10.5% earnings growth for value stocks this year, a substantial increase from the 1.5% growth seen in 2024.

Technology Sector Outlook

Despite strong recent earnings reports from major tech companies, the market response has been muted, indicating a growing skepticism. Jackson describes the market sentiment as “sell first, ask questions later,” suggesting potential for further downward pressure on tech stocks. The concentration risk within market-cap weighted indices like the S&P 500 means the performance of these large tech names heavily influences the overall index performance. However, JP Morgan Asset Management isn’t advocating a complete exit from technology, citing strong balance sheets, cash flow, and increasing capital expenditure (capex) across the sector. The key takeaway is that the market is demanding tangible results (“proof in the pudding”) from the tech sector.

Canadian Market Implications

The value rotation is particularly relevant to the Canadian market, which is inherently value-oriented with a significant presence of financials and materials companies. The steeper yield curve in Canada compared to the US is expected to benefit net interest margins (NIM) for Canadian banks. However, potential headwinds include slower Canadian economic growth and consumer activity compared to the US, which could impact lending and credit growth. Importantly, Jackson highlights that the emerging AI buildout will benefit Canadian energy and industrial companies, providing the infrastructure and materials needed for data centers and fiber optic networks. He summarizes this dynamic with the tagline: “growth spending is translating into value revenues.”

Emerging Markets: A Strong Performance Driver

Emerging markets are predicted to continue their strong performance, with returns this year (approximately 15% on the MSCI Emerging Markets Index) largely driven by earnings growth, unlike last year where returns were primarily from valuation expansion. Regional variations are key:

• Asia: Benefiting from its role as a primary supplier of chips and semiconductor inputs for the global AI buildout.
• Periphery Europe: Experiencing a rebound in consumer spending and benefiting from the technology wave and luxury goods demand.
• Latin America: Supported by a “resource grab” and potential increases in commodity prices, with commodity exporters poised to benefit. While not predicting a full-blown commodity supercycle, Jackson anticipates higher commodity prices.

Investor sentiment is positive, with capital flowing into emerging markets, reinforcing the strong performance.

Logical Connections & Synthesis

The discussion establishes a clear connection between macroeconomic factors (interest rates, economic growth), sector-specific trends (AI fatigue, energy demand), and regional opportunities (Canada, emerging markets). The value rotation is presented not as a rejection of growth stocks altogether, but as a recalibration driven by changing economic conditions and investor expectations. The AI buildout is framed as a key driver of growth, but one that disproportionately benefits value-oriented companies involved in the underlying infrastructure and resource provision. The emerging markets outlook is presented as a continuation of existing trends, with regional nuances driving performance.

Notable Quote:

“This growth spending is translating into value revenues.” – Jordan Jackson, highlighting the unexpected benefit to value companies from the growth associated with AI and related technologies.

Conclusion:

The primary takeaway is that the value rotation is a sustainable trend with significant implications for investment strategy. Investors should consider shifting allocations towards value stocks, particularly in markets like Canada, and recognize the potential for continued strong performance in emerging markets. While technology remains important, the market is demanding demonstrable results and a more cautious approach is warranted. The AI buildout, while driving growth, is creating opportunities across a broader range of sectors, benefiting value-oriented companies involved in the essential infrastructure and resource supply chains.