WSJ Your Money Briefing - WSJ’s Take On the Week: The AI Trade’s Next Phase Is Here. Are You Ready?

Episode Date: November 17, 2024

For YMB listeners, here’s a special presentation of WSJ’s Take On the Week: Co-hosts Gunjan Banerji, lead writer for Live Markets, and Telis Demos, Heard on the Street’s banking and money columnist, cut through the noise and dive into markets, the economy, and finance—the big trades, key players and business news ahead. This week, Telis and Gunjan dig into the latest on the Trump trade, the crypto rally and what upcoming retail earnings reports from Target and Walmart could signal about American consumers. Later, Dominic Rizzo, portfolio manager of T. Rowe Price’s Global Technology Equity Strategy, joins the show to talk about artificial intelligence investment and tech stocks, including companies such as AMD and Synopsys and those in the Magnificent Seven like Alphabet, Meta and Microsoft. And of course the sector’s shining star, Nvidia. Have an idea for a future guest or episode? How can we better help you take on the week? We’d love to hear from you. Email [e-mail] or the hosts at [e-mail] and [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, YMB listeners, we've got something special for you. WSJ's Take On The Week is back. The weekly podcast has returned with two new hosts and even more insight and analysis about the world of money and investing. The first episode dives into AI, crypto, and what Walmart and targets upcoming earnings mean for US consumers.

Take a listen and be sure to tune in on Sundays for new episodes of WSJ's Take on the Week. I'm Gunjan Banerjee, lead writer for Markets here at the Wall Street Journal. And I'm Telus Demos. I write for the Journal's Heard on the Street cull. This is WSJ's Take on the Week, the show where we give you a leg up on the world of money and investing. That's the stuff that we think and talk about every day here at The Wall Street Journal. And every week, we're going to bring you into those conversations.

They're going to be with insiders. They're going to be about markets, economy, and finance. And for today's show, we're going to dive into big tech stocks and artificial intelligence, and of course, what's been the splashiest event of earnings season, NVIDIA, which reports in just a few days. We chatted with a really big AI bull, Dom Rizzo.

He's a tech portfolio manager at Tiber Price, and he shared with us why he thinks AI is the biggest productivity enhancer since electricity. Electricity, that's a big one. I use that. I'd say so. And which companies specifically he thinks could be some of AI's unexpected winners.

You're going to hear that conversation in just a few minutes. Before that, though, let's get to what's been happening in the news and in markets. There's been a ton going on with crypto and we have some upcoming earnings from Target and Walmart. But first, for about two weeks post the U.S. presidential election and the Trump trade still seems to be on everyone's minds. Tell us what do you think? Do you think it's already losing steam? Well first let's break down what is the Trump trade, right? The Trump trade really comes

down to two big macro moves and that's stock prices are up and bond yields are up. So let's talk about bonds. Yields on tenured treasuries are still much higher than they were three months ago. Three months ago they were under 4%. Now they're flirting with 4.5%. There was a surge on November 6. That didn't quite continue. They've been a little up and down from there, but they're still up. And why are treasuries part of this Trump trade? Well, on the good side, because faster economic growth generally means the Fed is going to have to raise rates in the long term. But on the bad side, people are worried about how tax cuts, Trump promised a lot of cuts,

how those things might impact the deficit. And a wider deficit means the government is just going to have to keep selling more and more Treasuries, supply and demand. Those yields go up. So Gunshin, tell me about what's been happening with the stock market. Has that trade started to lose any steam as well? You know, it's so interesting. Throughout the week, the biggest question investors posed to me over the phone was, when will

the volatility that we're seeing in treasuries in the bond market, when and if will that start to stir volatility in the stock market, right? Of course, everything's connected. It is. And investors are constantly making this calculation of, should I put my money in super safe treasuries and government bonds, or do I take a riskier bet and put it into the stock market? And treasuries have been tempting. Those high yields mean you get paid a lot to own.

