'The winners, to me, have been identified': Thorne on tech stock in 2025

Key Concepts

• AI Investment Concerns: Investor apprehension regarding excessive spending on Artificial Intelligence (AI) without guaranteed returns.
• Valuation Stretch: The idea that the current market prices of AI-related companies are too high.
• Generational Capex Theme: AI is viewed as a significant, long-term capital expenditure trend, comparable to historical infrastructure projects like railroads.
• Euphoria and Fear Cycles: The natural market tendency to swing between periods of extreme optimism and panic.
• Artificial General Intelligence (AGI): The ultimate goal of AI development, requiring substantial infrastructure, energy, and materials.
• Market Pullback: A temporary decline in stock prices, considered healthy and normal after periods of strong gains.
• Long-Term Investors: Individuals who focus on the long-term growth potential of their investments, using market dips as opportunities.
• Peg Ratio: A valuation metric used to assess the reasonableness of a stock's price relative to its earnings growth.
• Interest Rate Sensitive Areas: Sectors of the economy that are heavily influenced by changes in interest rates, such as the housing market.
• Quantitative Tightening (QT): The process by which central banks reduce the size of their balance sheets, decreasing liquidity in the financial system.
• Liquidity Flush: An increase in the amount of money available in the financial markets, which typically benefits risk assets.
• K-Shaped Recovery: An economic recovery where different segments of the population or economy experience vastly different outcomes, with some thriving and others struggling.
• Recession in the Housing Market: The negative impact of high interest rates on the real estate sector.

Market Performance and Investor Sentiment

North American stocks are predominantly trading lower as investors grapple with concerns surrounding significant investments in Artificial Intelligence (AI). Despite positive earnings reports, a prevailing worry is that companies are overspending on AI initiatives without a clear path to realizing returns on these substantial expenditures.

AI Investment and Market Cycles

James Thorne, Chief Market Strategist at Wellington Altus Private Wealth, suggests that the current market pullback is a necessary correction. He acknowledges that AI valuations are "stretched" but frames AI as a "generational capex theme," drawing parallels to the early phases of the railroad era. Thorne anticipates that the market will continue to experience cycles of "euphoria and fear" and advises investors to become accustomed to these fluctuations, viewing them as normal and not out of the ordinary. The ultimate objective in AI development is "artificial general intelligence," which necessitates building out infrastructure, securing energy, and sourcing materials. Thorne notes that the market has moved from extreme pessimism in April to a rally to 69,100 on the S&P, and the current dip is a "nice normal healthy pullback." He believes that individuals who do not understand their holdings or are over-leveraged are selling, creating "a great opportunity for long-term investors to position their portfolios."

Trigger for the Market Fall-off

Thorne dismisses the idea of a single specific trigger for the recent market decline, stating that in his experience, a 5% to 8% correction can occur for "any reason whatsoever." He mentions that some hedge funds attributed the fall to overvalued stocks like Nvidia or Palantir, acknowledging that while these companies might have been overvalued, Nvidia's current PEG ratio of approximately 0.55 might not indicate extreme expense. However, he reiterates that with the market being "so overextended," a pullback was needed, and the current situation is "normal, natural, and healthy."

Identifying Winners and Future Diversification

Thorne believes the "treasure hunt phase" of the current cycle is over, and the "winners have been identified." He specifically points to Nvidia as a leading AI company, urging those who doubt this to conduct further research. Micron is also highlighted due to a "super cycle in memory." Thorne suggests that the real strategic question will arise in the latter half of next year, when the Federal Reserve begins to cut rates, supply-side policies from a potential Trump administration kick in, and the US economy reaccelerates. At that point, investors will need to consider whether to diversify into "more interest rate sensitive areas."

Underlying Economic Weakness and Fed Policy

Regarding pockets of weakness in North America, Thorne suggests that despite a lack of new US data, there is sufficient information to indicate that the Federal Reserve's monetary policy is "too tight." He cites the Cass Freight Index being at lows and "terrible numbers" from Home Depot and ADP (private sector employment data) as evidence. Thorne anticipates a 25 basis point rate cut by the Fed in December. He also believes the Fed has removed too much liquidity from the banking system through Quantitative Tightening (QT) and needs to "start replenishing." He references a statement from the President of the New York Fed suggesting potential purchases of $25 billion in additional securities next year, in addition to reinvestments of $60 billion to $70 billion. This, Thorne argues, will lead to a "liquidity flush" that will benefit "risk assets," as bull markets, in his view, end with a lack of liquidity, not valuation.

Home Depot Earnings and Retail Sector

Thorne is not surprised by Home Depot's earnings miss, noting that most other retailers are also experiencing corrections. He describes this as a "K-shaped recovery," where the high-end of the market is performing well, while the low-end is struggling. He quotes Secretary Yellen, stating that the Fed has "caused a recession in the housing market." Thorne criticizes the Bank of Canada and the Fed for targeting interest-rate-sensitive areas of the economy that did not contribute to inflationary pressures. He believes that to stimulate the real estate market, the Fed and Bank of Canada need to lower interest rates.