00:00Joining me now, Kevin Maughan, President and Chief Investment Officer, Henny & Walsh Asset Management.
00:05Kevin, thanks so much for joining us.
00:07It's my pleasure to be here.
00:08So, Kevin, we've seen this huge rebound since the tariff tantrum back in April.
00:14Stocks really sitting near record highs.
00:16As you think about the rest of the year, can the momentum continue?
00:21You think about it, the year didn't start off so well, did it?
00:24Through the first 73 trading days of 2025, the S&P 500 was down by 10.2%, the fifth worst start on record.
00:33So, as a portfolio, I manage to think, well, what happened in those four other times?
00:38And that's where the silver lining could be found.
00:40Because in those four previous worst starts, from day 74 through the end of the year, the market was higher every single time by an average of 23%.
00:49And it looks like that is the case again this year, because from day 74 this year through the end of the second quarter, the market's up 21%.
00:58So, that makes me now question, how much longer can this last?
01:01When are we going to start to see volatility again?
01:04And are there still growth opportunities ahead?
01:07I think there will be more short-term bouts of volatility, but I think there's still growth and income opportunities ahead.
01:13Investors are just going to have to be a little bit more selective to find them.
01:16Okay, so we're going to dig into some of those opportunities in just a second.
01:20But talk to me, aside from just seasonality and history being on the market side, what are some of the catalysts that could continue to push this market higher?
01:30Because right now, it's very much expecting Fed rate cuts starting in September, based on what we heard from Fed Chair Powell.
01:37Is that priced in, or is that a catalyst still?
01:39I still believe two rate cuts this year are priced into the market.
01:43I've given up trying to play the Fed guessing game.
01:45I've been doing this for 32 years right now.
01:47It's an exercise in futility.
01:49But if I go back to their June meeting, the last time they updated their dot plot chart and released their summary of economic projections.
01:56At that time, they told us they're still expecting two rate cuts of 25 basis points each.
02:01They believe that unemployment will increase to 4.5% this year.
02:06Economic growth will slow to 1.4%.
02:09So, if that's the case, well, then they should have been cutting already back in June.
02:13However, they also increased their forecast to inflation because of the unknown nature of tariffs.
02:19That's what's kind of kept them in this holding pattern thus far.
02:23But given the outlook for unemployment, that concerning jobs report that just hit the tape last week,
02:28I think that 25 basis point rate cut in September is now baked into the market.
02:32And if we don't get it, then expect some volatility.
02:35So expect volatility if we don't get it.
02:37But if we do, no rally?
02:40I don't think we get it.
02:41We already had the rally coming off of last Friday when Chair Powell sounded slightly more dovish in that Jackson Hole speech.
02:47So I think that's already baked into the card.
02:50On the other side, too, and a lot of people aren't talking about this,
02:53but if their first interest rate cut is 50 basis points, you may see a rally, but not for the right reasons.
02:59Because then the Fed is basically confirming that, yep, we're late to the party once again,
03:03and the economy is much worse than we originally thought coming into the summer.
03:07We have the Fed's preferred inflation gauge, core PCE, on Friday.
03:11If that comes in hot, what could that mean for the market?
03:15Well, then I think you're going to see the volatility come even sooner,
03:17because then the 84% probability of a rate cut that the bond market believes right now in September
03:22may start to drift lower back into that 50% range.
03:26In other words, a coin toss.
03:28But I think it's going to come in line with expectations,
03:31and I think the market will just trade where it is,
03:34and now we start looking ahead into September and waiting for that next FOMC meeting.
03:38What about earnings as a potential catalyst?
03:40Because we do still have NVIDIA coming up tomorrow.
03:43Boy, have earnings been good in the second quarter, right?
03:46About 81% companies have beat on earnings and revenue.
03:49I believe we have a year-over-year earnings growth rate now, nearly 12%.
03:52That would mark the third consecutive quarter of double-digit earnings growth.
03:57And then we have the big kahuna coming in this Wednesday after the close, that being NVIDIA.
04:01NVIDIA does move markets because all investors know the name.
04:07It's associated as being the hub of the AI ecosystem,
04:09and technology is the most held sector by retail investors.
04:13I think they're going to knock the cover off the ball once again.
04:16Earnings expectations are around $1 a share to $1 a share.
