Opinions
John Ewing A Comment -- General Comments From an Expert A Commentary COMMENT Jul 04, 2025
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The tech sector is driving things and, more specifically, it's really by the AI-related companies and the perceived AI winners. It tends to be like a gravitational force, where all the money gets sucked into the NVDAs, MSFTs, and ORCLs of the world and then also into the derivative plays. It means there aren't a lot of funds left over for consumer packaged goods companies, international insurance, etc.
This is very much a US trend, as well as a global trend. So it's a tale of Haves and Have Nots, led by AI.
Premium contentWe have these mega-gains. Both September and now going into October are the seasonally weak periods. Big investment houses like GS are saying that we've had so many good returns for so long, there has to be a regression to the mean for US equities. They say 30% odds of a recession and that the next 10 years aren't going to be as good. So that's one thing.
But on the other hand you have very powerful tailwinds. The "big, beautiful bill" has been passed and is very stimulative. One interest rate cut already, probably 2 more this year, and more next year. Those are also very stimultive. And we have all this AI technology that's proliferating -- delivering a lot of spending, a lot of demand, and a lot of productivity gains eventually.
You have these 2 things going on at the same time. But the question is valuations. Parts of the US have gotten very expensive, such as AI-related stuff and the Mag 7. People have been saying for a very long time that it's a very narrow trade and to be careful. But that didn't mean that they weren't going higher and that there wasn't value there.
We're at a point now where certain names still make sense, such as NVDA and AMZN. The other 5 are getting a bit pricey and over their skis. But there are other pockets that are still very investable.
The Mag 7 are starting to look a bit tired and showing some signs of exhaustion.
Financials are on fire; they have deregulation behind them, an upward-sloping yield curve, and strong capital markets activity. Aerospace and defense are global themes attracting a lot of spending to meet targets. If the price of gold bullion stays where it is, gold equities are trading a lot cheaper than they ought to be.
Small caps is another area he likes. There are 10k companies, and a lot of them are interest-rate sensitive. With lower rates and a better economy (we just had a 3.4% GDP print), there are some really strong tailwinds for them as well.
He's not as much a fan of oil stocks, as the price of oil is manipulated by OPEC. And you always have geopolitical issues, as with Russia. Harder to predict the price of oil.
Whereas natural gas is an enduring theme that will very much help investors over the next 5 years. Canadian government's finally helping the sector after many years of not being helped; that's really good for the sector (and for investors).
He harkens back to "irrational exuberance" of the internet bubble from Alan Greenspan in 1996. The bubble didn't pop until 4 years later.
Look back to how Fed chairs have fared when they talk about some sort of overvaluation in markets. Turns out that markets are higher 3-, 6-, 9-, and 12-months later. So their observations are not good timing indicators. Not to say that this time couldn't be different.
Look back to 2000 and the darling that was CSCO, trading at 120x forward PE. Compare that to today's darling NVDA, which has grown a lot and could be called expensive. Yet it's trading at ~35x forward PE, a pretty significant difference.
Looking at the chart from a technical perspective, how extended are we above the 200-day MA? Because that gives you a sense of how bubblicious or extreme the recent market move has been. At its peak in 2000, the NASDAQ was 54% above its 200-day MA. The NASDAQ today is 14% above.
So during the dot-com era, the darling stock was 4x more expensive and the market was 4x further away from its 200-day MA.
AI and the AI adoption curve have been followed by earnings. So today it's an earnings story, and the growth is actually there. Investors might miss out by sitting on the sidelines.
Part of diversification is recognizing that you don't always know the future. You want different things in your portfolio that are going to respond differently to economic factors.
He thinks that we're going to run a little hotter and have a bit more inflation and growth. But at some point in the future, in the next couple of years, that's going to meet the deflationary force of AI. So yields could end up lower in the long term as well.
We don't have one pervasive trend the way we did from 1982-2022, with 40 years of persistently falling interest rates. We're in an environment of inflation and interest rate volatility, so it won't be higher all the time or lower all the time. The average will probably be higher than people expect.
He has positions in gold/silver/platinum/palladium, and they change regularly through active management. He's both long and short, but generally long in the precious metals area. Scarce assets are something that most portfolios are underexposed to.
We're at a moment in time of higher inflation and monetary debasement. We're printing a lot of money, monetizing debt at probably 8% a year over the last few years. When that happens, you want something in your portfolio that's not printable, but scarce.
Scarce assets are things like gold and, to some degree, silver, bitcoin, platinum, and palladium. These can't be reproduced easily. If we need more oil, prices will skyrocket and more wells will be drilled. If we need more copper, more mines will be dug. For gold, the amount of gold that can be produced (even at all-out rates) is only ~2% of overall supply.
A scarce asset serves a different role in portfolios. It responds to macroeconomic factors like monetary policy and geopolitical situations. Globally, sovereign nations are stockpiling gold as they look for alternatives to US treasuries as reserve assets.
Brookfield Entities: Brookfield Asset Management (BAM)
BAM operates as an asset management business that went public in December 2022 after being spun out of Brookfield Corporation (BN), following the steep discount investors used to apply to the old Brookfield parent on a sum-of-the-parts basis. Since becoming a separately traded entity, BAM has delivered an annualized return of around 30% (including dividends).
Fundamentally, BAM is a royalty on an asset management franchise. It offers investors strong earnings growth and a highly recurring, fee-based revenue stream. The company targets earnings growth of 15%–20% while paying out ~90% of earnings as dividends. Going forward, we think BAM could continue to provide investors with annualized total returns of ~15%–18%.
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He and his team are contrarian investors. They try to look at areas that are at least a little bit out of favour. Things that are hitting all-time highs are not usually what excites them. Small caps have had a good rally in the last quarter, but not at the 52-week highs the way large caps are.
Canadian REITs are still really out of favour, so that's an interesting area. People have been obsessed with interest rates and how that affects real estate; but rates don't impact every sub-sector the same way. REITs tend to trade right near their NAV, except in occasional dislocations such as the GFC or Covid. But we're going on 2 years that Canadian REITs have traded at a big discount to NAV, which hasn't happened in the last 25 years. The property market is a lot more buoyant than the REIT market, so that's a great opportunity for investors to take advantage of 2 different ways to own the same asset.
When GICs were yielding 5%, you didn't need the volatility of REITs. As rates have come down, the attractiveness of REITs has gone up. Good place to get yield. Often trading at discount to NAV, so you can probably get some capital gains too. Relatively safe way to be invested in stocks.