‘FULLY INVESTED’: There’s SO much to like here, says investor

Key Concepts

• GDP Growth: Gross Domestic Product, a measure of economic output.
• Earnings Growth: The increase in company profits over a period.
• Profitability Margins: The percentage of revenue remaining after accounting for all costs.
• AI Ecosystem: The network of companies and technologies supporting the development and deployment of Artificial Intelligence.
• Federal Reserve (The Fed) Dual Mandate: The Fed’s goals of maintaining price stability (controlling inflation) and maximizing employment.
• Interest Rate Cuts: Reductions in the benchmark interest rate by the Federal Reserve, intended to stimulate economic activity.
• Accelerated Depreciation: A tax benefit allowing businesses to deduct the cost of assets more quickly.
• Big Beautiful Bill: Refers to recent legislation (likely the Inflation Reduction Act) providing tax incentives and funding for various initiatives.

Economic Performance and Future Outlook

The discussion centers on the surprisingly strong economic performance in late 2023 and optimistic projections for 2025 and 2026. The US experienced a GDP growth of 4.3% in the third quarter, the highest in two years. Louis Navellier predicts 5% GDP growth for the following year, a sentiment echoed by Adam Johnson, portfolio manager at Bullseye American Ingenuity Fund. Johnson notes that previous “dire predictions” for the economy have not materialized.

A key driver of this positive trend is four consecutive quarters of double-digit earnings growth, with profitability margins reaching all-time highs of 13-12%. Johnson anticipates a fifth consecutive quarter of this growth, reinforcing his bullish outlook. He states, “Louie talking about that 5% GDP growth. We're at 4.3. So, it's not exactly hard to imagine that.”

The Role of Consumer Spending and AI

Consumer spending has been a significant contributor to the US economy, though manufacturing hasn’t reached anticipated levels. However, the buildout of AI data centers is expected to fuel economic growth and job creation, particularly in the communities where these centers are located. The strong stock market has also bolstered consumer spending.

Artificial Intelligence is identified as the “strongest theme” and “most powerful investment theme” of Johnson’s career. He has allocated a third of the American Ingenuity portfolio to AI-related investments. He details a complex AI ecosystem, citing companies like:

• Apply Digital: Owns, operates, and builds data centers.
• Coreweave: Offers AI as a service, providing access to AI capacity without requiring full system purchases.
• Nvidia & Marll Technologies: Provide the chips powering these data centers.
• Sterling Infrastructure: Constructs the data centers.
• GE Vernova: Powers the data centers with on-site natural gas generators.

Johnson emphasizes that AI is already improving profitability across the S&P 500, stating, “It’s early days on AI and again that’s driving profitability across the S&P.”

Monetary Policy and Interest Rates

The conversation also addresses the potential for interest rate cuts and the upcoming change in Federal Reserve leadership in 2026. A Trump administration is expected to favor lower interest rates. The market currently anticipates the first rate cut in April.

The Fed’s “dual mandate” – price stability and full employment – is highlighted. Unemployment has risen to 4.6%, potentially providing justification for rate cuts. Johnson explains the impact of lower rates: “as rates go down, future earnings are worth more. Um, so you're willing to pay more for stocks and that's very powerful.” He also notes the political implications, suggesting lower rates could address affordability concerns for both Republicans and Democrats.

Impact of Legislation and Political Considerations

The “Big Beautiful Bill” (likely the Inflation Reduction Act) is credited with encouraging increased capital equipment spending by companies, due to accelerated depreciation benefits – a 15% increase compared to the past five-year average. This spending is expected to further stimulate the economy.

The potential for a “blue wave” in upcoming midterms is mentioned as a market risk, with the implication that a shift in political power could negatively impact investor sentiment. Johnson states, “imagine what would happen if we actually had a blue wave and it switched. Market would not like that. Uh nor would uh those of us who uh have voted for a certain Donald Trump.”

Conclusion

The overall message is one of economic optimism, driven by strong earnings growth, the transformative potential of AI, and the likelihood of lower interest rates. The discussion highlights a complex interplay of economic factors, technological advancements, and political considerations shaping the future outlook. The key takeaway is that the US economy is currently performing well and is positioned for continued growth, despite previous pessimistic forecasts.