Can big tech’s AI ambitions continue to drive markets higher?

* Well, the rally in big US tech stocks has pushed markets to record highs south of the border. But, of course, the question that lingers for many investors is, can that rally continue? Jennifer Martin, Global Equity Portfolio Specialist at T Rowe Price joined me earlier to discuss. * I would say AI's been definitely one of those themes you've had to responsibly navigate and capture that alpha for clients. And right now, if you think about AI, we think it has the possibility to be the biggest productivity enhancer since electricity. So I would say we're very constructive on this next generation technology. And we feel that we still have room to go. * But let me break down where we kind of see the areas of opportunity. You have to kind of understand where you are in the cycle. And we know that we're, right now, in a very large infrastructure build. And one of the things that we've looked at over the last year and a half is just the tremendous amount of capex those large hyperscalers have gone and really spent into building their AI infrastructure. * It almost seems unlimited. And I think the insight for us is appreciating the motivation of that spend. It's definitely offensive. They want to produce some really great applications. But it's also defensive, because GPUs create contestable markets. * For the first time, we're talking about, could there be a competitor to, for example, Google Search. So we have to responsibly navigate where we are. One of the areas that we're looking for our guidepost on that is just, where are we on year-over-year acceleration in capital expenditures? * And what you're seeing is that we might be nearing peak year-over-year growth. Absolute growth will still be quite large year-over-year, but that year-over-year deceleration might start happening. And so that means that you have to be a little bit more selective maybe in the next period of time for infrastructure. * But I would say we're still at the beginning of the AI cycle. And one thing that most of us are really thinking about is, what are the killer applications, like what that is. And I would say we're still looking for those right now. * But I'll pause there. But I would say that's kind of our summary. We still feel it's a very defining technology paradigm. And we know where we are in the infrastructure build. And we're really excited to find out what's next. * You know I want to talk to you about the potential for killer apps, because there's a huge amount of spendage you've outlaid, it's not just to have a really cool room full of computers saying it's filled with all kinds of crazy chips. Don't you worry. They want to produce something in the end. Is that the next leg for this, that someone finally comes up with that killer app that everyone says, I have to have this? * Well, I definitely think the killer apps are on the horizon. I always like to remind, though, individuals that when Apple launched the iPhone, none of us knew what the killer app was. I laugh now. I reflect like I never thought in a million years I'd be in the back of someone's Honda going to the airport. * And I think that we're going to have that moment with a gen AI app. But I would say the debate around AI, particularly related to the infrastructure cycle, is the idea that, what's that return on investment? And I think we have a few tangible examples already. * One area I would point you to is just the engagement uplift in the social media platforms, whether it's Meta or Alphabet. And the other area that's really easy to look at is in Microsoft for Copilot. I know, at least at our firm, our developers have a very high productivity. I recently got Copilot for Microsoft Teams. It summarizes some of the chats. It's incredible. * And so I think these killer apps might actually be evolving into more table stakes to existing applications. And then there probably still is that killer app down the horizon. But we just don't know what it is. * The hardware spend has been big looking for that killer app down the horizon. You talked about the growth cycles. Do we imagine there's still going to be demand, though? I don't think they're done building those centers. * Well, I think the infrastructure cycle-- you're correct. I think right now, we're estimating-- so the capex budget for the four largest hyperscalers has gone from $100 billion to $200 billion at the end of this year. And it's probably growing again in 2025-- not at the same growth rate, but it's still absolute dollars going higher. * So that will benefit the chip ecosystem. But what the interesting thing is about this cycle, particularly for hardware and chips, since you brought that up, is Nvidia, just because of law of large numbers, will see some deceleration in revenue. But all these other companies that we own in our portfolios related to semis are troughing on fundamentals. * And a good example is AMD. Their CPU is sort of bottoming. And a lot of that's just the end market of PC kind of coming out of that COVID normalization. You're also seeing, possibly, some next generation AI chips, their MI360 chips. And then you get the added bonus, possibly, of some market share gains with the challenges that Intel-- * I was going to say, does it all have to be in Nvidia all the time? I can't imagine that they're sitting back saying, well, you won. We're just going to sit here. * So I think, and Lisa Su, we trust-- I think that's a really interesting name, particularly on the fundamentals. But I would also expand that to other parts of technology. ASML is really troughing on orders. We see those accelerating in '25. * And there's a lot of areas, particularly in analog semiconductors and semis that sell into electronics, where they sell into the end market of industrials. Those have troughing and hopefully improving fundamentals. So there's actually some really interesting areas just in, since you mentioned it, the hardware side that still show some life. * Now, of course, AI has been the big macro theme for the space. But in the here and now, in the world, lots happens, including a US presidential election. What impact could that have on the tech space? * Well, I think one thing that we've been sharing with our clients is that regardless of who wins a US election, we don't think austerity is in the plan. And what I mean by that is both parties likely will continue to spend. And so that will be the backdrop. And that benefits an industry like technology where we're building redundancy in supply chains. * The other area that both parties seem to be coalescing on is being a little bit more coalition of protectionist vis a vis China. And so that won't change. Now, some have conjectured that under Harris, it could be more of the same, particularly from a regulatory standpoint. And that would actually benefit large cap tech. * Some have conjectured under Trump, with less regulation, that could benefit small and mid-cap stocks, potentially small and mid-cap technology. And that would maybe spur maybe a little bit more either innovation or M&A. So it depends. But, regardless, we don't think spending is going to happen in both, and generally we are supportive of protecting US technology.

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