Transcript:
Caroline Woods
We’re kicking off a new week, the first full trading week of May, with the S&P 500 hovering near all time highs. Is this rally healthy or is the market getting ahead of itself? Dan Niles is founder and portfolio manager at Niles Investment Management, joins us now. Dan, great to have you back. Thanks so much for being here.
Dan Niles
My pleasure. Caroline.
Caroline Woods
So Dan, what do you think? How are you looking at this market right now?
Dan Niles
Well, I mean, I’m not surprised it rallied. I put out a note on March 31st saying history may not repeat itself, but it often does rhyme. And from a big picture standpoint, if you go back to 1997 and 98, you were in year three and four on the internet infrastructure buildout. And back then you had some really severe macro scares and that you had a currency crisis in 1997, and then in 1998, you had the Russian bond default.
Dan Niles
And those are both structural issues. But after an 11% drawdown in 1997 and for a year, and then it was 19% in 1998, the S&P finished the year up 31 and 27%. Because you have that backdrop of that internet infrastructure buildout. So if you fast forward to today, you obviously have a macro scare following the Iran situation. Oil has surged, but this is actually a lot easier to deal with because you can reverse this with a tweet and decide, you know, we’re done.
Dan Niles
And you still have this massive inner or not infrastructure build out behind you, which is in sorry, I out which is going on right now, which is in year four. And so I think you’re going to see a strong rest of the year. And, you know, the market may be overbought in your term, but I think you’ll end the year higher than where you are today.
Caroline Woods
Okay. So the S&P 500 is up about 6% year to date. Not quite. What sort of returns could we expect to see.
Dan Niles
I mean, I don’t know, like anybody who’s telling you they know the answer is crazy. But what I would tell you is this the two biggest drivers of the market since the end of 2022, when we have this thing called ChatGPT show up has been easy money, right? The fed has been very accommodative or cutting and it’s been high.
Dan Niles
Well, if you look at the I part of that last week, you had, the three big hyperscalers plus meta report. And going into that or starting the year, people thought, oh yeah, CapEx will be up about 30%. And all of these companies reported in late January, and then that number moved from 30 to 60% last week. They obviously reported their March quarters, and that moved from 60% growth to now 70% growth.
Dan Niles
So that’s still continuing to ramp. The other thing you have is Kevin Warsh is going to probably get confirmed, right. And he’s going to start in the middle of May. He’s the new fed chair. And he was picked because he wants to cut rates. And so those two twin engines that have been really powering this market since the end of 2022 are certainly ramping up right now.
Dan Niles
And so, you know, I think you can see some pretty solid returns. And you’re going to have to pick stocks obviously. And the market’s getting more discerning right. We saw that last week where you had a Google up 10%. But then you had a meta down 9% in reaction to earnings. And so I think you’re going to have to pick the right names.
Dan Niles
But I see some pretty good returns through year end.
Caroline Woods
I want to dig into tech and picking the right names in just a second. But you mentioned it’s really easy money and I that’s driving this market higher at these levels though. What has to go right for the S&P 500 to keep moving higher.
Dan Niles
Well I mean I don’t think it’s anything special. It’s just what’s been going on, which is you have really strong earnings growth. And that’s continuing. And AI is obviously a powerful driver in the market. When you look at it and say, wow, you’ve got five companies out there that are spending, you know, tremendous amounts of money close to 800 billion this year.
Dan Niles
And that by itself is driving GDP growth. And you’re starting to see an acceleration in the growth rates for a lot of these companies. And so I think it’s just continuing what you’re seeing already. There’s nothing extra special to it. The the big extra special is really a new fed governor in the middle of May. And he’s already told you that his desire is to move rates lower.
Dan Niles
He’s focusing on trimmed mean PCI, which is at 2.3% versus core PCI, which is what the fed is focused at, which is at three. And so he’s already creating the situation of wanting to try to get rates lower. And that’s really powerful for the market. Right. We’ve seen that when the fed was cutting rates, when the fed stopped cutting rates.
Dan Niles
And you know it looks like they want to try to do that again. At least the chairman does. And that’s powerful combined with the I. So I don’t think there’s anything new. It’s just you just keep doing what’s been going on for the last several years.
Caroline Woods
As we think about choosing winners though tech lead in April, do you expect that leadership to hold and continue, or do you expect to see the market broaden out from here?
Dan Niles
Well, remember, tech is actually one of the areas that’s actually somewhat underperformed, right? If you look at the magnificent seven year to date they’re up about 2%. The S&P is up six. The Russells up 13. So now within that obviously it’s a very mixed bag on how each of these names have performed. But because The Magnificent Seven are only up 2% year to date.