Right. So there's this ongoing trade-off there. But at the same time, so far at least, those higher yields have not caused anyone to panic. But I do think it's something a lot of people are keeping an eye on. And those higher yields also haven't dampened a lot of the euphoria out there in markets. You know, I think things have been a little bit more range-bound in recent sessions and maybe even ticking lower as opposed to right after the election where you saw this crazy move up. But what I'm seeing in positioning data, what I'm hearing from investors is they are still kind of positioning for this year-end

meltup and for this rally to continue. Meltup. Meltup. I've heard of meltdowns, meltups. Could be exciting. And my favorite indicator of stock market euphoria has been flashing bright green. Tell us, guess what it is. Gunjan, knowing you, it's gotta be something

in the world of options, right? It's gotta be something about volatility. You make me sound like such a nerd. Well, in the very best way, Gunjan, you are a huge nerd. So tell me, it's gotta be something related to that, right? It's tied to options, but also a nerd. Well, in the very best way, Gunjan, you are a huge nerd. So tell me, it's got to be something related to that, right? It's tied to options, but also a stock. Guess which stock? Well, if it's options on a stock, let's see.

I know Nvidia is reporting this week. That's a big options name, right? It's close. Nvidia is the new Tesla, a lot of people say, and Tesla call options are my absolute favorite market indicator of how bullish or bearish people are at any given moment. And what we've seen is activity in this market has totally exploded since the election. People are piling into these trades, betting that Tesla's rally is going to keep going. The stock is going to keep rising after it hit the $1 trillion mark, or at least its

market cap, across the $1 trillion mark recently. There is one big caveat here, of course, and that is that investors might be getting ahead of themselves in terms of what the Trump trade even is. Well, it sounds like they've cut the brakes on the electric car of the stock market in what you're saying. So I'm not surprised to hear that. Well, you know, as one investor said to me this week, people are pricing in all the good stuff, none of the potentially bad stuff.

For example, threats of tariffs really weighed on stocks at times during Trump's last administration. And James McIntosh at the Journal had a great column on this recently where he pointed out that some of the Trump trades after the 2016 election quickly faded. Well, I take James's point and he's always worth reading on topics like that. But I do want to talk about one thing that looks like there's just unabated bullishness, and that's crypto. That has surged after the election. Digital assets are off the charts right now. It's been crazy.

Bitcoin prices hit $90,000 for the first time last week. Dogecoin has doubled. And the rally accelerated after Trump announced that Vivek Ramaswamy and Elon Musk would lead his, listen carefully, Department of Government Efficiency. Doge. Is everything a meme now? Seriously, is everything a meme now?

Well, some stocks are memes. Coinbase shares at one point were up more than 50% in November. And MicroStrategy, the tech company that owns a lot of Bitcoin, they were up more than a third so far this month the last time I looked at it. So yes, those are memes too. I know. And I think people are betting it's So yes, those are memes too. I know. And I think people are betting it's going to continue. They've clearly got the stage.

The question is, what are they going to want from it? I'm going to be watching that very closely. It's a good time to be a crypto bro. Well, we should and we'll chat way more about this in a future episode. Gunjin, we just relaunched the show. We can't just keep promising people episodes about stuff. We're still getting the hang of it. Well, we want people to come back and listen, don't we? Yes, we certainly do.

But I think perhaps it seemed like the big issue for the election, even more so than crypto really, was the economy and how people felt about the economy. That really seemed to push voters toward Trump, who was making a huge case that he was going to bring inflation down. He was going to bring inflation down, he was going to, you know, bring jobs back to America, boost manufacturing here. And in terms of inflation, I keep wondering, are we done talking about it? Because everyday Americans are still very concerned about it, but I wonder how much investors are paying attention to it now. What do you think?

Well, we flagged Target and Walmart's earnings, and here's why I think they'll be interesting for a couple of reasons. One is I think people will be listening to those calls like they have started to listen to many calls for any comments about the impact of tariffs. Tariffs will impact the supply chains potentially for people who sell you stuff in stores. Will they make any comments about their margins or pricing? Target and Walmart have both been lowering prices on a lot of stuff lately. So one way the inflation story could continue to be part of the conversation is if tariffs start to bleed into the prices of things that you might buy at a Walmart

or a Target. It's just so tough to see how that's going to shake out, right? I don't know, I feel like a lot of stock investors were really caught off guard by the tariffs in President Trump's last term, where his tweets on tariffs would drive these huge moves in the stock market. So it seems like something that's tough for investors to prepare for. But there's also just the consumer mood. And I think that's going to be really interesting to watch in terms of Walmart and Target's earnings. I know lately I've been splurging a little less. The past two years, I was kind of on a travel spree after the pandemic, and it's been calming down for me.

