Sticky Inflation vs. AI Growth: The Market’s Balancing Act
00;00;01;18 – 00;00;09;22 Unknown Hello, and welcome to Blue Chip Now!, the podcast that gives you insider access to content that we tailor specifically for our clients.
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00;00;16;28 – 00;00;19;09 Unknown Welcome back to another episode of Blue Chip Now! You have Daniel Dusina, chief investment officer, matt Mondoux, senior financial advisor and Dan Seder, managing partner.
00;00;26;23 – 00;00;39;19 Unknown So has been a very eventful start to the year. And I would say it’s been a little bit outside of the ordinary because we’ve had a few very big thematic things playing out.
00;00;39;22 – 00;01;03;06 Unknown The first being artificial intelligence and how that’s rippled its way through financial markets. We’ll talk about that a little bit. But then also some of the conflict in the Middle East, you know, what has that done to not just geopolitical relations, but then what is it done to financial markets? We’ll talk about that with regards to the bond market and inflation, whether or not we see some potential stickiness.
00;01;03;08 – 00;01;23;23 Unknown And then we’ll close out with why June could end up being one of the bigger tests for the market that we’ve seen over the last couple of years. So, just to kick things off, I think it’s easy to continue talking about artificial intelligence just because of not just how much it’s in the headlines, but just how rapid the development has been.
00;01;24;00 – 00;02;05;18 Unknown So I think right now, at least the most important story is centered around artificial intelligence spending. So I think investors have have really become pretty accustomed to strong artificial intelligence demand. But as we look out or I guess we look back over the last 2 to 4 weeks, you’ve seen the narrative broadening quite a bit. In terms of it’s not just Nvidia, it’s not just Microsoft, some of your stalwarts, but really within the chip space, looking at companies that provide memory chips or you look at a company like Nokia that was this old school cell phone provider that all of a sudden has become a key player in artificial intelligence deployment.
00;02;05;21 – 00;02;32;06 Unknown You know, it has been a very, very interesting dynamic to watch this narrative develop. So it’s not just the chips, it’s also the power infrastructure players, data center infrastructure players, your picks and shovels type type folks. So the big thing here is that the market is effectively betting that AI spending will continue to be one of the strongest investment cycles in decades.
00;02;32;08 – 00;02;58;28 Unknown So Daniel, the bull case is that this will continue. I guess you have to think of it in terms of what’s being priced in today. And stocks in this segment are relatively rich in terms of valuation. So valuations have gone up and they’re not considered cheap at this point, even though there’s a really strong prospect for earnings growth moving forward.
00;02;59;00 – 00;03;34;09 Unknown But maybe just some feedback on what if what if the infrastructure infrastructure spending here slowed down. What if what if it doesn’t continue at the pace that we’ve seen? Is there any risk that valuations are too high and there could be a pullback? I think that’s the biggest question that we can’t answer. Just yet. The biggest question being what happens if demand doesn’t come to fruition as is currently being expected, meaning how do these large language model providers monetize, you know, at the enterprise level?
00;03;34;09 – 00;03;54;00 Unknown What if they can’t make as much money as initially expected? We’ve talked about this right. So Google came to dominate 98% of search. Right. So they have a monopoly effectively an internet search. What if this model is different. So we don’t know what the business model is. We can have three players in AI. It could become more of a utility margins or lower.
00;03;54;03 – 00;04;22;28 Unknown Yeah dramatically different outcomes. Precisely. And so to me I would I would make the argument that yes, in certain pockets of this artificial intelligence narrative, you do see valuations that are pretty stretched and are ultimately they could potentially be pricing for a perfect scenario, a perfect world that doesn’t end up existing. Headline. It was predicting that the AI boom is 50 times larger than the internet boom.
00;04;23;01 – 00;04;48;01 Unknown And those types of numbers, I think, really put it into perspective. This this will change. But it’s not just AI, it’s the knock on effect that it has on other businesses and margins falling to the bottom line. More companies are more efficient. Really. What’s what’s fascinating to me is and it’s going to be the story that plays out and how it impacts jobs, which ultimately impact consumers.
00;04;48;03 – 00;05;15;27 Unknown Yeah. I mean, look, we have some fairly encouraging proof points at this juncture. An easy one to talk about is anthropic creator and provider of Clod Private Company, still planning to go public later this year. Their quarter over quarter revenue increase from the first quarter of 2026 to what they’re they’re expecting for the second quarter of 2026, is just north of 130%.