04:19I believe they exceed that. They exceed revenue expectations, and that's where do they guide going forward.
04:25I'm really interested in seeing, Caroline, what their data center revenue is.
04:29Last quarter, it accounted for 88% of their revenues.
04:32Just 12% came from the chips.
04:34Our data center is going to continue to lead the way, or are chips now going to pick up the pace again?
04:39So we'll know by Wednesday afternoon, but I expect that to be a tailwind for the markets.
04:43But it's already up 35% year-to-date.
04:45How much higher can it go, right? But you could have said that also last year or even two years ago.
04:50And I still believe we're at the beginning stages of the AI revolution right now.
04:55And as more and more CapEx starts to take place into the AI infrastructure build-out,
05:00NVIDIA is going to benefit from that.
05:01Taiwan Semiconductor is going to benefit from that.
05:04ASML is going to benefit.
05:05All the ancillary providers that make NVIDIA who they are also stand to benefit.
05:10Okay, so it sounds like a few picks there, but you mentioned investors are going to have to be more selective,
05:16given how far the market has already run in finding those growth opportunities.
05:21What should they be selecting?
05:22Yeah, I've always followed the golden rule in investing, and that's to follow the money.
05:26In this case, it's to follow the spending.
05:28Where is all the major spending taking place right now?
05:31Well, it's in AI infrastructure, and it's in aerospace and defense.
05:34So if you look at the sectors that benefit from all that spending, it's information technology, it's industrials, and it's utilities.
05:42So I'll just dive into those three areas.
05:44I'll start with information technology.
05:46Taiwan Semiconductor is a name that we really like and hold at SmartTrust.
05:50Why?
05:51Well, you might be surprised to know that NVIDIA, the largest chip seller in the world, doesn't make their own chips.
05:56Taiwan Semiconductor does.
05:57The largest dedicated chip foundry in the world with nearly a 60% market share.
06:02And now they're helping NVIDIA to on-source and build their chips in the U.S. based upon Taiwan Semiconductor's plant in Phoenix, Arizona.
06:11They pay a good dividend, and they're trading at reasonable valuations.
06:15Of course, I still like NVIDIA.
06:16I'm a big hold on NVIDIA right now.
06:19I don't think they're going away, and they're going to stay as the hub of the AI ecosystem.
06:23Industrials?
06:24Well, there's two ways you can play industrials.
06:25One, through the cooling solutions that all of these data centers need, whether it's Avertive, or how about all the additional construction of data centers that's taking place across the country?
06:36I just came back from a business trip in Houston, Texas, last week.
06:40They're building data centers everywhere across the state of Texas.
06:44And who benefits from that?
06:45A company like Acom, who's one of the leading providers of engineering, design, and construction of warehouses and data centers.
06:51And don't forget, as you look at industrial names, you also have to look at aerospace and defense, because that falls in the industrial sector.
07:00We just learned a couple weeks ago, Carolyn, that NATO countries have committed to spend up to 3% of their, oh, rather 5% of their GDPs on defense spending by the next 10 years.
07:15But some of the smaller cap names, too, like Kratos Defense, which is building all this drone technology to be used in military warfare.
07:22So the opportunities are still out there.
07:24And utilities, just quickly, are opportunities there?
07:26Oh, boy, my favorite sector right there.
07:28So that's a nice pairing with the AI ecosystem, because we need to supply the power to keep the AI revolution going.
07:35But our country's grid is maxed right now.
07:37We need to explore natural gas, nuclear, and other geothermal and alternative energy solutions.
07:43A couple names I like in that space.
07:45If you look at the natural gas side, NYSource, one of the largest distributors of natural gas in our country, a multi-utility play with a dividend yield of about 2.7%.
07:54But if you want to go nuclear right now, look at Constellation Energy.
07:59They partnered with Microsoft to open Three Mile Island not so long ago to power their data centers.
08:03So those are two good utility names.
08:05They both pay dividends, both trading at reasonable valuations.
08:09They hold it well in the face of volatility.
08:11And now they become a backdoor plane for the AI revolution.
08:14All right.
08:14Thank you so much for those picks and your insights.
08:17Kevin.
08:17Thank you for having me.
08:18Really appreciate it.
08:18That's Kevin Maughan, President and Chief Investment Officer at Henny & Welsh Asset Management.
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