A Comment -- General Comments From an Expert (A Commentary)

A lot of it is earnings. A few months ago, earnings estimates weren't quite as high as they are today. In March we were worried about geopolitical events around the world, but right now markets are trading through that.

It really underscores that geopolitical shocks tend to be short-term. It's earnings and fundamentals that drive markets.

Combination of the two. It's a story about a new capex spending cycle, electrification, near-shoring, and manufacturing trends. Capital spending has accelerated into the physical economy. 

We're a bit overbought technically, so could be due for a pause at some point. If oil remains above $100 for a sustained period, that could cause inflation to ratchet up. Geopolitical events can cause new concerns, along with US midterms in November.

That said, the third year of a presidential cycle (next year) is typically the best of the four for markets.

Inflation has ticked up a bit, but it's hard to say. When you look at futures markets, oil is forecast to be ~$70-80 by the end of this year. If those futures markets are correct, oil prices will ease and that should continue to help markets.

The semiconductor space is absolutely on fire, with the SOXX index up ~75% YTD. We're still structurally underbuilt on AI infrastructure. Earnings added a lot of fuel to the fire. We're too low on capex numbers, and hardware has all the pricing power (and that's showing up in a big way on margins).

The supply chain is very interesting. Seeing a massive supply/demand imbalance, largely due to the spike in increased demand around AI. Each evolution of AI is driving usage higher and higher, and each stage is growing exponentially.

Everybody's been investing in the hyperscalers, and why not? For the past few decades they've been absolutely dominant in terms of performance, earnings, and so on.

But what we're seeing now is that free cashflow is moving from the hyperscalers to semiconductors and the infrastructure layer. It's the semi and infra players who are cashing the cheques that the hyperscalers write. The market missed more than an extra half a trillion dollars in capex spend by hyperscalers for 2026. And all that extra $$ is going to the semi and infra spaces.

Definitely in the penalty box. No silver bullet. Workflows are being very much disrupted. Software is abundant, while hardware components are scarce. Invest in scarcity, and avoid abundance.

Stay long semiconductors, stay long infrastructure, and stay away from software.

Not only do we need to power these data centres on a grid basis, but we also need to worry about how the power is distributed within the data centre itself. 

It's also a geopolitical issue. China, for example, has abundant energy and it's cheap. In the US, it's much more expensive -- so it has to optimize power much more effectively.

Is the US-Iran war carries on, then gas and oil prices will remain high and translate into inflation. We already see higher prices at the gas pumps. US unemployment remains low at 4.3%, but employment growth is slowing, while unemployment in Canada is high. This all puts central banks in a tough spot; in Canada, rate cutting is done, but not in the US before the Iran war erupted. Central banks are waiting and seeing, but if inflation continues to climb, then central banks may be forced to raise interest rates. Slow growth and high rates could lead to stagflation which is not good. Manufacturing in the US has been expanding while services has been healthy, though. Earnings growth is coming through, largely driven by technology. Growth is projected at 23% this year and 15% in 2027. Analysts are not projecting a significant slowdown. The AI data centre build is a long-term secular growth theme, but the lack of power would slow that build. A pullback in that build is possible. 

Most companies have reported Q1 earnings at this stage. For the most part, earnings have been quite resilient despite the situation in the Middle East.

In US markets, most of the recovery has gone to AI-adjacent companies. A lot of consumer and industrial stocks remain fairly sluggish, especially for the low-end consumer.

It seems as though the market's expecting that big tech will continue to spend on AI, regardless of what returns they're earning on this capital. That's what's powering the strong performance of companies that supply the data centres. All that while the share prices of big tech companies themselves haven't been going up as much.

Canadian stock market is much more commodity-driven. Given what's happening in the Middle East, investors have largely forgotten about the upcoming renegotiations (even though that will be a much more consequential event for Canadian equities and the Canadian economy).

Overall, he expects quite a bit of volatility as parties position themselves. Ultimately there will be a successful renegotiation, as both countries need what each other is offering.

Because of what's going on in the Middle East, the US may want a more secure supply of natural resources of the kind that Canada has (sulpher, rare earths, oil). The focus for Mexico will be more along the lines of auto jobs and onshoring. So the details between Canada and Mexico will differ substantially.

Markets see right through the high oil prices and the US-Iran war and see only great earnings and nothing else. For the population that lives paycheque to paycheque, the oil price makes things worse while the other half are okay. Unfortunately, that's the state of the world. This should result in market volatility because the high oil price will matter. Also, if this happens long enough, wages will rise top keep up with higher prices. Things will get way worse before they get better. Also, US government debt is astronomical.

Inflation expectations for 30-year yield bonds: take the nominal and real return bonds and subtract the yield to arrive at the expecattion priced into the 30-year yield. Long term yields haven't been higher in more than 2 decades. Tariffs and geopolitical risks are fueling inflation. This is terrible because the US has $39 trillion in outstanding debt. T-bills are now at 3.3% and projected to keep rising. Trump wants to lower rates, but this will increase inflation expectations. If T-bills trend higher, then the cost of debt to GDP will become unmanageable. How well will the White House, treasury secretary and not Fed chief cooperate in the coming quarters.

He has taken some $$ off the table in energy (SU is a good example), and sporadically in other areas.

Everybody exited software, which is under pressure from AI. Then they went into oil, and subsequently trimmed it. The cyclical category of defense has also moved up as a conflict beneficiary. The narrative seems to be that, at some point, the US president will end the Iran conflict. Then we'd see energy retrace. 

It's been a great way for governments to harvest taxes off people, because when you move from winners to winners you have to pay taxes all the way through. This'll be a big year for everybody paying taxes come March 2027. It's an unappreciated risk that people need to think about.