Thoughts on the Market: February Edition
Technology is Back in a Bull Market.
February saw further gains in the equity markets, with the S&P returning 5.2% and TSX up 1.6% in local currency. The strength in U.S. markets vs. the TSX was due to a strong return in technology stocks, with the NASDAQ Composite Index rising 6.1%, eclipsing its all-time high set back in 2021.
The month saw several blow-out earnings reports from its largest constituents. Amazon and Meta Platforms kicked off the month with earnings beats that drove the shares to new 52-week highs. In Meta’s case, the shares closed ~25% above its previous 2021 high, capping a stunning comeback, with the shares up five-fold in the past 18 months. Nvidia further accelerated the gains with strong commentary on the required investment to build out data centers to run artificial intelligence models. This quote from Nvidia CEO Jensen Huang stood out to us:
“Generative AI has kicked off a whole new investment cycle to build the next trillion dollars of infrastructure of AI generation factories. We believe these two trends will drive a doubling of the world data center infrastructure installed base in the next 5 years and will represent an annual market opportunity in the hundreds of billions.”
These remarks are backed up by Wall Street estimates of capital spending by the cloud of capital spending by the cloud computing leaders (also known as Hyperscalers) in Table 1. Capital spending is forecast to grow 36% in 2024, with incremental growth of 13% and 9% in 2025 and 2026. Although the estimates are company-wide, and include spending in divisions beyond cloud computing, we believe the Generative AI spending is growing faster than total company capital spending.
Table 1: Capital Spending by Hyperscalers
Source: Morgan Stanley, MWG
The key question, in our view, is whether Generative AI uptake will exceed expectations. If usage is below plan, companies may have spare capacity and return on investment may not meet thresholds. This would likely cause these companies to reduce capital spending in 2025.
Given the early nature of Generative AI applications, there are mixed but promising anecdotes. Oil major BP has rolled out Microsoft AI assistant Co-Pilot for the substantial majority of its staff after a pilot project in summer 2023. At $30 per month per seat, it represents a substantial revenue driver for Microsoft while at the same time representing a fractional increase in cost per employee for BP. Klarna, a Swedish payment company, announced that its AI assistant built on Chat-GPT is handling 2/3rds of customer service requests, with better results than live agents. It will eliminate 25% of its customer service department as a result.
In last month’s report, we noted the ongoing strength in economic growth in the U.S. We believe AI enthusiasm is playing a part in that. The spending on new datacenters requires substantial infrastructure spending in terms of electrical power and telecom requirements. Also, the productivity improvements from AI, which should flow through the whole economy, will start to show their positive effects in earnings reports and lead to ongoing investment in implementing these systems.
GLOBAL EQUITY GROWTH FUND
The MWG Global Equity Growth Fund increased 7.4% in February versus a 4.7% return for its benchmark. Year to date, the Fund has returned 11.1% versus the benchmark return of 6.8%. The Fund’s top three performers in the month were Adyen (+28%), Meta (+28%) and Docebo (+25), while Major Drilling (-5.6%), Bank of Montreal (-3%) and United Health (-2%) were the biggest detractors.
We made no changes to the Fund in February.
INCOME GROWTH FUND
The MWG Income Growth Fund rose 0.5% in February versus a return of 2.8% for its benchmark. Year to date, the Fund has returned 0.9% versus the benchmark return of 3.9%. The Fund’s top three performers in the month were Target Corp (+12%), Canadian Natural Resources (+10%) and Manulife (+10%), while Northwest Healthcare (-18%), Chemtrade (-9%), and BCE (-7%) were the biggest detractors.
We made no changes to the Fund in February.
This Month’s Portfolio Update is written by our Head of Research, Jamie Murray, CFA.
The purpose is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.