Kevin Mahn, President & CIO of Hennion & Walsh Asset Management, joins Bloomberg's Vonnie Quinn on "Bloomberg Brief" to discuss the concentrated gains on the S&P 500 and the AI ecosystem.
Kevin Mon, president and CIO of Hennion & Walsh Asset Management writes, Despite the S&P 500 Index's trading near records, gains have been largely concentrated in certain areas of the market, such as AI revolution oriented technology stocks with overall market breadth being limited. He joins us now. Kevin, you're not the only one saying that today. Bank of America also saying, look, definitely breadth is limited and that's one of the signs that we're about to pop at some point. Are we about to pop though? I feel like we've been having this conversation for a year now.
It does seem that many investors almost are wishing that the AI bubble is going to pop and I don't think we're there just yet. Perhaps we'll never see it pot, but rather just pullbacks which create attractive entry points. And I find it really interesting in the markets right now that investors continue to climb the proverbial wall of worry. With oil prices above $100, reescalating tensions between the US and Iran, bond yields rising. We also know that the Fed may or may not raise interest rates again this year, in course mid-term elections coming up, but the S&P 500 just hit another all-time high, led once again by technology. What concerns me is that we don't have a breath in the rally, whether it's with respect to stock performance or earnings.
Well, exactly, all of it is like water off a duck's back when it comes to this market. The equity market at least. Yeah. Ben Ram or M Live strategist earlier is saying, look, the market is you know, taking into account next year's earnings. We already know that they're going to be, you know, pretty strong. Is that the case? And then next year will we see the market trying to discount whatever comes down the pike after that?
Possibly, consider this, for Q3, we're on track right now for the third consecutive quarter of 20% plus year over year earnings growth. However, for the third quarter, just two stocks, Micron and Nvidia account for one-third of that earnings growth. In fact, their projected earnings growth is more than 490 other stocks combined. That's good for investors in those two stocks, perhaps not as good for investors in those other 490 stocks. So let's not be fooled thinking that earnings growth is off the charts because it's really limited to that AI infrastructure state, which is one of my favorite trades still right now.
Yeah, exactly. Well, what happens when we do start to see a bit of a coming off of the AI trade. I feel like we got a preview recently and all that happened was that the equal weight S&P 500 did better because other stocks stepped up to the plate.
Yeah, absolutely. And I think we're starting to see that now. We saw utility stocks rally yesterday on the heels of what Constellation Energy announced with Google with that 20-year contract to provide them with nuclear power for their AI needs. We saw that in the defense arena when RTX signed a $20 billion contract with the US Navy to replenish their Tomahawk missiles. So we're starting to see other growth opportunities resurface again, but AI infrastructure will continue to lead the way and I think it's with us for at least the end of this decade.
So, if you're an investor who was trying to be very conservative maybe a year ago and pulled out of the Nasdaq 100 and said, look, I've I've had some nice gains, I'm good. What do you do now? You've got FOMO. All your peers are doing better because they've been fully invested in the Nasdaq. Bank of America says, you know, call options on the Qs are an option here. What would you do?
I would remind investors not to try and time the market. Look, I've been doing this for three decades right now. I can't time the market, but I think there's a better way to invest in technology and a better way to invest in the AI revolution. Look at the entire AI ecosystem. Don't just try and find the next Nvidia. Don't just lever up into the software stocks. Consider the hardware names, consider the heating and cooling names, the data centers, the data center construction companies. Data centers are still being constructed and of course, power and water. The AI revolution starts and stops without power, without memory, and without water.
There are so many concerns out though, there though. Moratoria in so many different states at the moment, which means that the data center revolution might not even happen, right? States have to give their blessing. We also have Lisa Su heading to South Korea for a second time this year to talk to Samsung because, you know, we need more memory, right? The there's scarcity. All of those things, plus the 30 year yield we just saw hit 5.7% right now. Is none of that concerning you?
All of that concerns me, but I don't think it's enough to slow down the air revolution, nor is it enough to slow down the billions of dollars that large cap tech still has to spend. And I think about the data center moratorium in certain areas of the country. Look, there last that I saw there's over 4,000 data centers in existence right now, and there are plans to still build more. Perhaps this was just a mid-term election rallying cry, perhaps that starts to dissipate after that. But even if this pace of data center growth slows down, we have to maintain the existing data centers and there's plenty of companies using those data centers right now to fuel their AI algorithms. So I still believe in the AI infrastructure buildout and if Jensen Wong is correct, the godfather of AI, right? And there's between three and 4 trillion spent on AI infrastructure by the end of this decade. Goldman Sachs even more, well then we got trillions more to go.
Last time you were on, you had a few interesting names for us in the energy sphere related to AI, of course. Give us some more names today.
So one name that I really like, I mentioned HVAC, a cooling provider. No one thinks that's sexy, that's not an interesting space to invest in. Comfort systems, Ticker symbol FIX. Last that I saw from creative planning, it's the number one performing stock in the S&P 500 on a cumulative total return basis over the last five years. Comfort system, who would have thought. On the power side, I like American Electric Power, a utility company, pays a good dividend above 3%, trading at a reasonable multiple, and they supply power to 5 million customers in 11 different states right now, including the state of Virginia, which has become the data center capital of the world.
Yeah. It's also where Constellation is going to be building out their nuclear though, right? So perhaps the utilities won't be as necessary.
Or, most of the utilities are owned and operated, I'm sorry, most of the nuclear power plants are owned and operated by utilities, like Constellation and Duke Energy and Next Air energy. So I think utilities are the way to harness the power needed for the AI revolution.
Okay, so you won't be swayed from your thesis, but are you looking to build a new thesis for when something goes arry in this market? Because surely at some point, as it always does, something will have to go arry.
Yes, and I think utilities can be your fallback. Not your father's or my father's utilities. Yes, they hold up well in the face of volatility. Yes, they pay good dividends, but they're going to be a critical backend component of the AI revolution today, next year, and for the balance of this decade. But I also think about aerospace and defense stocks, which pulled back significantly in the in the second quarter, or rather the third quarter. But what history shows us is that when they have pullbacks in a given quarter by 12% or more, one year out, they're higher 100% of the time by an average return of 29%. This time could be different, but that's an area I'll look at because of the billions of dollars being thrown into defense across the globe.
Kevin, we may or may not get Anthropic's IPO around Thanksgiving, right? Are you getting inquiries about it and are you recommending people get in given what we saw with SpaceX which really hasn't so far performed that badly?
Right. I I think SpaceX gave investors a lessons to look at these IPOs, these new companies that aren't profitable, that haven't proven their business model just yet. Look, I think Elon Musk is the Willy Wonka of our times. Many investors believe he can do anything, but he's not profitable with SpaceX just yet. He's tapping the debt markets in a significant fashion upcoming. I think with Anthropic, I still believe they may push it off till next year, but if they were to IPO this year, I think investors will be wise to wait and see how that company grows, see how their balance sheet improves before they throw dollars at it.
