Market Call: David Driscoll's market outlook on global equities

Key Concepts

Momentum Market vs. Tested Market: The current market environment is shifting from a sustained momentum-driven phase to one being tested, particularly after Q3 earnings.
Tax Loss Selling: A seasonal practice where investors sell losing investments to offset capital gains, potentially influencing market movements.
Federal Reserve Interest Rate Policy: The market is highly sensitive to the Federal Reserve's decisions on interest rates, especially regarding potential December rate cuts.
Small Cap Performance (Russell 2000): The underperformance of small-cap stocks is linked to the impact of tariffs on U.S. small businesses.
AI and Hyperscalers: Artificial Intelligence is a dominant trend, with hyperscalers (Google, Amazon, Microsoft) positioned to benefit significantly, potentially leading to quantum computing dominance.
Quantum Computing: A future technology that calculates millions of times faster than AI chips, with hyperscalers expected to lead its development.
Bank Sector Challenges: While banks have performed well due to interest rate spreads, future challenges include mortgage renewals at higher rates and potential increases in loan loss provisions.
Infrastructure Spending: Government investment in infrastructure is seen as a positive for construction companies.
Telecommunication Sector (5G Buildout): Telecom companies have faced challenges due to high debt from 5G network buildouts and flat revenue growth, with some considering asset sales.
Software Sector Vulnerability: Software companies are under pressure, potentially being overtaken by AI, leading to significant stock price declines.
Serial Acquirers: Companies that grow by acquiring other businesses, often at lower valuations, offering a path to revenue growth independent of AI disruption.
AI-Proof Businesses: Manufacturers and companies whose core operations are less susceptible to AI disruption.
Consumer Product Sector Challenges: Trends like weight loss drugs and reduced consumption of ultra-processed foods are impacting consumer product companies.

Market Volatility and Investor Learnings

The past two weeks have presented significant "learnings" for investors, characterized by market volatility, particularly in tech stocks. David Driscoll notes that the market has transitioned from a "momentum market" of the last 2-3 years to one that is currently being "tested." This shift is occurring as the market moves out of the Q3 earnings season. Historically, September often sees market declines, but this year saw a rally, followed by a sell-off in November, a month that typically experiences gains. This topsy-turvy behavior is also attributed to "tax loss selling season," where portfolio managers may engage in "window dressing" by selling losers and buying winners.

Federal Reserve and Market Sentiment

The market's direction is heavily influenced by news items, with a primary focus on the Federal Reserve's stance on interest rates. The anticipation of a potential interest rate cut in December is a key factor. Driscoll emphasizes that a hawkish commentary from the Fed, or a decision not to cut rates, would cast a "shadow over stocks," especially momentum and growth stocks that rely on falling interest rates for profitability.

Small Cap Performance and Tariff Impact

The Russell 2000 index, representing small-cap stocks, has underperformed significantly this year. Driscoll attributes this to the negative impact of tariffs on U.S. small businesses. Small businesses facing substantial import tariffs (e.g., 40%) have limited options: either pass the cost to consumers, risking revenue decline, or absorb the tariff, reducing free cash flow and potentially hindering their ability to secure loans for growth.

Company-Specific Analysis and Investment Opportunities

Thomson Reuters

Thomson Reuters showed decent Q3 earnings, with its legal professional side up 9% organically. However, the print division experienced a 4% organic decline due to slower print recovery, government contract cancellations, and softer corporate sales momentum. Despite a recent ~15% stock price decline from its peak, Driscoll views it as a "decent time to be adding to this name" for most investors.

Google (Alphabet) and AI

Google is identified as a top-tier "hyperscaler" in the AI trend, alongside Amazon and Microsoft. These companies are leveraging their computing power to gain market share from software companies. Google's development of a quantum computing chip and Microsoft's cooling technology for such chips highlight their leadership in this space. Driscoll advocates for having at least one hyperscaler in a portfolio due to the potential dominance of quantum computing in the next 5-10 years. He advises discipline, suggesting taking profits if the stock doubles to protect downside.

