'People want to see how companies manage revenue/cost': Harris on return of AI investment

Key Concepts

• Geopolitical Tension & Precious Metals: Increased global instability drives investment into safe-haven assets like gold and silver.
• Federal Reserve Policy: Shifts in the Fed’s approach, particularly regarding quantitative easing and its mandate, impact market sentiment.
• Palantir’s Government Contracts: The company’s reliance on government contracts is a key driver of its current performance.
• AI & Tech Earnings: The impact of Artificial Intelligence on advertising revenue, cloud growth, and cost management is crucial for evaluating tech companies like Meta, Alphabet, and Amazon.
• Capex & Revenue/Cost Ratio: Large capital expenditures (Capex) and the ability to manage revenue relative to costs are major concerns for tech investors.

Gold & Silver Market Outlook

Paul Harris, portfolio manager at Harris Douglas Asset Management, noted that while his firm doesn’t currently hold gold or silver stocks, the recent rebound in precious metals is understandable given the current global climate. He attributes this to “continued geopolitical issues” and a perceived “chaotic” approach from the US administration, leading investors to seek safe-haven assets. He specifically mentioned the US “pulling away from alliances” as a contributing factor. The “weakness of the US dollar” is also cited as a supporting element for commodity price increases. Harris believes that as long as “turmoil” persists globally, demand for gold and other precious metals will remain strong.

He highlighted the impact of the new Fed governor, stating that the governor’s vision for the Fed differs from previous administrations, particularly regarding the scope of its mandate and the pace of unwinding quantitative easing. He explained that “quantitative easing although it's a necessary evil…was not pulled back fast enough and so the Fed balance sheet became quite large.” While the governor cannot necessarily force interest rate cuts as desired by figures like Donald Trump, Harris suggests a shift in how the Fed is perceived and how it will respond to future financial crises. He acknowledged that these metals had “run up a lot” and that the recent correction was a “healthy pullback” typical of a bull market.

Palantir’s Performance & Valuation

Regarding Palantir’s recent earnings report, Harris emphasized the positive aspects: the company “beat revenue, they beat EPS and then also they give very positive guidance going forward.” This contrasts with other software companies that haven’t demonstrated the same positive outlook. He attributes Palantir’s strength primarily to its substantial government contracts, particularly relevant in the current geopolitical landscape. However, he cautioned that Palantir is currently “one of the most expensive stocks in the S&P 500” and investors should be “cautious” about its long-term valuation, questioning whether the company can “achieve that valuation over the long term.”

Tech Earnings Preview: Alphabet & Amazon

Looking ahead to the earnings reports of Alphabet and Amazon, Harris outlined three key metrics to watch. First, he wants to see if they demonstrate similar improvements in advertising metrics as Meta, specifically regarding the impact of “the use of AI [to] improve outcomes on the advertising side.” He noted Meta’s advantage in this area due to its focus on “retail clients.” Second, he emphasized the importance of monitoring the continued growth of their cloud businesses, comparing Amazon and Google to Microsoft (which had already reported some “constrictions” on its growth). Finally, he highlighted the need to assess their capital expenditure (Capex) plans. He expressed concern about the “massive capex spend” and its impact on their balance sheets, asking whether they are seeing a “reduction in that spending.”

Harris pointed out the broader trend of tech companies leveraging AI internally to improve efficiency and reduce labor costs, citing Amazon’s planned layoff of approximately 16,000 employees as an example of using “AI more effectively within their firm to offset some of the…technologies things use of technology.” The critical question, he stated, is whether these companies can effectively offset their high Capex with improved revenue and cost ratios, a concern for many investors. He summarized this concern as needing to see a “much better revenue to cost ratio.”

Logical Connections & Synthesis

The discussion flows logically from a macro-level analysis of geopolitical factors driving precious metal prices to a micro-level examination of individual company performance. The connection between the Fed’s policy shifts and market reactions is established, providing context for the precious metals rebound. The analysis of Palantir then transitions into a broader discussion of tech earnings, linking the common theme of AI’s impact on revenue, costs, and future growth prospects.

The central takeaway is that while geopolitical uncertainty is benefiting safe-haven assets like gold and silver, individual company performance within the tech sector is increasingly dependent on their ability to effectively leverage AI, manage capital expenditures, and demonstrate sustainable revenue growth. Investors should exercise caution regarding highly valued stocks like Palantir and closely scrutinize the key metrics outlined by Harris when evaluating the earnings reports of major tech companies like Alphabet and Amazon.