00;05;16;02 – 00;05;42;23 Unknown That’s quarter over quarter not, you know, the second quarter of 26. Looking back over to last year, that’s just one quarter. That’s a larger figure than zoom did in the heart of the pandemic in 2020. So so the proof point right now is that the adoption is good. Anthropic is monetizing right now. But are there securities and public markets that are extrapolating that level of demand growth in perpetuity in certain segments?
00;05;42;23 – 00;06;12;27 Unknown Yes. In other areas, for example, if you go up the supply chain and think about power generation, they don’t have the risk of demand monetization. The people that need the power have to pay for it up front. So your GE or Nova’s your quanta services, some of your small modular reactor and alternative energy plays. They might be trading at a lofty valuation relative to history, but that’s because they’ve got demand booked out two three years.
00;06;12;29 – 00;06;40;26 Unknown So like there are elevated valuations, I take more issue with it in certain parts of that economy than I do with others. It may just be a good Segway, but, you know, I think the contrarian contrarian in me or the skeptic, I mean, we’re have all these, IPOs this summer, open AI space X, which has, you know, X I anthropic might all IPO near-term kind of reminds me of when I’m in rocket IPO right in the interest rate.
00;06;40;26 – 00;07;11;19 Unknown Bottom right. Yeah. I think look like entirely separate conversation around some of these massive IPOs that are slated for the back half of this year. But, you know, I think the common notion of get while the getting’s good, I do think applies here. On the flip side, you know, even though we’ve seen a pretty meaningful run, at least in US equities over the last, really the last two, two months or so, you had the bond market behaving pretty interestingly.
00;07;11;19 – 00;07;36;21 Unknown And, and I would argue that, you know, it is kind of or at least it has been flashing a yellow warning light. So, so specifically, if we look back pretty much since the start of the conflict between the US and Iran, you’ve had Treasury yields rising across the curve. And it’s been fairly stark at certain points. You know, you had the ten year Treasury hitting a one year high, close to 4.6%.
00;07;36;27 – 00;08;02;26 Unknown You had the 30 year Treasury that moved above 5%. And the secondary market for the first time since 2007. And these are clearly levels that make investors pay attention. I think if I could just sum it up into one thing that is the reason behind this happening sticky inflation. People, investors and the general public are very concerned about sticky inflation, on the back of higher oil and energy prices.
00;08;02;28 – 00;08;31;22 Unknown You know, I think that right now, it continues to be a concern and it will be a concern until we get some absolute resolution between the US and Iran. And thus, you know, a little bit of resolve in oil prices have seen it a little bit more recently. But still, if you look at consumer sentiment, you know, from the University of Michigan, that’s that survey they put out every, every month, consumers have never felt worse, quite literally in the history of this survey.
00;08;31;29 – 00;08;53;04 Unknown And they are pricing out inflation expectations north of 4.5% in the medium term. Yeah. And, you know, this is, you know, I think from a consumer standpoint, this is a big bummer, right? I mean, you look at oil prices on top of food prices, inflation has really dominated the news cycle more or less since I, gosh, the pandemic.
00;08;53;06 – 00;09;22;03 Unknown You know, it’s been really interesting, you know, mortgage rates that, you know, people have really grown accustomed to two, three, 4% mortgage rates now were five, 6%. That makes housing affordability that much tougher. So inflation does become a problem. It is, you know, it’s a headwind. You know, consumer spending still remains decent. You know, I guess when you look at a lot of the data, doesn’t really care if you’re spending at, Nordstrom’s or if you’re buying gas at BP.
00;09;22;06 – 00;09;42;20 Unknown But at the end of the day, you know, it does eat, you know, out of, you know, people’s pocketbooks. It makes housing. Housing is the big one. You know, housing affordability, you know, housing turnover. So you, you, you know, the economy really well. Hopefully, you know, be able to adjust and like you said, I think we get some relief on oil energy.
00;09;42;22 – 00;10;08;06 Unknown That will go a long way. But but yeah, when you’re just going to start to flow, the longer this goes, the longer it will flow through to, you know, producer prices to, you know, just creating everything, being more expensive. Right. And I think that’s that’s essentially it. Right. You know, if we get a more absolute resolution within the next two weeks, I think this all becomes ultimately a blip on the radar.
