Goldman's Barrs: AI Story, Opportunities Are 'Transformational'

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00:00We talk about an AI trade. We've heard all the statistics about just how narrow this rally has

00:04been. It's been driven almost entirely by AI and to a larger extent that AI CapEx spend. Does that

00:10continue? We think it does. Katie just referenced the data point through third quarter. What we've

00:15seen through earnings in the last couple of weeks is evidence that, yes, there's been a lot of money

00:19being put into AI holistically, but the signs of that slowing down still slightly limited. I think

00:25we're going to see $360, $400 billion this year of AI CapEx, and we probably see a trillion dollars

00:30over the next three years as companies continue to invest in that space. It's really about how do I

00:34build the models? How do I stay up with the pack? Then where is the opportunity that comes from that?

00:39It's not just what we've seen in the last few years. It is going to evolve, and I think that's

00:43the key investment consideration. No signs of this slowing down. I wonder, though, for investors who

00:48are watching this just continue, and you think about some of the projections in terms of where AI is

00:54going to go. I mean, when do we start to see push comes to shove and investors maybe get a little

00:59bit impatient about when we're really going to see this translate into meaningful productivity gains

01:04or something else for these big companies? I think to a degree, Katie, you are starting to see that.

01:08You've seen the reaction to certain guidance in earnings. You've seen the reaction in the market

01:12more recently, where if companies aren't necessarily being able to articulate how the ROI is going to

01:16come in the near term, then they are getting penalized for that. But I think we have to take a step back

01:22and say, okay, what about the medium term opportunity here? Because the AI story is

01:26transformational, and the opportunities that come from that are transformational if you can identify

01:30who are going to be the winners and losers. And so if we start from this clear, critical consideration

01:35of the big get bigger, and those that have dominant data and application flexibility and capability

01:41are going to need to spend to stay ahead of the pack, that could still be a very compelling

01:46medium term story.

01:46I know AI has sort of sucked a lot of the air out of the room, but we're seeing a lot of other

01:51sort of big transformational moments in other industries, including in the healthcare space.

01:55And I was pointing out at the top of the show, at least over the last couple of sessions,

01:58we started to see somewhat of a rotation into healthcare. I know some of that is just kind of

02:02going after the laggards and hoping that you can take that ride. But when we talk about

02:06weight loss drugs, or you even talk about the injection of AI and other technologies into the drug

02:10discovery process, are you seeing opportunity there as an investable asset class right now?

02:15We see huge opportunity. And I think in healthcare especially, that is where you start to see

02:19innovation really on sale. You're getting an opportunity to enter into some very critical

02:23transformational themes, and a multiple that looks very different to other parts of the broader

02:26innovation ecosystem. And so what I would say in healthcare is twofold. One, you've seen a real

02:31shift in the last five years or so around large cap pharma R&D spend. You'd been on this structural

02:36decline in terms of R&D spend, outsourcing that to some of your biotech businesses, and that's actually

02:40started to change. And what you're starting to see is the evidence of that leading to

02:43transformational solutions in the healthcare space, not just the GLP one trade, but things

02:48we're seeing in Alzheimer's, things we're seeing in diabetes more holistically, that not only

02:52have life impact, but actually can be very accretive to earnings and growth. And I think

02:56more broadly, one of the challenges in healthcare in the last few years, at least post COVID was

03:00in a funding environment that's more challenging as rates have moved higher, that biotech part

03:05of the ecosystem that's been very focal for generating innovation has been a bit challenged

03:09because people have said, okay, how do you fund that growth cycle? Yeah.

03:11Now we're seeing a little bit more comfort. The innovation is coming through. We're seeing

03:14some of the animal spirits come back. And so the M&A cycle for large cap pharma that's

03:18built up cash on balance sheet, going and effectively acquiring some of that innovation in the biotech

03:23space really is quite compelling. Well, it's fascinating. I mean, we're just coming off the heels

03:27of a bidding war for MetSera, for example. Looks like Pfizer finally won out there. Luke,

03:32we don't have a lot of time left, but I want to talk about small caps because I'm taking a look

03:36at your notes. You identified that U.S. small caps potentially being attractive here. I've heard

03:41so many bull cases for small caps. They never seem to stick around here. What's going to be

03:46different this time? Well, I think full disclosure, we've been bullish on small caps in the last 18

03:49months and haven't necessarily been on the right side of that. And so we've got to recognize that

03:53part of the trigger for that and the catalyst was a better economic backdrop with rates coming

03:57down. And that is very helpful for the small cap asset class, which is floating rate debt,

04:01short maturity debt. So there's a positive impact on the bottom line and the margin that comes from

04:06Fed policy starting to become a little bit more favorable. But I think more holistically, if we

04:11look at what's happened in the last couple of quarters, and I say this from an active management

04:14perspective, you've seen very strong performance out of a subset of the small cap space, which is

04:19typically your least profitable, most volatile, arguably lower quality part of that ecosystem. And you

04:25haven't seen the pickup and the rally in the higher quality ecosystem. So as we think about

04:29healthcare is a great case in point, that biotech space looks compelling. We think about AI and

04:34technology, the broadening out of that theme into the smaller cap utilizes of that technology and

04:39the application software businesses within that space, you're getting that at a very different

04:43multiple, which with a robust economic backdrop, which is still our base case, can be a very compelling

04:47forward story.

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