I'm taking a closer look at how much some of these hotels cost. Aaron Powell Well, you're not alone in that. If you look at indicators and things generally related to people doing that, like really big time travel luxury spending, some of those things have been slowing, right? We've been looking at American Express' results and their spending volume growth has slowed a little bit and that's one place of course people look for spending on travel. But I think that because the consumer is overall still pretty strong, they have lots of money in their checkbook, they have a job, their wage growth has often outpaced inflation,

the question is whether or not people are going to be spending a little bit more on things that might be travel but might still be things they don't absolutely need. I don't know about you but I'm a big like knock off buyer like I will buy like the Walgreens brand. Anyway the biggest thing of course we have coming this week is Nvidia earnings and we talked to Dom Rizzo who's a tech portfolio manager at Tiro Price about the chipmaker, AI investment, and tech stocks. We're going to get to that after the break. AI investment and tech stocks. We're going to get to that after the break. This podcast is brought to you by CME Group, the world's leading derivatives marketplace, offering the widest range of global benchmark products across all major asset classes.

CME Group, where risk meets opportunity. So tell us, Nvidia reports earnings later this week and before the presidential election took over everything. Artificial intelligence was really the theme that dominated the market for more than a year. And the champion of that trade was Nvidia. They sell the specialized chips that power all of these complex computations needed to realize AI.

And as of November, Nvidia was worth more than $3.6 trillion, making it the most valuable company on planet Earth. Yeah, that is an absolutely wild number to me. I mean just for context that is three Berkshire Hathaway's which is itself a pretty big company, right? But Gunjan, am I right to also say that there's some skepticism about the AI boom that's been kind of setting in in the market this fall, right? You follow volatility in the market so closely and it seemed like it was really on display in the aftermath of the earnings reports of a couple of those big tech companies that have invested heavily, and I mean heavily, like to the tune of tens of billions of dollars heavily in AI products.

And that's, for example, Microsoft and Meta platforms, right? Meta being the parent company of Facebook, Instagram, et cetera. Those both fell sharply after their earnings. But then again, they've bounced back since. So maybe I'm just kind of going on about nothing. You know, my reporting suggests that you are picking up on something real. Like, I sense some wariness when I talk to investors

about the AI trade. At the same time, I think a lot of people are almost afraid to bet against it. But we have the perfect person here to help us unpack all of this. Dom Rizzo is a portfolio manager at Tiro Price, and he manages a fund with all of the big tech names, including Nvidia, which is his number one largest holding.

Dom, thank you so much for joining us today. Thanks for having me, guys. So there's a lot to talk about here with individual stocks, valuations, and all that, but let's zoom out a little bit. Last time you and I chatted around a month ago, you seemed pretty bullish on AI. Tell us why. Well, look, I think AI has the potential to be the biggest productivity enhancer for the

global economy since electricity. And what do I mean when I say that, right? Well, if you take a step back and you look at what electricity did to the global economy, it added roughly 1% a year of GDP for 32 years. The question is, can AI beat that? And I think the answer is yes. We're starting to see productivity enhancing elements

to companies already. We're starting to see productivity enhancing elements to companies already. We're starting to see it in earnings reports. And just look at what the Mag 7 are spending on CapEx. They clearly believe it also. This is existential for them to win. So I think this AI boom can continue from here. So you mentioned those investments. I mean, we are talking very serious numbers here, right?