00;10;08;08 – 00;10;29;20 Unknown Even though you might have CPI or PCE, whatever, your preferred inflation gauge is coming in a little bit elevated on a year over year basis over the next few months. Realistically, as there’s an end in sight, I think consumers have a lot less challenges to spend. And that’s where your whole sticky inflation narrative kind of falls apart.
00;10;29;20 – 00;10;53;04 Unknown Now, maybe one secondary interesting observation that I will that I have on the back of broadly, broadly higher rates across the U.S. Treasury curve is that, generally speaking, when you get that, that fairly meaningful move upward in interest rates, there’s a negative correlation between that upward move in rates and what happens in the stock market for certain segments.
00;10;53;06 – 00;11;14;08 Unknown Well, in this case, you know, when I think about what segments that those are, it’s it’s firms that trade at a high valuation are usually going to be pretty sensitive to rising yields, meaning let’s just call a spade a spade. Places like the tech sector, usually rising rates are not super, super productive for for equity investments in tech.
00;11;14;10 – 00;11;44;14 Unknown That has not been the case this go around. You’ve seen tech stocks rising in lockstep with yields. So that’s maybe just an interesting point to call out. And it’s not to say that, you know, the this would be cause for a bottom falling out of the tech sector. I think that what investors are more paying attention to is not the discounted cash flow Excel plug, and more paying attention to the actual results, the underlying growth, what we’ve seen put forth, at least through the first quarter.
00;11;44;17 – 00;12;04;13 Unknown But I think it’s just a one important call out that, you know, to see tech being very correlated with, with interest rates is not something we generally see. I’m sure there’s a bit of FOMO in there as well. You know, this is a pretty unique market. But I will say when you look at something, you know, overall it’s not terribly strong.
00;12;04;19 – 00;12;27;21 Unknown So we’re not in that euphoric state where you start to worry about that. The dreaded B-word bubble. You know, you know, according to most sentiment survey, still people are more bearish and bullish, right? That’s correct. And, you know, maybe just switching gears, albeit briefly, just to to talk about the actual conflict between U.S. and Iran and not just, you know, one of the major byproducts being inflation.
00;12;27;23 – 00;13;06;17 Unknown You know, the the biggest developments we’ve seen in the last two weeks, I think, have been, at least for me, to have some level of confidence instilled that we are mostly through this conflict. You have essentially, the two parties at the goal line and it’s just a matter of some of the minutia right now. So even though markets started to price this in essentially at the beginning of April, now you’re starting to see some real resolution and very productive talks between the two parties, which is why I think investors have been able to rationalize continued support for equity markets.
00;13;06;20 – 00;13;47;17 Unknown Now, you know, this does open up the, the, the, the financial markets in general to potential for downside. If you were to get a unforeseen collapse in negotiations. Again, I don’t see that happening at this juncture. The the commentary that we’ve gotten from both sides is, again, very much related to the minutia. So I think that some of the optimism that you’ve seen, whether it’s a bit of a reprieve in bond yields over the last week or continued upside in some of your chip stocks, I do think that some of it’s founded, but it’s just worth being aware of, you know, 60 day ceasefire, for example, which is essentially what’s currently tentatively agreed
00;13;47;17 – 00;14;07;02 Unknown upon right now, doesn’t solve the entire issue, because if the Strait of Hormuz gets closed again in 60 days, we’re kind of back to square one. And that sticky inflation narrative retain regained some ground. Yields had higher oil prices, higher stocks ultimately look more expensive. Yeah. Yeah. So it’s I mean this is going to be a tough one to control.
00;14;07;04 – 00;14;25;28 Unknown You know ultimately you know that the world is aware of how important the strait as this is. You know, I think a lot of people knew it, but never knew exactly how much significance and how much how much this could drive inflation in the US. Yeah. And okay. So like last topic and this is going to be trying to put everything together.
00;14;25;28 – 00;14;49;15 Unknown But June as we as we record this on the 1st of June 2026, it could end up being a pretty big test for the market. And the reason for that is because, as I mentioned before, off of the bottom, you know, peak pessimism of the conflict between us and Iran, pretty much since the first day of April, the market has enjoyed a pretty extraordinary run.
00;14;49;17 – 00;15;17;26 Unknown You have major U.S. indexes reaching, record highs. I would say pretty broad based participation from lows, but really, it’s been dominated by the tech stack. And you do see some evidence of investors just abiding by that buy the dip mentality. But what I would say is the reason that June ends up being important, you’ve got a ton of different things that are now converging employment data.