Dan Niles
But the earnings estimates for, you know, different ones have been going up. You’ve got have a very, good valuation metric for some of these names. And the momentum should just continue to keep building because agenda Guy is is the new thing this year for the internet infrastructure buildout. So I’m sure your viewers have heard about Open Claw, which got formalized at the end of January.
Dan Niles
Right. That’s not that many months ago. Since that’s come out, this whole thing of a gigantic eye has taken off. Where before, let’s say last year it was all about you asked your chatbot on a question. It gave you an answer back. Now, what people are able to do is say, hey, you know, go to the street, pull this type of data, go to the Federal Reserve website, pull this other data, go ahead and create an Excel spreadsheet for me.
Dan Niles
Well, that takes a lot more tokens. And so what you’ve seen is token generation since Open Claw got formalized over the next two months, it went up about 100 plus percent. In the prior two months it was about 20%. And so you’re seeing this big uplift driven by genetic. And so that should power you for at least another year within the whole IE food chain.
Dan Niles
And to your question on tech, that’s where are you going to get the returns is sort of up and down that food chain of names associated with that.
Caroline Woods
But to your point, we’ve seen a mixed bag seven performance meta Microsoft and Tesla are all lower year to date. Alphabet, of course, is the big winner. Amazon a big winner as well. If I monetization is showing up and if I will continue this this rally momentum, why aren’t all of those names higher? What’s the market not believing yet in some of these names?
Dan Niles
Well, the market’s acting very rationally. The names that are down should be now. So if we get into results last week. So what people are concerned about is you’re spending all this money, but are you getting any return from it. Are your estimates going up. So if you think about what happened last week, Google beat revenues and EPs for the quarter.
Dan Niles
But the Ford numbers went up as well, and they went up very nicely. And you saw acceleration for Google Cloud from 48% year over year revenue growth in the December quarter to 63% in the March quarter. And so the stock, you know, the next day was up about 10%, finished the week up 12%. So that made a lot of sense.
Dan Niles
So even though their CapEx goes up, so did the revenues and EPs going forward. If you look at AWS, their revenues went from 24% growth in December, 28% growth in March. So it went up a little bit. They maintained their CapEx, though they didn’t raise it. Operating by operating profit guidance for the March quarter went down a touch.
Dan Niles
But the stock, you know, did what you would expect in that situation where it stayed roughly flattish. But you did see that acceleration from AWS from 24 to 28. Now, if you get to Azure from Microsoft, that only accelerate from 38 to 39. But they guided below the street for revenues for the June quarter while the CapEx number went up.
Dan Niles
So CapEx goes up, but your earnings go down. The stock should have been down. And then from meta, people are worried because they raised their CapEx. They guided in line for revenues. But if they have if they’re overspending, unlike the prior three that we just talked about, they don’t have a public cloud. So there’s no way for them to say, okay, we’re spending all this money, but if we overspend, we can sell to these all these other customers, they don’t have that capability.
Dan Niles
The other guys do. And so that stock got hit the hardest and it showed up. And so that’s kind of how you can break this down. So that’s why I said again you have to go back to stock picking. This isn’t like the first two years of this I build out where you could basically buy anything and it would go up.
Dan Niles
Now people are saying, well, who can afford to spend who’s getting return on that investment when they raise their CapEx and the stocks are responding the way they should, which is why I said you have to kind of pick stocks underneath this.
Caroline Woods
So it sounds to me like you think this is a stick with the winners moment versus a buy the losers. What’s a mag seven name you would buy right here?
Dan Niles
Well, I still like Google. I mean if you have not been saying this for a while now, which is, you know, early on they were obviously be hot. Then they caught up and now they’ve got, in my opinion, the leading model out there, but they have the full stack. So they have chips of their own so they don’t have to pay the Nvidia tax as people call it.
Dan Niles
Right. The 80% gross margins that Nvidia gets on some of these chips, and they’ve been building these chips for over a decade. So they’re not new to this party. Like others like Medoc, they’ve also got the ability to fund all of this with massive cash flow, because they have this monetization engine, which is obviously search, and so they don’t have to worry about that piece of it, and then they can get all this technology out to end devices.
Dan Niles
Because don’t forget, Android power is close to 80% of the world’s smartphones out there. And so they can push this out through that to the ultimate customers. And so they really have everything to be very successful. Whereas if you go through the other names, they’re missing one or more of those pieces to the puzzle. And so that’s why I think they’re in really good shape with Amazon, in a weird way, because they’ve got this massive physical infrastructure that’s going to benefit from AI.