Royal Bank of Canada (RBC) and Canadian Banks

Canadian banks have had a strong year, benefiting from the spread between loan and deposit rates as the Bank of Canada cut interest rates. However, Driscoll expresses concern about upcoming mortgage renewals for individuals with fixed mortgages from 2020 (e.g., at 1.5%) facing renewal at significantly higher rates (4%+). This could strain consumer spending and increase risk for banks, potentially leading to rising loan loss provisions in the coming year.

Bird Construction

Bird Construction, a small company (market cap ~1 billion) in the contracting business, has faced a tough year. However, potential government infrastructure spending is seen as a positive catalyst. With a $10 billion backlog and current weakness, Driscoll views it as a "nice little entry point for a long-term hold" if investors are looking for a small-cap infrastructure play.

Canadian Telecom Sector (Telus, Rogers, BCE)

Canadian telecom companies have incurred significant debt ($20-40 billion) for 5G network buildouts, expecting customers to pay a premium. However, customers opted for cheaper plans, hurting revenues. Driscoll highlights the "three D's of investing": debt doesn't disappear, revenue growth is flat, and BCE had to cut its dividend. Telus is considering asset sales as free cash flow may not cover its dividend. The sector faces challenges with flat revenues, and efforts to cut capital expenditures and divest assets are ongoing.

Enghouse Systems

Enghouse falls into the category of software companies currently "under the gun." Driscoll notes that many software companies are down 20-50%, and his firm sold its Enghouse position months ago, believing AI has "overtaken" software and will make business growth challenging.

Banco Santander

The Spanish economy and tourism have been strong, benefiting Banco Santander. However, Driscoll questions where future expansion will come from and highlights the risk of the Spanish economy struggling. He suggests that after doubling its value, it's a good time to "pare back on your position" or "sell half" to lock in profits, as rapid price increases often lead to sideways or downward movement.

Fiserv

Fiserv is facing increased competition in the payments market, which has led to a stock price drop. The key challenge for investors is to assess Fiserv's next phase of growth and how it will create a "moat" against competitors. This competitive threat is impacting other financial services companies as well.

Past Picks Performance and Current Views

Alfa Laval

Alfa Laval, a maker of industrial equipment and heat pumps, has performed relatively flat, up around 4% since May. Driscoll would "buy it right now," citing its solid company fundamentals, good dividend growth, and the tailwind of the Swedish Krona (best performing major currency this year). With future P/E multiples around 10-15 times, he finds it attractive.

Comfort Systems USA

Comfort Systems, an HVAC manufacturer, has seen a significant increase of over 80%. This surge is linked to infrastructure plays for AI data centers and increased demand for HVAC systems due to rising electricity bills and global warming. Driscoll likes the company and continues to buy it, noting profit growth in the 35-50% range, but warns of its volatility.

Intertek Group

Intertek, a British testing and assurance company, is seen as having more growth potential than its competitor, SGS. Its business has been good, with tariffs increasing the importance of its services. Driscoll considers it a "buy right now," noting that tariffs haven't significantly impacted its business, and its U.S. revenue base is relatively small, offering some insulation from U.S. tariff impacts.

Microsoft

Despite other tech giants rising, Microsoft's stock has seen some decline. Driscoll notes that Meta has also fallen. He points out that year-to-date, Google is up 52%, NVIDIA is up 34% (though down 11% in November), and Microsoft is up 13% (down 7% in November). He highlights that Microsoft's Azure revenue growth is superior to Amazon's AWS and Google's cloud services. While the street was satisfied with Microsoft's earnings, expectations for growth speed were not met. Driscoll's firm owns Microsoft for clients, believing it will be involved in AI and quantum computing, and recommends having at least one hyperscaler in a portfolio. He specifically owns Microsoft among the hyperscalers (Amazon, Google, Microsoft).

