00:00Yeah, that's exactly it, Matt. They do need each other for revenue. And that's why we're seeing companies like NVIDIA invest in the companies that are building the infrastructure, which ultimately leads to the applications.
00:11And it's those end applications that we're all sort of on tenterhooks waiting to see. We're seeing some of it. Some of the industrial companies have been out saying how they're using AI.
00:22Some of the financial companies have been out saying how they've been gaining from the application of AI within their firms and for their customers.
00:29So I think that's why investors are nervous, though. It's really when are we going to see more revenue from the applications?
00:35And I think that's going to be pretty hard to measure. But this set of circular deals is sort of an indirect way of vertically integrating from the applications providers to the data center builders to the chip providers.
00:47If they were all one company, we wouldn't be so worried about a company investing in its own development for new applications.
00:54So it's not a bubble in our view. It is simply a step in the progress of building this new capability that we are starting to see deployed into applications.
01:06What if one of the links of this chain is weak? I mean, for example, what if consumers and institutions decide to use Gemini or Claude or any other AI chatbot than OpenAI, which seems to be assumed as the leader and winner already?
01:26Yeah, I actually think that they're not assuming OpenAI is going to be the winner.
01:32I think what what these companies are recognizing is that it's a race and they're trying to enable, you know, their best prospects like for NVIDIA to sell chips into whoever is going to be the winner.
01:45And so, you know, funding the expansion of AI is as a way to to be diversified and so to be exposed to whomever becomes the winner.
01:56They already know that, you know, Google, Microsoft, Amazon are buying their chips and are in the race and they just want to make sure they're exposed to all the potential winners.
02:05Joanne, would you say, I mean, if you're bullish on this sector, is this a buying opportunity for these companies?
02:11Well, selectively, Matt, we do like NVIDIA here and we do think it's a core, you know, should be a core holding for for investors who have a sufficiently long time horizon because it's likely to be volatile.
02:26You know, you get news out of core weave like that quarter to quarter.
02:29They're likely to see some volatility.
02:31We know that it's awfully hard to maintain a steady pace of a build out and even to sell those application possibilities.
02:39So volatility is going to be the name of this game for a while.
02:43But we do see a pretty resilient build out on its way.
02:48You know, it's been happening for a number of years now.
02:50We think it's going to happen for some years more.
02:53And, you know, I think what we're seeing in SoftBank is a pivot towards being positioned to develop and sell those applications.
03:00So in some ways, that's a very positive move in the market because it's ultimately the applications that are going to prove the value of all this construction.
03:10We see this rally in stocks all year and maybe the last couple of years, too, in part because of the huge CapEx spend here.
03:19The funding of this build out is expected to drive growth in the U.S. economy.
03:23Is it enough to make up for the loss of consumer spending at the lower end?
03:28Because we've also seen income inequality exacerbated to a level some say we've never seen before.
03:37Yeah, that certainly is an issue for the broader economy.
03:41And we're seeing that in the wage data, the data that we do have, showing that the lowest percentile of earners have seen a pretty sharp slowdown in their wage growth.
03:51It's still keeping ahead of the measures of inflation that we have.
03:55But clearly, their spending power is being constrained.
03:58And we're seeing that in some of the lower end retail shops who are suffering from reduced spending at their places.
04:03You know, but clearly the CapEx spend is elevating not just the technology sector, but also we're seeing it in utilities.
04:11We're seeing it in industrial service providers who are helping build those data centers.
04:16So it's having a pretty broad effect on the economy on that side of things, even as some of the lower end consumer households are really suffering here from past inflation and from potentially more limited job opportunities.
04:28Does that continue, you know, inflation at 3 percent or more as the Fed cuts rates?
04:35Are you concerned that they that they that they boost inflation with these rate cuts?
04:41Yeah, I mean, I think the concern, Matt, is that tariffs are going to boost inflation.
04:45And we've only seen some of the pass through of tariffs to final prices.
04:49Right. Firms have been absorbing a fair bit of it.
04:51They've been trying to rework their supply chains.
04:53Ultimately, you know, does more of the tariff impact get passed through to consumers?
04:58And then, you know, we'll see that in the broader price indices.
05:01It seems likely that that's going to happen.
05:03We have to see, obviously, how the SCOTUS decision comes out with regards to the legality of those tariffs.
05:08We may see a broad change in that structure.
05:12But clearly the consumers are under pressure.
05:14And that's why we tend to like some of the, you know, more sort of high end consumer retail plays like a Williams-Sonoma.
05:20And, you know, back to the AI build out.
05:24You know, we like some of the peripheral plays into AI, whether it's in the energy sector or industrials.
05:29It seems like there are an awful lot of opportunities out there.
05:31Companies that pay dividends, by the way, which can help investors ride out this volatility.
05:36Something we build into our balance strategy to create a more conservative approach to this market.
05:42Joanne, we saw the sell-off last week was driven by these tech jitters, this lack of confidence.
05:47But now the gains that we saw in yesterday's market were said to be because of the government shutdown coming to an end.
05:54So maybe investors did care about the government shutdown.
05:57If you had a crystal ball and could see that the Supreme Court decided against the legality of these tariffs using IEPA,
06:06wouldn't you want to be short this market?
06:07If they rule against the use of the tariffs.
06:14The use of IEPA to put tariffs in place.
06:16I mean, doesn't that cause at least short-term chaos?
06:20Yeah, chaos is a good word.
06:21But think about the direction of that uncertainty, right?
06:25We have these high levels of tariffs now across countries.
06:29If SCOTUS rules against the legality of those, for whatever reason, then presumably tariffs have only one direction in which to go, which is lower,
06:39which would be a positive for a lot of firms and small businesses.
06:43And we would expect to see their profit margins rise.
06:46Now, we know that there are a lot of deals already in place that are unlikely to be unwound.
06:50And we also know the administration has other tools for imposing tariffs.
06:53But those would take a long time.
06:54What it is sure to do is to create more uncertainty, Matt, which I think is kind of your question.
06:59And we've seen that that uncertainty can delay things like factory expansion, hiring, and other things.
07:04So that would not be a good thing.
07:06But putting more money in the pockets of households would be a positive.
07:10And putting less pressure on profit margins for firms would also be a positive.
07:14Yeah, it is an interesting thought experiment.
07:17But nothing more than that, because obviously neither of us knows, none of us knows what's going to happen.
07:22And with regards to something that's maybe a little bit more predictable, and that is earnings,
07:27how confident are you that we continue at this pace of growth?
07:30Or do we slow in 2026?
07:34That is the question.
07:37You know, what we've seen for the third quarter, companies reported so far, is 13% year-over-year earnings growth.
07:43And that's up from the expected 7.9% before companies started reporting.
07:48So we've seen a lot better earnings than expected.
07:50We probably shouldn't expect that pace of earnings growth to keep up.
07:54And we've had a massive surge in spending this past year on those data centers.
07:59We should expect that to slow down.
08:01But put valuations in context.
08:03You know, you look at NVIDIA.
08:04People have been concerned it's too expensive.
08:06You know, they're trading at like 34 times.
08:08The market's trading at 23 times earnings.
08:11But NVIDIA's earnings are growing at three times the market.
08:14And it's only 150, you know, it's only 50% more expensive.
08:17So that makes NVIDIA look like a value.
08:20So I think people are a little bit over-concerned about the valuations in this group of fast-growing companies.
08:27The real risk to your point, Matt, is what our earnings are going to do in the future.
08:30We do expect a slowdown.
08:32It's only natural as the build-out sort of continues and it's going to go at a slower pace.
08:36But right now, we see valuations in this group as being pretty well justified.
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