The dominance of technology stocks in the stock market may be coming to an end, according to a report by Bank of America. The report outlines four reasons why this shift could occur. First, the earnings growth differentials between tech and non-tech companies are narrowing, making investors more price sensitive. Second, higher interest rates could disproportionately impact credit-sensitive, long-duration growth stocks. Third, the current economic cycle favors value stocks over growth stocks. Finally, the long-term beneficiaries of artificial intelligence (AI) may be found outside of the tech sector as AI adoption saturates. Bank of America suggests that investors may start seeking out cheaper earnings growth and shorter equity duration vehicles instead of pure, long-duration growth stocks. [bef2097f]
However, Jeremy Siegel, a Wharton Professor, believes that the tech momentum trade driving market gains is likely to continue. He states that the momentum trade on tech and AI-related stocks is still strong and shows no sign of slowing down. Siegel predicts that stocks will outperform bonds over the next three to five years, delivering real returns of about 5%. He also mentions that while the tech momentum trade may eventually be overdone, it is likely to continue for longer than many people believe. Siegel argues that today's stock market is not in a bubble because earnings are backing up the record-high stock prices. He cites Nvidia as an example of a solid company with a reasonable valuation. Siegel forecasts a 5% after-inflation rate of return for the entire stock market over the next three to five years. He shares a personal anecdote about a colleague who shorted internet stocks in 1999 but had to cover his shorts at the top due to margin calls, highlighting the difficulty of betting on a bubble. Siegel concludes that the tech momentum trade will continue as long as stocks like Nvidia deliver strong returns. [09c2cff3]
Hardware has become Wall Street's new favorite bet as the importance of hardware in the tech industry has increased. The rise of generative AI has put a spotlight on the need for specialized hardware for training large-language models. Tech giants like Apple and Google have formed unique partnerships to leverage each other's hardware capabilities. Hardware tech stocks have outperformed software tech stocks by 30 percentage points this year. Nvidia and Broadcom are examples of hardware companies that have seen significant stock growth. Private-equity giant Blackstone is betting big on data centers, with plans to double its $50 billion portfolio of data centers. The hardware market is expected to grow to a trillion dollars in the next five years. While software still holds value, the increased importance of hardware has caught the attention of investors. [a5eba7e2]
The growing importance of hardware in the stock market is not limited to the tech sector. Baillie Gifford's Spencer Adair, manager of The Monks Investment Trust, explains that physical hardware may replace software as the main source of growth in the next 20 years. He believes that gritty, physical companies that build things in the material world are poised to thrive as advanced economies reconstruct their infrastructure. Adair highlights companies such as Eaton, Comfort Systems USA, Martin Marietta Materials, and Advanced Drainage Systems as potential beneficiaries of the US government's $2.2tn infrastructure spending plan. He also notes that the infrastructure boom is driven by the need to replace aging infrastructure, the shift to green energy, and the desire to reorient the US economy and reshore supply chains. Adair believes that the infrastructure boom could also happen in Europe. [4f0c6a2a]
The shift towards hardware in the stock market presents a growing opportunity for infrastructure investing. As the importance of hardware increases, investors are looking beyond the tech sector to find companies that will benefit from the infrastructure boom. This shift is driven by factors such as narrowing earnings growth differentials, the impact of higher interest rates on long-duration growth stocks, and the saturation of AI adoption in the tech sector. While some experts believe that the tech momentum trade will continue, others see the potential for hardware companies to thrive in the next 20 years. The rise of generative AI has highlighted the need for specialized hardware, and hardware tech stocks have outperformed software tech stocks. Companies like Nvidia, Broadcom, Eaton, Comfort Systems USA, Martin Marietta Materials, and Advanced Drainage Systems are gaining attention from investors. Private-equity giant Blackstone is also betting big on data centers. The infrastructure boom, driven by the need to replace aging infrastructure and shift to green energy, presents opportunities for companies involved in infrastructure construction. The US government's $2.2tn infrastructure spending plan is expected to benefit companies in this sector. The growing importance of hardware in the stock market is not limited to the US, as the infrastructure boom could also happen in Europe. [bef2097f] [09c2cff3] [a5eba7e2] [4f0c6a2a]