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

Midterm elections are coming up, and those typically introduce a lot of policy uncertainty. 

Continued overhang of capex in AI and data centres among the hyperscalers -- this year it's going to be show me the ROI (return on investment). They'll need to show how they're turning investment dollars into revenue. 

His firm is being fairly patient. When you look at what the capex was last year, it was around $440B. When they reported Q4, the numbers have come up dramatically. Projections are for $750B for 2026, and $900B for 2027. Some of them have over $1T as we approach 2030.

Those capex numbers have to translate into profits for the hyperscalers. Typically, hyperscalers would show 2-3 times their capex in terms of profits over the next several years.

If we look at current estimates for profitability for these companies, they have to come up dramatically to support the ROI expected from the capex spend.

People are moving from the speculative hype of last year toward measurable productivity. Generative AI will have more to do with cost efficiency and margin expansion than with pure revenue growth. 

In the news over the last month or so we've seen how the productivity of companies and professionals (lawyers, accountants) is benefiting dramatically from using these tools.

Lots of chatter on this topic right now. These would help the US banks, by way of supporting the consumer and overall lending. Positive for stocks broadly speaking, as well as for the banks.

Microsoft, Amazon, Netflix and other tech names are getting rotated out and into defensive stocks, like value and dividend stocks. Also are seeing flows out of the US and into Canada. She's nervous about the markets, but less so about the Canadian. Valuations are historically high in energy, but where else can you put your money? The energy trade isn't over yet (i.e. Enbridge). Gold is the flight to safety, but how safe is it when multiples are this high? She likes Canadian banks, but have moved up so sharply the past year so won't buy them short term, but likes them long.

Real estate stock charts are flat over 5 or more years, though still trading at low PE's compared to the market. Pay a good yield. Real estate is a great place to be.

Maybe not obvious, but it definitely aligns with what we've seen over the past 10 years in terms of seasonal weakness during February/March. Hard to pinpoint just one factor.

Three underpinnings are quite supportive of the outlook for the year.

Economic backdrop -- global growth trend for 2026 and into 2027 is relatively healthy. Global economy expected to grow at a faster clip than over the past 3 years. Canada's economy is accelerating closer to its historical pace. On the macro side, employment and inflation are supportive.

Corporate fundamentals -- across the US, the eurozone, and Japan have been coming in well above expectations. Guidance for the remainder of the year has been very strong. 

Markets -- broadening out.

In the US, there's a one-time tax break coming around April that will provide a boost.

For the Canadian consumer, we're seeing about 100 bps of interest rate easing and downward momentum in terms of inflation. That will benefit the Canadian consumer, as will some of the spillover effect from fiscal announcements.

The key thing to know is that the effect of monetary policy is immediate (floating rate mortgage, line of credit, etc.). However, it's imprecise. 

Fiscal policy is very precise, but it makes its way into the real economy at a much slower pace. It can have a lower material impact over a longer period of time. Think defense spending, housing, key federal projects, support for the auto sector. These will be tailwinds for the consumer in the years to come.

Hard to tell if they're overspending. What he can say is that their history of deploying capital can help us decide. Early days, and general consensus is that it's a bit of sticker shock.

MSFT, for example, is expected to spend ~$130B over the next 12 months. He looks at their capital allocation decisions of the past compared to generated returns. Majority of the Mag 7's have generated upwards of 20-30% ROIC.

For those of the Mag 7 that have reported, he's seen strong underlying trends such as strong corporate demand and business fundamentals that support the buildout and justify the spending.

Demand is high, and it's being driven by a lot of consumer and real-time usage of AI across the global ecosystem. Strong demand, and he sees strong visibility to monetization efforts. Won't happen overnight, but tidbits of numbers here and there support the long-range view.

There all these extreme events that could happen (such as CUSMA blowing up). His team looks at the risk in the market from a probability point of view. If an event has over 50% of occurring, then for sure it will be factored into their assessments.

CUSMA blowing up would be meaningfully detrimental to Canada, but it might be even worse for the US. It's in the range of extreme scenarios, but not his base case. The agreements that have been made globally have been way more digestible than the initial sticker shock of "liberation day" tariffs.

US president is shooting from the hip and testing who'll flinch first. Nadeem expects a fairly reasonable outcome from CUSMA negotiations. Once we achieve closure on this deal, then companies and consumers can look past it and start deploying capital.

In logistics and wealth management, for example, these services businesses are deeply entwined with other products that won't be disrupted by AI. The story has switched overnight from companies that can use AI to grow productivity and earnings to being disrupted by AI. This is really inaccurate.

If you look at the last 3-6 months, we've seen a bit of a broadening of the market cycle. It's no longer all about tech and communications. Technology is starting to float to the bottom of the 11 sectors in terms of performance. Now other cyclicals are starting to perform well -- industrials, basic materials, etc. 

It's great for continued market upside. 

The concern really is about how much money they're spending. If you look at the hyperscalers, we're talking about 100's of billions of dollars. The market's saying "show me" that what you're spending is going to produce great results.

We're seeing a shift -- instead of the build up, we're going to the build out that's the infrastructure required around data centres and AI.