Investment Grid and Diversification

Driscoll outlines a "grid" for portfolio construction:

AI & Hyperscalers: (Amazon, Google, Microsoft) - leading computation.
Chips:
Infrastructure: (Comfort Systems, Tourmaline, Stantec) - supporting data centers.
Utilities: Providing energy for data centers.
Financials: Funding growth.
Resource Companies: Potential beneficiaries of a falling U.S. dollar and increased commodity prices.
Serial Acquirers: Small-cap companies making acquisitions, often AI-proof, with revenue growth exceeding global economic growth.

He advocates for having at least one company in each of these seven categories.

Cargojet

Cargojet, like other trucking and transportation companies, is struggling due to tariffs and falling volumes. Driscoll sees it as a potential opportunity if tariffs recede or a trade deal is reached. The current weakness, combined with tax loss selling, could make it a decent opportunity to acquire.

Lindsay Corporation

Lindsay, a player in irrigation and infrastructure, has faced pressure. While its irrigation equipment uses satellite technology, the infrastructure side has weakened due to low demand. The company struggled in Brazil. Driscoll sold his Lindsay position in the summer due to underperformance, and Comfort Systems was a potential replacement. He currently holds about 10-15% cash, waiting for opportunities.

Emera Inc.

Emera, an electricity producer in the Maritimes and Florida, is seen as a buy. Its growth is driven by rate base expansion, benefiting from lower interest rates and customer base growth. Dividend growth is projected at 3-6% annually. Driscoll believes the company is in the right space at the right time, with rising demand for electricity.

Novo Nordisk

Novo Nordisk has experienced a significant stock price decline (down ~55% from its peak). Challenges include tariffs, FDA issues, pricing pressures, and competition in the weight loss drug market from Eli Lilly and others. The CEO's departure and failure to secure patent protection in Canada have also impacted the stock. Driscoll considers it "dead money" currently, with headwinds likely to persist for pharmaceuticals due to pricing power concerns and FDA dynamics. He would not buy more at this time but suggests patient investors could hold on, contingent on the weight loss business's future participation.

ZQQ and ZQQX (ETFs)

Driscoll questions the rationale of holding two ETFs that perform the same function, suggesting it leads to unnecessary volatility. He advises against hedging currency risk over the long term, as it becomes benign. He also warns about the potential for significant corrections in tech stocks, referencing the dot-com bubble where the NASDAQ took 17 years to recover.

Meta Platforms

Driscoll is not a fan of Meta due to ethical concerns and his view of Mark Zuckerberg. He suggests investing in EssilorLuxottica, which manufactures virtual reality glasses for Meta, as a less volatile way to gain exposure to the VR trend. EssilorLuxottica has outperformed Meta year-to-date.

Top Picks

Cameco Corporation

Cameco, a uranium giant, is a "slow growth story." Driscoll sees potential upside if nuclear power generation increases and if the U.S. dollar falls due to interest rate cuts, which would boost commodity prices. He views it as a decent buy at current levels but emphasizes it's for "patient investors only."

HDFC Bank (India)

As the largest private sector bank in India, HDFC Bank benefits from India's young population (average age 30) and the government's focus on infrastructure development. With expected earnings growth of 15-20%, it offers diversification away from North America and better opportunities in international markets, where emerging market indices are the best performers.

Lifco AB (Sweden)

Lifco AB is presented as an example of a "serial acquirer." This Swedish company in equipment manufacturing, contract manufacturing, vehicle interiors, and environmental technology grows through acquisitions and organic growth, achieving a return on invested capital north of 15% and growing dividends by 15-20%. Acquisitions are typically debt-free, funded by free cash flow. Driscoll sees this as a way to invest in well-run companies outside North America that are AI-proof, as they physically "make something."

AI Immunity and Sector Outlook

Driscoll believes manufacturers are generally "AI-proof." He expresses caution regarding healthcare software and consumer products. For consumer products, he notes trends like weight loss drugs and reduced consumption of ultra-processed foods are impacting companies like PepsiCo, leading to dismal performance. He also mentions "shrinkflation" as a strategy employed by these companies.