Dan Niles
And so that’s going to improve all of that. They don’t have to worry about AI going ahead and wrecking their business, because I plus, robotics should help with that massive e-commerce infrastructure that they have. And they’ve also got a very strong relationship with anthropic because they were early investor in anthropic right now is the fastest growing of all the private AI companies out there.
Dan Niles
Microsoft in in my opinion, in the worst shape because they’ve hitched their wagon to OpenAI, which they have a 27% ownership in and Opening eyes corp between anthropic, which is growing incredibly fast by focusing on businesses. And then you’ve got Google and Consumer, which obviously is incredibly strong. And so those are the the differences, I think, between all of them and how I would think about it.
Dan Niles
And then Apple, I think later this year in a weird way, because they’ve been so horrible at AI, they haven’t invested a lot of money in it. They’ve teamed up with Google, which, as I said earlier, I think has the best consumer solution. You should get phones with a, towards the end of the year, you should get a foldable phone near the end of the year as well.
Dan Niles
And I think that can drive a really strong upgrade cycle, which is crazy to say, because they’re already growing revenues faster than they have since 2021. And so if people are willing to buy these phones, which in my opinion are particularly great, what are they going to do when they get really great phones that are foldable, much bigger form factor and you’ve got AI infused Siri capabilities.
Dan Niles
I think that’s going to be pretty strong.
Caroline Woods
So bottom line, you’d buy alphabet, Amazon and Apple right here.
Dan Niles
Those are the three that to me are the most interesting now in terms of right here. Like is the market up a ton. Absolutely. Could it correct 3 to 5%. Absolutely. But if you’re talking about a year end, do I think those names will be higher? Yes.
Caroline Woods
Outside of the Meg seven, how are you positioning your portfolio right now, given that the run up that we’ve already seen, what are some of their top picks that you have?
Dan Niles
Well, I mean, I think you can look through the food chain and say a gigantic is a big deal. As I said earlier, you’ve seen growth rate in tokens at about 130% versus, you know, it growing at 20% prior to that. And so one of the big changes is you need a microprocessor a lot more. So in the world of you’re just talking to a chat based AI, you’re using maybe one gigawatt of microprocessors versus about 7 to 8GW of GPU.
Dan Niles
Now, when you’re doing all these disparate things with the genetic, that ratio moves closer to 4 to 1, and potentially it gets closer to 1 to 1 at some point, depending on the use cases. And so I think names like Intel, which I wrote about again in I think late March, that one’s interesting names like an AMD that’s also interesting.
Dan Niles
And so I think you can look at those obviously a lot of the industrial companies that help with power generation, names like a given over, those are interesting. Obviously, a lot of these names have had a big run. And so for me, for some of them, I think they can drop on or I’m hoping they drop and then you can get involved again, in them because they’ve had such monstrous moves.
Dan Niles
I mean, you look at the semiconductor names, obviously Intel’s had, you know, a huge move off the bottom. But I tell somebody to chase it right here. Now I’d wait for hopefully a bit of a pullback. But these are sort of the same names that did in some ways well for the last several years. But if a genetic is really driving this huge uplift, which it is, you can see it in the numbers that were reported last week.
Dan Niles
Then it’s kind of those names are going to continue to work as you go through the rest of this year with some tweaks, right. Microprocessor names weren’t particularly good the last couple of years. That’s something that’s different. I think some of the optical names out there, are interesting, like a Corning, for example. So it’s kind of up and down the food chain.
Caroline Woods
Is shifting gears a bit. When you were last on at the the beginning of January, Nike was one of your top picks for 2026. And Nike has been, pretty beaten down. It’s down about 30% year to date. Are you still betting on Nike or has something changed? And, throwing in the towel there?
Dan Niles
I’m not throwing in the towel, but has something changed while having oil prices up over 100 is not good for any consumer name, and then Nike in particular, the turnaround is taking a lot longer than any of us imagined. Right? You had a lot of insider buying, coming into the year. Obviously that was completely wrong. You’ve seen some more insider buying since another not great quarter.
Dan Niles
But the thing I kind of go back to is, is there something damaged with the brand? Does Nike’s as Nike’s brand vintage? And I don’t think so. But is the turnaround certainly taking longer than I ever imagined? Absolutely. So is it something where I’m trying to be patient with it? But you look at their results compared to some of their peers, and even with the Iran war and oil being higher and consumers potentially being more stressed because of that, because of gas prices going up and everything else, you know, Nike is still underperforming.
