AI Trade is Healthy Despite Reset, Says Intelligent Alpha Founder Doug Clinton

AI Trade Resilience and Market Reset

• 💡 The AI trade is fundamentally alive and healthy, despite a recent market reset that was needed, particularly for some of the hottest AI names.
• 🎯 The report from TSM (Taiwan Semiconductor Manufacturing Company) served as a catalyst, reminding the market that the infrastructure buildout for AI is still in its early stages.

Capital Expenditures and Demand

• 📈 TSM guided for approximately 40% growth in capex next year, indicating strong future demand.
• 💰 The Mag 7 companies are expected to increase their capex by about 35% this year, a figure that could potentially reach 50%.
• 🛠️ As TSM expands its fabrication plants, other major players are anticipated to increase their capital expenditures to meet this growing demand.

Market Tolerance and Value in Mag 7

• ⚠️ The market's tolerance for high capital expenditures is a key question, especially as some Mag 7 stocks appear expensive on a free cash flow basis due to significant spending.
• 📊 Amazon is highlighted as a name offering value within the Mag 7, trading at a forward PE in the mid-20s, which is historically low for the company.
• 🚀 While Nvidia and Google's stories are well-known, Google is seen as being in the pole position for AI, making its stock performance compelling if it maintains that advantage.

Software vs. Chips and Future Outlook

• 📉 There's a significant performance delta between chip stocks and software stocks, with investors currently favoring chips over software.
• 💻 Despite current investor sentiment, models are gravitating towards software, suggesting that the value of some software companies may become hard to ignore over time.
• ⏳ The narrative around AI's impact on software could shift, but it might take another month or two for this change to become apparent.