Investing opportunities in post-earnings season

Key Concepts

• AI Trade: Investments and market focus related to artificial intelligence technologies and companies.
• Concentration Risk: The risk associated with having a significant portion of investments in a single sector or a few large companies.
• Valuation: The process of determining the current worth of an asset or company.
• Yield: The income return on an investment, typically expressed as a percentage.
• Price-to-Earnings (P/E) Ratio: A valuation ratio of a company's share price to its earnings per share.
• Consumer Sentiment: A measure of how optimistic or pessimistic consumers are about the overall state of the economy and their personal financial situation.
• Fiscal Spending: Government expenditure on public services and infrastructure.
• Passive Investing: An investment strategy that aims to replicate the performance of a market index.
• Active Investing: An investment strategy that involves making specific investment decisions to outperform a benchmark index.
• Global Equity Funds: Investment funds that hold stocks from companies across various countries.
• Utilities: Companies that provide essential public services like electricity, gas, and water.
• Data Centers: Facilities that house computer systems and associated components, such as telecommunications and storage systems.

Market Outlook and Investment Themes

Following NVIDIA's earnings and the subsequent concerns surrounding the AI trade, investors are now looking for new data to guide their investment decisions as earnings season winds down. Kyle Taylor, Wealth Advisor and Portfolio Manager at Tri-Delta Private Wealth, suggests that while NVIDIA's earnings may have somewhat eased AI trade anxieties, sentiment is shifting, and volatility is expected to persist. He emphasizes that long-term investment themes, even those considered "here to stay," will inevitably experience periods of both success and disappointment. Investors can choose to view these downturns as opportunities or as reasons to panic and shift to other investments.

Focus on US Economic Data and Consumer Health

As the year draws to a close, there will be an increased focus on lingering US economic data. Reports scheduled for Tuesday and Wednesday are expected to provide insights into the consumer's current financial standing. Taylor notes a significant divergence between investor sentiment and consumer sentiment, particularly in the US. He points to the University of Michigan Consumer Sentiment Survey, which indicates consumer sentiment is worse than during the depths of the 2008-2009 financial crisis. While higher-income consumers have maintained their spending, lower-income segments appear to be influencing overall sentiment, as reflected in the strong performance of retailers like Walmart, Dollar General, and Dollarama.

Interest Rate Expectations

Regarding interest rates, Taylor anticipates that the Federal Reserve might hold rates steady in December, potentially citing a lack of data availability due to a US government shutdown. However, he believes at least one rate cut is likely before the end of the first quarter.

Sector Opportunities: US Healthcare

Taylor highlights the issue of market concentration, particularly in the US, but notes similar trends in different sectors in Canada. He identifies US healthcare as a sector that has historically been discussed on the show and is now showing signs of life. This sector, along with other less appreciated market segments, is considered reasonably valued and offers attractive yields.

• Recent Performance: US healthcare has become one of the best-performing sectors in the US over the last two months.
• Eli Lilly's Valuation: Eli Lilly recently became only the second non-tech company to reach a $1 trillion valuation, driven by its obesity and diabetes drugs. The company's stock is up 14% in the past two months, and the sector as a whole has seen an 11% year-to-date increase.
• Investment Opportunities: For income investors, companies like Bristol-Myers are trading at over a 5% yield with single-digit price-to-earnings ratios. Taylor's firm owns Pfizer, Johnson & Johnson, Bristol-Myers, Eli Lilly, and UnitedHealth, believing there is still room for appreciation and a potential catch-up in this space. The initial concerns about US administration headlines regarding drug price reductions have not materialized as negatively as initially feared.

The Pitfalls of Passive Investing and the Case for International Exposure

Taylor argues that simply buying an index is one of the worst investment strategies in the current environment. While passive investing may have been suitable at times, an active approach is now crucial to avoid jeopardizing portfolios. He illustrates the mathematical disadvantage of index investing during downturns: a 20% drop in an index requires a 25% gain to recover, whereas a portfolio that only halves the index's decline needs only an 11% gain to return to its previous level.

Furthermore, Taylor advocates for increased international investment, moving beyond the heavy concentration in US names. He points out that even global equity funds often have a 50-60% weighting in US stocks. He suggests looking beyond North America, particularly in Europe, where there are significant opportunities.

• Shift in Fiscal Spending: Unlike previous years where US fiscal spending post-COVID propped up its economy, many other nations, including those in Europe, focused on deficit reduction. However, Europe is now showing a notable shift towards increased spending.
• Germany's Infrastructure Investment: Germany, for example, plans to double its current infrastructure spending, presenting opportunities for companies in that region.

Specific Stock Pick: Enel (Italian Utility)

As a specific European stock pick, Taylor highlights Enel, an Italian utility company. He connects utilities to the growing demand for power driven by data centers and the AI trade.

• Data Center Power Demand: The projected power needs for data centers planned in Europe over the next decade are equivalent to the current total power demand of the entire continent.
• Valuation: Enel is trading at approximately 13 times earnings, significantly lower than the low-20s P/E range seen in US and Canadian utilities.
• Growth Prospects: The company is expected to experience continued steady growth, with international operations and several catalysts for further expansion.
• Dividend Yield: Investors can currently benefit from a yield of just over 5%.

Conclusion

In summary, the market is transitioning from a singular focus on NVIDIA and AI to a broader consideration of economic data and diverse investment opportunities. While volatility is expected, particularly around the AI trade, long-term investors are encouraged to view dips as potential entry points. US healthcare presents a compelling sector with attractive valuations and yields. Critically, a shift towards active investing and increased international diversification, especially in Europe, is recommended to navigate current market dynamics and capitalize on emerging growth areas like infrastructure and the energy demands of the digital economy.