Dan Niles
So yes, I’m I’m sort of sitting there trying to think through it. You know, in a portfolio of names, you always are going to have problem children. Is Nike one of them? Absolutely. But, you know, I also know there’s not a lot that needs to go right for the stock to work. And I do think that there are some issues being caused by this Iran war that affects all consumer companies.
Dan Niles
And for a company like Nike, it’s probably worse given their, you know, they’re trying to turn their business around. As well.
Caroline Woods
We’re we’re actually hearing from quite a few names linked to the consumer this week in terms of earnings. And, you know, with oil at $102 a barrel, it could be impacting them as well. Shopify, Kraft Heinz, Disney, Uber, Airbnb, McDonald’s, they’re all underperforming the broader market this year. So for investors looking for value ahead of some of these earnings, should they buy or just avoid names linked to the consumer right now?
Dan Niles
Well I mean here’s my big picture view. We know that there’s midterm elections coming up. We know that President Trump wants the Republican Party to do well. They’re not going to do well if oil’s over 100. So you know that’s got retreat. Because, you know, we can back out of this anytime we want because we’re not getting oil from going through the straits.
Dan Niles
Right? We produce our own. We’re net exporters of oil. And so I think the more time the passes, the more likely it is that oil breaks back below 100, hopefully significantly below 100, at which point a lot of these consumer names that are rightly struggling. Right. Because if I’m wrong and this drags on for whatever reason, then you’re going to have a lot more pressure in the future.
Dan Niles
Right now, the reason the stock market is sitting at all time record highs is obviously people think that this is going to get solved sooner rather than later. Otherwise this makes no sense because, well, prices, if they stay up at these levels for 1 or 2 quarters, you’re probably going to have a recession. That’s the way it’s worked in the past.
Dan Niles
Ten out of the last 12 recessions have been preceded by a big spike in oil prices, but it’s a sustained spike if it just goes up and then comes right back down again, you’re good. But if it stays up here, that’s when the problems hit. And so it’s a long winded way of me saying, I think the consumer names you want to be looking for other sectors other than tech, right.
Dan Niles
We talked about how the Magnificent Seven as a whole were underperforming the market. And so I’m looking at some of these underperforming sectors, whether it’s in like crypto. You talked about consumer already. And so I’m trying to look in these other areas software which is obviously gotten killed this year. If you look at the soft core ETF it’s down high teens.
Dan Niles
If you look at the semiconductor ETF it’s up almost 50% this year. So you know, are companies going to sound a little bit more like it. Last seen the report last week which was supposed to be one of the losers in as a genetic ramped up. But hey, what they kind of talked about is the genetics really helping us because people are using our back end tools instead of replacing them.
Dan Niles
And so some of the beaten down sectors, whether it’s consumer or software or crypto or, you know, looking at some of the China tech names, for example, those are all areas I’m doing a lot of work on, as well, because I think there could be a lot of value, as some of those sectors hopefully start to improve.
Caroline Woods
So outside of some of the tech names that you’ve mentioned, what’s your best idea to maybe have to help mitigate risk in your portfolio?
Dan Niles
Well, I mean, I’m, I always say this like you should never you hear about all the guys who made a ton of money by owning one stock for a decade. Right. But you never hear about the guys that owned Lehman Brothers or, you know, you pick your favorite, you know, web band, etc.. And so for me, I think just having a diversified portfolio, you know, if you look at the Russell, it’s up 13% like that’s killing the S&P.
Dan Niles
It’s killing the Magnificent Seven. So I think having a broad portfolio of stocks in this environment makes a lot of sense versus just saying, hey I mean you talked about Nike right? I thought it was going to do well. Obviously the CEO bought shares early in the year. The CFO, Tim Cook, CEO of Apple, as the stock does.
Dan Niles
It’s done terribly. So I think, you know, there’s a difference between sort of gambling versus investing. And I think having a broad group of names that can benefit from a much more friendly Federal Reserve, combined with I kind of providing an uplift for the overall market, that’s the way you want to think about it versus necessarily. I know it’s a lot more fun picking an individual name and hoping you hit it out of the park.
Dan Niles
But, you know, there the, the good ones like an Intel. And then obviously you’re going to end up with the bad ones like a Nike.
Caroline Woods
All right. And we have to leave it there. But always appreciate your perspective. Dan Niles founder and portfolio manager Niles Investment Management. Thank you so much for the insight.
Dan Niles
Thank you Caroline.
Caroline Woods
If you enjoyed this street talk, check out our full interview with Dan Ives, where he explains why he thinks the tech trade has more room to run and gives a whole bunch of his top names.
