Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi strategist Drew Pettit assesses the damage from Monday’s tech sell-off,
“Valuations for Artificial Intelligence were elevated but seemingly justified based on consensus estimates. To us, [Monday’s] selloff was a repricing of fundamental risks emerging from DeepSeek … We review the Growth setup and develop some scenarios to stress our what’s priced in framework. This leads us to a maniacal focus on revisions and guidance/commentary, which if positive, could re-instill some confidence in the early winners. While this plays out, Artificial Intelligence remains a top theme … Artificial Intelligence Enablers, think companies building infrastructure, were down significantly led by Semiconductors, Tech Hardware, and Capital Goods … Not all Growth themes faced selling pressure, including some with relatively high correlation to Artificial Intelligence. Software-as-a-Service, FinTech, Digital Leisure, and Cyber Security have correlations above 0.60 to Artificial Intelligence but posted gains. Conversely, Data Storage saw more significant losses than the more diversified Artificial Intelligence portfolio. Beware of Estimate Risk — Our Artificial Intelligence basket is still pricing in 11-18-per-cent annualized EPS growth over the next three years after the selloff. Analysts will likely await management color before making any revisions. However, if analysts cut estimates 10 per cent, consensus EPS CAGR would fall below the low end of our implicit growth range. This underscores the importance of confidence in fundamental trajectories”
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BMO senior economist Robert Kavcic noted that domestic stocks were unfazed by Nasdaq volatility,
“AI-related equities were hammered on Monday on concerns that DeepSeek’s cheaper AI model development will undermine U.S. counterparts, especially hardware providers like Nvidia. To say that AI-related equities have been on a powerful run would be an understatement, driving the Nasdaq to record highs in recent weeks and more than double levels seen at the start of 2020—that doubling in 5 years comes despite a global pandemic and aggressive tightening cycle. As always, high-growth areas are driven by future expectations, and if the AI development calculus changes, so too will valuations—hence the market concern. Meantime, defensive and rate-sensitive areas of the market—i.e., much of the TSX—were just fine. In those corners, valuations aren’t stretched (Canada is actually reasonably cheap), and the rally in bond yields helped”
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Goldman Sachs chief U.S. strategist David Kostin warned clients that U.S. stocks are not priced for retaliatory tariffs,
“The equity market appears to be pricing some risk of targeted US tariffs, but little risk of retaliatory or universal tariffs. A basket of stocks with supply chains in China has lagged its macro-modeled returns since Election Day, as has a group of Auto stocks. This underperformance likely reflects the risk of tariffs on imports from China and automobiles that are our economists’ base case expectation. In contrast, a basket of stocks with high sales in China, which could suffer from retaliatory tariffs on US goods, and a basket of stocks at risk from broad global tariffs have both outperformed their macro-modeled returns, showing little signs of concern … Absent any major policy surprises, we expect earnings growth of 11 per cent in 2025 will drive the S&P 500 to 6500 by year-end (up 7 per cent). Next week is the busiest week of the 4Q earnings season with 33 per cent of market cap reporting results, including four of the Magnificent 7 stocks”
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Diversion: “The Worst Page on the Internet” – The Atlantic