Microsoft has spent $53 billion this year through the third quarter. That's about 28% of their revenue over that timeframe. Alphabet's CapEx was up 62% in the third quarter over the same time last year. So these numbers are big and growing. But for all that, you know, kind of call it AI power grid that's being built here, some of the big society changing things that we've been talking about with AI, like four-day work weeks because you can get everything done much faster with chat GPT, you know, hyper-intelligent robots that drive your car and do your housework, heck,

even just like a decent customer service bot, those things still seem far away. So when will all this AI investment turn into equally huge revenue generating products? Yeah, well, that's the nature of seismic change, right? We always overestimate what it can do on a one-year basis and then underestimate what it impacts society on a 10-year basis. Because it just takes time to go put in AI native applications. In order to have AI be the biggest productivity enhancer for the global economy since electricity,

you really need to believe in a world of AI agents, right? Versus just co-pilots. And just to give everyone a quick definition, co-pilots, humans are in the loop, AI agents, humans are not in the loop. And so you're directing those agents to go do things on your behalf. Take a company like T-Route.

You could have thousands of digital employees doing things upon your behalf. But these numbers, like you said, are monstrous, right? Let's just put them in perspective. Amazon, Google, Meta, Microsoft, 2023, spent $154 billion of CapEx. But as an investor, so you own all of these stocks or a lot of these tech stocks,

how many more quarters or years of spending are you willing to withstand before you kind of throw in the towel and say, hey, it's too much? Well, I think we're starting to see the revenue growth come through. And this is something that I think people probably underestimate because it's hard

to point to specifics, but I'll give you some anecdotes and maybe that can satisfy a little bit of what people are looking for So if we go back a year and we said hey, what do most people think? Meta is gonna grow in q4 of 2024 that number was in the low to mid single digits, right? We just got their guidance a few weeks ago, and that number, according to them, is gonna be anywhere from 12 to 20% growth, Meta historically a conservative guider.

It wouldn't surprise me if we were at the upper end of that range. Let's look at Microsoft, right? Let's look at Azure growth. AI for their entire business is their fastest business ever to $10 billion of ARR, annual recurring revenue. It just happened in two years. Moreover, Azure itself with AI is growing 33%,

without AI is only growing 21%. And then there's a plethora of companies that have reported so far this quarter, ServiceNow, HubSpot, Atlovin, just to name a few, that specifically called out AI as driving accelerating revenue growth. So it sounds like what you're saying is that we don't need necessarily to get to total revolution in life to have success in these investments. And I see what you're saying there.

I mean, frankly, that kind of appeals, right? It's like an AI trade that maybe isn't as exciting, as some people might hope, but it's maybe kind of a boring, and maybe in some ways less risky AI trade, right? And that sort of appeals to me, that there are kind of products coming out now that are going to be successes enough to justify that spending. And they're making money.

They're making money right now. And that's the big difference between now and the internet. If we think about compare and contrast 1999 versus today, well, number one, a lot of the 1999 and 2005 were built out was built with debt. Build it and they will come. On the other hand, today, this is funded by the cash flows of the most

profitable companies in history, right? So very different setup just from a capital markets perspective. NVIDIA is a really good example of that. And you know, that brings me to my next question, which is, we have this really big earnings report coming up. A lot of these other companies are spending on NVIDIA's chips. Is this the one report that really matters? Well, Nvidia's earnings is always a blockbuster event to keep the 90s analogies going. Right. But I don't know if we've seen the stock move too much into the print to see how it react. But we just saw what Jensen said a few weeks ago that Blackwell demand is absolutely insane right now.

That's Jensen Huang. He's CEO of NVIDIA. And Blackwell is a signature product for NVIDIA, right? Yes, the signature new product, right? And that doesn't surprise me because the benefits of investing in the new chips are just so beneficial when you compare it to the old chips until it turns to training the next new model.

There's training spend and there's inference spend. The training spend is what really requires the most leading edge, bleeding edge technology. We'll see what ends up happening on the print, but if you take an 18 to 24 month view, which is what I try to do in my strategy, I don't see this AI capex spend slowing. Well, actually mathematically it has to slow. I don't think it stops anytime soon. You can't spend at these growth rates forever. You have to decelerate.

