AI Rotation’s Market Breadth Impact, Why Trump Administration Wants Tech to Succeed

Morning Trade Live. It's time now for thicture. Let's welcome in the team from Charles Schwab, Casey McCurdy, Schwab Wealth Advisory, and Alexandra Semenova, financial insights strategist. Charl Schwab. Good mor to both of you. Thank you so much for your time. Happy Friday. We ma We've got one bell to go until we can start our weekends. But I do wanto start with you, Alex and Chips, because you've been looking at this space very cl Oly, we've seen a lot of volatility since the summer, but what are you watching rig now. Yeod morning Sam. Great to be here with you in person. So I would say the ry is back in the forefront for investors. There are some very legitimate questions abouing debt financing, the AI boom and whether companies can monetize their heavy capital outlays. But it's very important right now to distinguish the long term oppty from the high bar that investors have set tacticald when we look big picture, we are still focused on the AIfrastructure ay beneficiary of this AI investment cycle. So when you think about AI leadership, there has been abrupt rations as everyone competes to create the next big chat bot. Butdernee computing power has been really the constant and the marke has been telling that story all year long. Semiconductors are up year to date, so there should be some near-term volatility as invesind of navigate the run up. But when we think big picture and look out in t long term, that insatiable demand is going to persist. And of course, though, that makes the bar very high for earnings come next week. And going forward, the expectations from analysts for AI infcture profits for 2027 are 63%. So in July thatmby high bar for companies to deliver onnd weant investors to be selective. Yeah, no really good points. And even though we've seen semis lagging this week you're right. I mean we have seen tlysts turning more bullish hitting the refresh button on their price target boosts b of the AI agentic tailwinds that we're hearing from the muse he certainly for the CPUs. Casey I defer to you then. s are you building this week, particularly off the back of I know it was fresh and everybody's minds just yesterday afternoon. It's only a rep this stage. There seems to be a bit of back and forth as to, you know, who's right, who's got the right story at the moment. But, you know, with all these questions right now about AI slowdown, open AI, how much money it's actually making right now as far as that run rate is cod, because we've started to see a little bit of an AI unwind yesterday. It seems to of scare the markets and hit a nerve. I've had a number of questions in the past couple of weeks around thing that folks like to ask about. I what I've been trying e question of who currently has the most writing on the AI build out, I would suggest considering Washington. I think we've heard about the the idea that you don't want to fightthet there. We don't want to fight the administration. You know,tho this this build out succeeding. They want to see that thi can increase the the US leadership, that it can strengthen growth and it ca make the debt math work a lot better. And one of the thingike to call out is when you think about the $40 trillion in debt that we're all knowing and hearing about, there's about four ways that you can solve that problem. One, you know, you can tax, you can increase taxes. Two, you canredt generally gets a chuckle. And three, you can i your way out of the issue. We know that Kevin Warsh has at least hiked recently. So we can say that there's a little bit of credibility there in fighting inflation. The fourth way is that you grow your way out of thatebt, and AI productivity boom is one way that I think the administration is seen as an opportunity to grow their way out of that debt pile. Yeah. I mean, Besson has said it himself, hasn't he? And getting back to you, Alex, and the dynamics in these mar right now, I mean, you and I for a number of weeks have been talking about the situation right now where we've seen this dramatic deterioration in breadth. We did start to see a little bit of a pickup as far as partici this week. I mean, today looks pretty broad based as far as the rally Monday auesdaysome fairly good sessions. But something happened yesterday that I thought was really interesting. We had tpen AI scare. We had a bid for bonds. We had Trump sayin not going to bomb Iran before the midterms. And we started to see a big rotation into some of those underperformers, like the Russell 2000, which I know youdt very closely as far as small cap underperformance and some more defensive sectors as well. Have you been encouraged by what we've seen this week? Yeah, I think by some measures, the deterioration in breadth has been kind of a sign of capitulation byestors, right. We've seen strength at the index level, but a lot of stocks in the S&P 500, the majority have been significantly underperforming. And so investors are now starting to look opportunity in those sectors. And we are approaching the four year anniversary of this year. This bull market the S&P 500 ise October 2022. But thatd, it has been categorized by very, very narrow leadership. And the S&P equal weight is actually underperforming by the widest ine do need a stronger foundation for this ra to continue. And the onus is on the earnings season for companies to deliver. And we really want a broadening and profit growth. We need to see that earnially vang the resilience we've seen in these markets. To your point, we're speaking to Ryan Dietrich about exactly that as well. Happy birthday bull very soon. But Casey, getting back to you, I mean, how difficult isto construct a portfolio just feels like the markett dynamics continue to shift j on a dime every three months? It feels like we're looking at a brand new market, and yet we're sitting near all time highs. It's kidible to see how resilient the broader market has been in that enviro for us. I'm trying to help our clients think about this current AI situation. At oe question, if this is potentially a bubbl trying to highlight that. You know, I like the way Howard Marks has s tncept where there are two different types of bubbles. One of those is the financial bubbles.That'sn 2008. The idea there is that you don't really have a lot of value that is created after the event happens, relative to we may be experiencing now, which is potentially an innovation bubble. And if it tu, the value is in the aggregate demand long term. And so I' trying to help our clients think about let's get our portfolios set up properly today. What are the needs that you have for your goals? What is the the sequence of return that you need to make sure you can mai your spending. And so that usually includes short term views, g into bucketing of your your next few years and then making sure you're staying inves for that growth that may come as part of this iion boom. So I think it's very important. I've been trying to help our clients think about this be more selfish. You know, don't always think about the broader market. It is mu more about you than it is about the bigger picture all the time. Yeah. And I was just speaking to Joe Mazzola about that yesterday as, certainly when it comes to technology, we have been spoiled. Hence, and herein lies the response and reaction. We got to Samsung TSMC numbers this week. Thank you to both of you for your time today. Reall appreciate the Have a wonderful weekend. Casey McCurdy, Chief portfolio strategist,b Wealth