There's a level of interest for AI trade to continue, says Bartlett's Holly Mazzocca

Markets are currently hovering near record highs, driven significantly by the AI trade and leading tech names like Nvidia, Microsoft, and Apple. However, there's a growing interest in expanding this trade beyond the "Magnificent 7" by looking for productivity gains across the broader market. One area showing promise is the industrial sector, with companies benefiting from the modernization of the electric grid, which is projected to see US electricity demand grow sixfold in the next six years.

While the market anticipates interest rate cuts, the substantial AI capital expenditure (capex) is a key driver of the current rally. Earnings in the first couple of quarters of the year significantly surpassed expectations, with many large companies maintaining or increasing their capex estimates. Looking ahead, while the earnings growth for the "Mag 7" is expected to slow down from its current high rates, a broadening out is anticipated as the other 493 companies in the market see their earnings improve through next year. This suggests that while big-cap growth names will likely continue to lead, there will be increasing opportunities in other sectors.

The expectation is for market breadth to continue expanding, revealing broader opportunities beyond the dominant tech stocks. Analyst forecasts indicate a moderation in the earnings growth of the "Magnificent 7" as the financial and industrial sectors, along with consumer discretionary, are poised for growth. This shift suggests a move towards catch-up trades and a more diversified market landscape.

• Markets are near record highs, largely propelled by the AI trade and prominent tech stocks.
• There's a strategic focus on expanding the AI trade beyond the "Magnificent 7" to capture broader market productivity gains.
• The industrial sector is identified as a key area for growth, partly due to the modernization of the electric grid, with US electricity demand projected to increase sixfold in six years.
• AI capital expenditure is a significant factor in the current market rally, with earnings exceeding expectations and companies maintaining or increasing investment.
• Future market performance is expected to see a broadening out, with the earnings growth of the "Mag 7" moderating while other companies, including those in financial, industrial, and consumer discretionary sectors, improve.

Related Video Summary

• Nvidia earnings preview: Can Nvidia's hot streak continue?
• An economy that works for everyone is not a fantasy – it’s a choice
• Surge CEO & Co-Founder, Edwin Chen: Scaling to $1BN+ in Revenue with NO Funding
• Gigantic revision signals US job growth much weaker than believed

Market Performance and AI Trade [00:00]

• The markets are currently at or near record highs.
• There is a continuing interest in the AI trade, with names like Nvidia, Microsoft, and Apple leading the way.
• The discussion includes bringing another voice to the conversation about market trends.

And that's how bringing another voice to this conversation. Bartlett's Holly Mazaka and also Wells Fargo's Scott Ren as well. Uh you guys both heard what we just spoke about with Lauren here.

This section sets the stage for the market discussion, highlighting record highs and the dominance of the AI trade, while introducing the participants.

Expanding the AI Trade Beyond "Magnificent 7" [00:39]

• The focus is on how the AI trade can expand beyond the "Magnificent 7" companies.
• Long-term favor remains with big tech names, but opportunities are being sought in how productivity engages across the entire market.

We are though looking for how that trade can expand beyond the Magnificent 7. So, while we long-term continue to favor those big tech names, we're also looking for opportunities that start to look at how you're seeing productivity engage across the market.

This highlights a strategic shift towards looking for growth beyond the largest tech companies by examining broader productivity trends.

Industrial Sector Growth and Grid Modernization [01:13]

• Productivity is manifesting clearly in the industrial space.
• Companies like Eaton are favored in this environment because they are an AI play and benefit from data center growth.
• They are also benefiting from the modernization of the US electric grid.
• US electricity demand is expected to grow sixfold in the next six years.
• This growth presents significant opportunities for many companies beyond the impact of the "Mag 7" names.

One area where we are seeing it is in the industrial space and there's stocks like Eaton that we really favor in this environment and area because they are not only an AI play and a growth of the data center play but they're also looking beyond that as we continue to see the modernization of our electric grid. We're expecting the US electricity demand to grow sixfold in the next 6 years.

This section identifies specific sectors and trends, like industrial growth and electric grid modernization, as key areas for investment outside of the dominant tech giants.

AI Capex and Market Rally [02:22]

• The market expects a rate cut this week, and it's almost certain to happen.
• AI spend and AI capital expenditure (capex) are considered a huge deal.
• Earnings in the first couple of quarters of the year "blew away" expectations, doubling them.
• Analysts initially expected some backing off of capex, but instead, most big companies either held capex steady or increased their estimates.
• A significant portion of the market rally is built on AI capex, and this is not expected to change soon.

And really what we saw in the first couple of quarters of the year, I mean, let's face it, earnings blew away what the expectations were. They doubled it in both uh the quarters. And a lot of analysts thought maybe we'd see some backing up of, you know, capex is going to be a little bit less. We're a little cautious. Instead, it seems like most of these big companies, they either held their capex level steady or they increased their estimates.

This part emphasizes the critical role of AI capital expenditures in driving market performance, noting how earnings and investment have exceeded prior expectations.

Future Market Broadening and Earnings Growth [03:00]

• Between now and the end of 2026, the earnings growth rates for the "Mag 7" (or "Mag 5" etc.) are likely to slow down, as it's unsustainable to grow 75% year-over-year indefinitely.
• A broadening out is expected where the other 493 companies will see their earnings improve through next year.
• Big-cap growth names with great products, demand, and cash flows are likely to continue taking the market higher.
• The expectation is that the market will go higher over the next 14-18 months.

Um, and then we're going to see a broadening out where the other 493 companies, their earnings um, improve as we move through next year. So, I think it'll be a little bit of a broadening, but these big cap growth names that have great products, great demand, great cash flows, I think, you know, it's it's it's correct to say they're likely to take the market higher, which over the next 14 18 months, we think it is going to go higher.

This section outlines the anticipated future market landscape, predicting a slowdown in growth for the largest companies and an acceleration for the broader market.

Impact of Interest Rates on Valuations and Market Breath [03:46]

• As interest rates hypothetically move lower, holding cash and money markets becomes incrementally less attractive.
• Lower rates can power valuation-type stories.
• The discussion considers whether the current strategy should be about looking for catch-up trades or continuing with momentum.
• Market breath is expected to continue, indicating broader opportunities beyond the top stocks.
• Analyst expectations point to moderating earnings for the "Magnificent 7" while breadth expands to the financial, industrial, and consumer discretionary sectors.

We're expecting to see that market breath continue as Lauren mentioned as well. this idea that there are broader opportunities out there. And when you look at analyst expectations, the expectation is that the Magnificent 7 earnings will start to moderate over time while you see this breadth expand to the financial sector, to the industrial sector. You could see the consumer discretionary continue to do well in this

This segment explores how interest rate movements influence investment strategies and highlights the expectation of increased market breadth across various sectors.