Market Call: Ernest Wong's outlook on North American Large Caps (May 11, 2026)

Key Concepts

• AI-Adjacent Companies: Businesses providing the infrastructure (data centers, cooling, hardware) for AI, rather than the AI software developers themselves.
• USMCA (CUSMA) Renegotiation: The upcoming 2026 review of the trade agreement between Canada, the US, and Mexico.
• Merchant Electricity: Electricity sold into the open market without long-term fixed-price contracts.
• Vertical Integration: A strategy where a company owns multiple stages of its supply chain (e.g., owning both the venue and the ticketing platform).
• Asset-Light Model: A business strategy (common in homebuilding) that uses land options rather than direct ownership to reduce capital risk.
• Hyperscalers: Large tech companies (Amazon, Google, Microsoft, Meta) that operate massive cloud and data center infrastructure.

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1. Market Overview and AI Trends

Ernest Wong notes that Q1 earnings have been resilient despite geopolitical tensions in the Middle East. The market recovery is heavily concentrated in "AI-adjacent" companies—those supplying the physical infrastructure for data centers. Conversely, the broader consumer and industrial economy remains sluggish. Wong highlights a divergence in consumer behavior: high-end services like DoorDash are thriving, while mass-market retailers like McDonald's are struggling to maintain demand even after price cuts.

Regarding the "Capex bubble" concerns from late last year, Wong argues that the market has accepted that "Big Tech" will continue spending on AI infrastructure regardless of immediate returns, which continues to benefit hardware and infrastructure suppliers.

2. Trade and Geopolitics: CUSMA/USMCA

Wong emphasizes that the upcoming 2026 CUSMA renegotiation is a highly consequential event for Canadian equities that investors are currently underestimating due to the focus on Middle Eastern conflicts.

• Canada’s Focus: Likely to center on secure supply chains for natural resources (sulfur, rare earths, oil) that the US requires.
• Mexico’s Focus: Likely to center on automotive manufacturing and "onshoring" jobs.
• Outcome: Wong expects a successful three-party renegotiation because the economic interdependence remains high.

3. Sector-Specific Analysis

• Utilities: Wong prefers utilities with fully contracted, predictable cash flows. He views Capital Power as a "merchant" utility, which carries more risk and is not a traditional "safe" dividend play. He notes that mergers in the utility sector are rare because regulators set rates, leaving little room for an acquirer to improve returns.
• Software/Tech: The sector has faced volatility due to AI disruption fears. Wong sold Adobe due to the lack of market discrimination between quality companies and a recent CEO change. He remains bullish on Netflix, citing its scale, content budget, and expansion into live sports/gaming.
• Financials: J.P. Morgan is viewed as a "safe, defensive" bank with strong wealth management and net interest margins. Wong notes that potential deregulation under a Trump administration could further improve their return on equity.
• Mining/Resources: Regarding Barrick Gold’s potential spin-off of North American assets, Wong suggests this is a strategy to capture the "premium" assigned to mining companies operating in stable, regulatory-friendly jurisdictions.

4. Step-by-Step Frameworks

• Evaluating Software/Information Services: Wong’s framework focuses on the "difficulty of replicating" proprietary data. For Thomson Reuters, he argues their "Westlaw" platform is a standard that lawyers will continue to use, making them a "trusted provider" that will successfully integrate AI to improve efficiency.
• Evaluating AI-Adjacent Stocks: Wong is cautious about companies like Vertiv (data center cooling). He argues that these solutions are not technologically unique and that the small number of "hyperscaler" customers (the buyers) have significant pricing power, which could compress margins.

5. Notable Quotes

• "Most of the recovery has clearly gone to what I would call AI-adjacent companies... while the big techs themselves, the share prices themselves have not really been going up as much."
• "The Canadian stock market is much more commodity-driven... investors have largely forgotten about the upcoming renegotiation of CUSMA, even though that is going to be a much more consequential event."
• "We don't try to wait for the last extra drop of return. We just like to get our money and put it into better ideas." (Regarding M&A arbitrage).

6. New Investment Picks

• Stryker (SYK): A leader in orthopedics. Wong likes the demographic tailwind (more people opting for surgery over rehab) and the company's consistent market share gains over competitors like Zimmer Biomet and J&J.
• MSCI: A provider of international indices. Despite volatility, Wong views it as a high-margin, high-free-cash-flow business that benefits from investors seeking non-US exposure.
• Waste Connections (WCN): A well-run waste management firm that focuses on small, vertically integrated markets. Wong highlights their focus on employee safety as a key driver of operational efficiency.

Synthesis/Conclusion

The main takeaway is that the market is currently bifurcated. Investors are prioritizing companies that provide the "picks and shovels" for the AI revolution while remaining wary of traditional software and consumer-facing businesses. Wong advocates for a disciplined approach: focusing on companies with high barriers to entry (like Thomson Reuters), avoiding "merchant" risk in utilities, and prioritizing companies that can successfully integrate AI to improve their own margins rather than those simply selling AI-related hardware to powerful, price-sensitive tech giants.