'Multiples haven't been these cheap in two years': Hogan on Big Tech following AI bubble concerns

Key Concepts

• Market Performance: Mixed market conditions with some indices (TSX, Dow Jones, S&P, WCS crude) up, while others (NASDAQ, WTI crude, Canadian dollar, Bitcoin) were down.
• November Seasonality: November typically a good month, but this year was shaping up to be one of the worst in 17 years, with a pulled-forward seasonality from October and September.
• AI Valuations: Concerns about AI valuations, with multiples for the "mag six" (excluding Tesla) being the cheapest in two years, despite strong earnings and revenue growth.
• Federal Reserve (Fed) Rate Cuts: Shift in market expectation from a 40% to an 80% possibility of a rate cut in December, likely a divided decision (e.g., 7-5 vote).
• GDP Growth: Atlanta Fed estimates GDP growth north of 2.5%, while the St. Louis Fed is closer to the mean of 1.8%. Growth expected to pick up in Q1 and H1 next year due to deregulation and AI productivity.
• Earnings Growth: Third-quarter earnings reporting season exceeded expectations, with growth north of 13% (initially projected at 7-7.5%). Fourth-quarter and 2026 estimates have also increased.
• Sector Performance: Communication services, utilities, and industrials are outperforming the S&P 500, with six out of eleven sectors doing so, indicating broader market strength than the previous year.
• Nvidia: Seen as a leader in providing chips for large language models, with demand for next year in the hundreds of billions of dollars, excluding China.
• Alphabet (Google): Identified as the new leader with its Gemini 3 rollout, driving gains.

Market Overview and November Performance

The market is experiencing mixed conditions, with the TSX, Dow Jones, S&P, and WCS crude showing gains, while the NASDAQ, WTI crude, Canadian dollar, and Bitcoin are down. November, typically a strong month, was shaping up to be one of the worst in 17 years. This deviation from seasonality is attributed to concerns about AI valuations and the Federal Reserve's potential rate cuts in December. The first two weeks of November saw significant sell-offs, indicating a risk-off attitude. However, the S&P 500 found support at its 50-day moving average, bouncing back from a 5% drawdown.

AI Valuations and Market Sentiment

Concerns surrounding AI valuations have eased. The multiples for the top six AI-focused companies (excluding Tesla) are at their lowest in two years. These companies are exhibiting strong fundamentals, with average earnings growth exceeding 50%, revenue growth over 60%, and gross margins above 65%, all at an average P/E multiple of 31. This suggests a more rational valuation compared to the previous year and diminishes the likelihood of a near-term bubble. Speculative AI plays have seen larger drawdowns, but the overall situation is improving.

Key Point: "multiples haven't been this cheap in two years."

Nvidia and Alphabet's Role in AI

Nvidia remains at the forefront of providing chips for large language models, with demand for next year projected to be in the hundreds of billions of dollars, even without China's participation. While less expensive chips may be needed in the future, the current demand favors Nvidia. Alphabet (Google) has emerged as a leader with its Gemini 3 rollout, driving market gains. This leadership is expected to evolve over the next few years, but currently, Alphabet holds a strong position.

Quote: "Nvidia is has been at the tip of the sword for all of the folks that want to build out large language models."

Sector Performance and Broader Market Strength

While tech is a major focus, the communication services sector has also performed well. More significantly, utilities and industrials are benefiting from the AI adjacency, requiring substantial power and data center buildouts. This has led to six out of the eleven sectors in the S&P 500 outperforming the index, indicating a broader market strength compared to the previous year.

Federal Reserve and Interest Rate Expectations

The market sentiment has shifted regarding Fed rate cuts. The probability of a rate cut in December has increased from 40% to 80%. This move towards a decision, likely a divided one (e.g., 7-5 vote), is being celebrated by the market. The quiet period leading up to the decision is seen as beneficial.

Key Point: "we've gone from a 40% possibility of a rate cut to an 80% possibility of a rate cut is also positive."

GDP Growth and Economic Outlook

The Atlanta Fed estimates GDP growth to be above 2.5%, while the St. Louis Fed's estimate is closer to the mean of 1.8%. GDP growth is anticipated to accelerate in the first quarter and the first half of next year. This is attributed to the current administration's policies, including deregulation and increased productivity driven by AI, along with a stable corporate tax rate. Concerns about trade and tariffs have previously overshadowed these positive factors.

Quote: "I think GDP growth is going to pick up in the in the in the first quarter and the first half of next year because a lot of the the the things that this new administration is bringing about less regulation and more productivity with artificial intelligence."

Earnings Growth and Investor Strategy

Third-quarter earnings reporting season surpassed expectations, with growth exceeding 13%, up from an initial projection of 7-7.5%. Crucially, estimates for the fourth quarter and 2026 have been revised upwards, indicating improving fundamentals. Despite ongoing concerns about trade, tariffs, and AI valuations, the sound fundamental picture provides a good reason for long-term investors to maintain their diversified investment plans.

Key Point: "estimates for the fourth quarter went higher and estimates for 26 went higher. So earnings growth and the fundamentals are clearly better."

Conclusion

The market is navigating a complex environment with mixed signals. While November presented challenges, a shift in sentiment towards AI valuations and the prospect of Fed rate cuts are providing support. Strong earnings growth and a broader sector outperformance suggest underlying economic resilience. For long-term investors, focusing on the sound fundamental picture and maintaining a diversified strategy is recommended.

Final Statement: "if you're an investor thinking about the long term, the fact that the fundamental uh picture looks sound is probably a good reason to stick with your diversified investment plan."