But I think that we can see very high orders of magnitude as we go from an AI chip market of $45 billion in 2023 to $400 billion by 2027 and $500 billion by 2028. Are there companies out there that you think of as attractive AI plays, but that investors right now don't think of as AI plays? I'm thinking of, say, retailers or banks. Yeah, Banker told me the other day that that's the biggest thing that they're looking at investors right now don't think of as AI plays. I'm thinking of, say, retailers or banks. Yeah, Banker told me the other day that that's the biggest thing that they're

looking at in their business over the next couple of years. Well, I think it's going to just be part of every single business. It's like saying having an app or an internet web page is a differentiator. I actually don't know if it's going to be a differentiator for normal companies over time. I think the question is, is AI a sustaining innovation? Does it make the big companies stronger?

Or is it a disruptive innovation, right? Do smaller companies with lower cost structures and different ways of doing business, are they able to enter the market and be able to take a lot of share from the traditional companies? So you think other stocks could kind of power some sort of an echo boom or second wave

for this whole AI trade? I think it has to in order for the AI wave to continue, right? You need the revenue growth acceleration for the rest of the market in order to happen. You can't just rely on a capex cycle forever. But I think there's plenty of innovations and applications turning up that will justify the continued spend beyond just the Max 7. Well, let's get back to the elephant in the AI room and really in every room and every

conversation now, and that is the Republican victory. So what do we think might be on President Trump's potential agenda, Dom, that could really impact AI supply, demand in a positive or negative way? What does that mean for the overall economy? That probably means a few things. Lower taxes and deregulation for businesses, but it also means tariffs on products coming in from outside the US, right? And if you think about all these different business leaders all around the world, they didn't know where they were going to go build that next new factory. Did we build it in Vietnam? Did we

build it in China? Did we build it in India? Or do we build it in the US? I think the answer is very clearly and robustly now is probably in the US going forward. Now, with regards to AI specifically, like I said, I think that we have animal spirits in terms of capex build-outs. I think that's have animal spirits in terms of of capex build outs I think that's gonna probably mean more power build out In the US which you need for AI to be like power like electricity more electricity physical electricity, right? Like the AI has the potential to be the biggest productivity enhancer for the global economy since electricity as long as we have enough electricity All right. When we come back we are going to ask Dom which tech company he's the most

bullish on. So Dom, what is, in your view, the most ambitious way to play AI right now? And what is the safest way to play it? Yeah, that's a really interesting question. When I look at my strategy, I have a few names that if AI really hits in a big way, there could see fabulous revenue growth from that potential. And a name that comes to mind in that scenario

would be an AMD, right? I think they have a real potential to be a second source to NVIDIA in the data center for the companies that need, you know, true general purpose compute. In terms of where AI is going to improve the business model, and it feels more marginal, but it's clearly direct AI, I would highlight the electronic design automation software companies, the EDA software companies, Synopsys and Cadence. These two companies design all of the software that all of the chips in the world are designed on today. And not only is AI supercharging their business with the hyperscalers, right?

Amazon, Meta, Google, all designing their own chips with these two companies, but they're also making the design process more efficient by putting AI into the software itself. So the ability to materially, materially increase the potential chip outcomes, and as a result, their core businesses should be accelerated from that too. Wow, so if chips are the picks and shovels of AI,

then these are the pick and shovel makers for the pick and shovel makers. I like that. Exactly. Well, Dom, you've given us a lot more than seven names to think about when it comes to AI. Thanks so much for joining us. Thanks for the time, guys. Thanks, Dom.

This has been great. Dom manages a fund that includes holdings of AMD, AppLovin, HubSpot, ServiceNow, Synopsys, Cadence, and many other technology companies. Well, and that's everything you need to know for Sunday, November 17th. The show is produced by Trina Menino, Jess Jupiter, and Jessica Fenton. Michael LaValle and Jessica Fenton are our sound designers, and Michael also wrote our theme music. Aisha Al-Muslim is our development producer, and Scott Salloway and Chris Zinsley are the deputy editors, and Falana Patterson is the head of news audio for the Wall Street Journal. For even more, head to wsj.com.

I'm Telus Demos. And I'm Gunjen Banerjee. Until next time. Well, we haven't even talked about crypto yet. That's for another... This is not that long of a show. Don't even go there. In 10 seconds crypto is going to be a really big thing.