00;15;17;26 – 00;15;40;06 Unknown This has been a continued question for the last year. Inflation. Are we going to see stickiness or are we going to see inflationary figures bleed into other areas outside of gas? You’ve got a Federal Reserve that has a new chairperson. You have earnings that blew out expectations in the first quarter. Can that momentum be maintained or are expectations now going to be all the higher.
00;15;40;09 – 00;16;06;07 Unknown And then, you know, of course you have commentary around the Middle East. So you’ve got a lot of events and a lot of different pieces of the puzzle that are starting to converge. So this crossroads that we’re at right now, although there has been fundamental support for what the market has done, I think that there is a fairly complex equation that’s going to have some very old variables solved for in the month of June.
00;16;06;10 – 00;16;31;01 Unknown So, you know, I think about something like seasonality that typically sell in May and go away, as is the, seasonal trend where from May through the end of October, the market is generally weak. From November through the end of April, the markets and we saw, the S&P up over 3% in the month of May. That’s a big move.
00;16;31;01 – 00;17;10;18 Unknown And one month, particularly a seasonally weak month. You see TAC thriving when rates are going higher, which is uncommon to me. I think these are the signals that signals when the market is moving, contrary to what could be a seasonal trend or a fundamental trend or correlation between rates and tax. But it would be, if we have corporate earnings that have been tremendously strong, how much of anything, any flopped in employment data for inflation data and developments in the Middle East and the corporate earnings cover up at the end of the day, earnings drive price.
00;17;10;20 – 00;17;38;26 Unknown And if earnings continue to move at the pace in which they’re moving, I wouldn’t be surprised if price falls and a price increase follows, contrary to some of these other trends. That to me that’s the signal extraordinarily bullish. That’s a bullish signal. Yeah I would agree with you. And the only counterpoint I have is that I think that some of the headline index figures for the month of May are masking what’s actually going on underneath the surface.
00;17;38;29 – 00;18;01;28 Unknown Right. And so I think a lot of people would be surprised to hear that on a cap weighted basis, if you looked at instead of the S&P 500 index level return, if you looked at the 11 gig sectors within that index, only three of them were positive. So tech was very positive. And then you had consumer discretionary and health care that were positive.
00;18;02;00 – 00;18;42;08 Unknown But below the index level return. Your other eight sectors were actually in negative territory for the month of May. So on one hand that’s a bit concerning. But on the other hand, I could make the argument that how do you talk about overvaluation at this juncture in anywhere outside of potentially three sectors and not talk about it, you know, a month ago for the rest of the equity market, right, like so I just think that and by the way, if you looked at this on an equal weighted basis, meaning, you know, every stock in the S&P 500 gets an equal allocation within the index and it’s not 30% tech.
00;18;42;11 – 00;19;06;10 Unknown It was a similar kind of experience where tech was up 20 something percent. And I think there was I have to fact check this, but there was four sectors that were positive I think, instead of three, but same kind of experience. So it’s not like it’s just the cap weighted methodology that’s skewing results. It’s really just that the tech sector has been fueled by optimism, and that’s what’s fueling index level returns.
00;19;06;13 – 00;19;39;26 Unknown So I do think there is room for a return to what we saw for the first three months of this year, and that was a broader set of returns. The equal weighted S&P outperformed the cap weighted S&P meaningfully in the first quarter. And that, to me, is always going to be indicative of a healthier market. So even though some of the optimism around conflict resolution and earnings prints, has kind of dominated what investors have priced into the market, I think one piece of optimism I have is that there is a potential for return to broader returns.
00;19;39;28 – 00;20;18;10 Unknown And to me, it just does points you need for selectivity. And you know that just when you get to a juncture like this, with so many, so many different factors that are coming into play, I think you have to be very astutely aware of what you own and why you own it. Awesome breakdown. All right, everybody, just to recap, talked at length about narratives and I, talked a bit about an expansion of what’s going on in the bond market, where we could see some sticky inflation, where we might see a resolution and then put it all together with, why June could end up being a pretty big test for financial
00;20;18;10 – 00;20;38;22 Unknown markets. So thank you all for tuning in to another episode of blue Chip. Now as always, and we look forward to speaking with you again soon.
