The semiconductor sector is undergoing a correction as interest rate cut expectations dwindle, prompting concerns about the impact on these high-growth, technology-driven stocks. Wedbush Enterprise Hardware Analyst Matt Bryson joins Yahoo Finance to discuss the dynamics shaping the chip industry.

Bryson acknowledges that the rise of generative AI has been a significant driving force behind the recent success of chip stocks. While he believes that AI is shifting “the way technology works,” he notes it will take time. Due to this, Bryson highlights that “significant investment” will continue to occur in the chip market, fueled by the growth of generative AI applications.

However, Bryson cautions that as interest rates remain elevated, it could “weigh on consumer spending.” Nevertheless, he expresses confidence that the AI revolution “changing the landscape for tech” will likely insulate the sector from the effect of high interest rates, as investors are unwilling to miss out on the “next technology” breakthrough.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance.

This post was written by Angel Smith

Video Transcript

BRAD SMITH: As rate cut bets shift, so have moves in one sector, in particular. Shares of AMD and Intel, both down over 15% in the last 30 days. The Philadelphia Semiconductor Index, also known as Sox, dropping over 10% from recent highs, despite a higher rate environment.

Our next guest is still bullish on the sector. Matt Bryson, Wedbush Enterprise Hardware analyst, joins us now. Matt, thanks so much for taking the time here. Walk us through your thesis here, especially, given some of the pullback that we’ve seen recently.

MATT BRYSON: So I think what we’ve seen over the last year or so is that the growth of generative AI has fueled the chip stocks. And the expectation that AI is going to shift everything in the way that technology works.

And I think that at the end of the day, that that thesis will prove out. I think the question is really timing. But the investments that we’ve seen that have lifted NVIDIA, that have lifted AMD, that have lifted the chip stock and sector, in general, the large cloud service providers, building out data centers. I don’t think anything has changed there in the near term.

So when I speak to OEMs, who are making AI servers, when I speak to cloud service providers, there is still significant investment going on in that space. That investment is slated to continue certainly into 2025. And I think, as long as there is this substantial investment, that we will see chip names report strong numbers and guide for strong growth.

SEANA SMITH: Matt, when it comes to the fact that we are in this macroeconomic environment right now, likelihood that rates will be higher for longer here, at least, when you take a look at the expectations, especially following some of the commentary that we got from Fed officials this week, what does that signal more broadly for the AI trade, meaning, is there a reason to be a bit more cautious in this higher for longer rate environment, at least, in the near term?

MATT BRYSON: Yeah. I think certainly from a market perspective, high interest rates weight on the market. Eventually, they weigh on consumer spending. Certainly, for a lot of the chip names, they’re high multiple stocks.

When you think about where there can be more of a reaction or a negative reaction to high interest rates, certainly, it has some impact on those names. But in terms of, again, AI changing the fundamental landscape for tech, I don’t think that high interest rates or low interest rates will change that.

So when you think about Microsoft, Amazon, all of those large data center operators looking at AI, potentially, changing the landscape forever and wanting to make a bet on AI to make sure that they don’t miss that change, I don’t think whether interest rates are low or high are going to really affect their investment.

I think they’re going to go ahead and invest because no one wants to be the guy that missed the next technology wave.

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It’s time to ask a rude question: Is Canada still worth investing in?

Before you rush to deliver an appropriately patriotic response, think about the issue for a moment.

A good place to begin is with the federal government’s announcement this week that it is forming a task force under former Bank of Canada governor Stephen Poloz. The task force’s job will be to find ways to encourage Canadian pension funds to invest more of their assets in Canada.

Wooing pension funds has become a high-priority matter for Ottawa because, at the moment, these big institutional investors don’t invest all that much in Canada. The Canada Pension Plan Investment Board, for instance, had a mere 14 per cent of its massive $570-billion portfolio in Canadian assets at the end of its last fiscal year.

Other major Canadian pension plans have similar allocations, especially if you look beyond their holdings of government bonds and consider only their investments in stocks, infrastructure and real assets. When it comes to such risky assets, these big, sophisticated players often see more potential for good returns outside of Canada than at home.

This leads to a simple question: If the CPPIB and other sophisticated investors aren’t overwhelmed by Canada’s investment appeal, why should you and I be?

It’s not as if Canadian stocks have a record of outstanding success. Over the past decade, they have lagged far behind the juicy returns of the U.S.-based S&P 500.

To be fair, other countries have also fallen short of Wall Street’s glorious run. Still, Canadian stocks have only a middling record over the past 10 years even when measured against other non-U.S. peers. They have trailed French and Japanese stocks and achieved much the same results as their Australian counterparts. There is no obvious Canadian edge.

There are also no obvious reasons to think this middle-of-the-pack record will suddenly improve.

A generation of mismanagement by both major Canadian political parties has spawned a housing crisis and kneecapped productivity growth. It has driven household debt burdens to scary levels.

Policy makers appear unwilling to take bold action on many long-standing problems. Interprovincial trade barriers remain scandalously high, supply-managed agriculture continues to coddle inefficient small producers, and tax policy still pushes people to invest in homes rather than in productive enterprises.

From an investor’s perspective, the situation is not that appetizing. A handful of big banks, a cluster of energy producers and a pair of railways dominate Canada’s stock market. They are solid businesses, yes, but they are also mature industries, with less than thrilling growth prospects.

What is largely missing from the Canadian stock scene are big companies with the potential to expand and innovate around the globe. Shopify Inc. SHOP-T and Brookfield Corp. BN-T qualify. After that, the pickings get scarce, especially in areas such as health care, technology and retailing.

So why hold Canadian stocks at all? Four rationales come to mind:

• Canadian stocks have lower political risk than U.S. stocks, especially in the run-up to this year’s U.S. presidential election. They also are far away from the front lines of any potential European or Asian conflict.
• They are cheaper than U.S. stocks on many metrics, including price-to-earnings ratios, price-to-book ratios and dividend yields. Scored in terms of these standard market metrics, they are valued more or less in line with European and Japanese stocks, according to Citigroup calculations.
• Canadian dividends carry some tax advantages and holding reliable Canadian dividend payers means you don’t have to worry about exchange-rate fluctuations.
• Despite what you may think, Canada’s fiscal situation actually looks relatively benign. Many countries have seen an explosion of debt since the pandemic hit, but our projected deficits are nowhere near as worrisome as those in the United States, China, Italy or Britain, according to International Monetary Fund figures.

How compelling you find these rationales will depend upon your personal circumstances. Based strictly on the numbers, Canadian stocks look like ho-hum investments – they’re reasonable enough places to put your money, but they fail to stand out compared with what is available globally.

Canadians, though, have always displayed a striking fondness for homebrew. Canadian stocks make up only a smidgen of the global market – about 3 per cent, to be precise – but Canadians typically pour more than half of their total stock market investments into Canadian stocks, according to the International Monetary Fund. This home market bias is hard to justify on any rational basis.

What is more reasonable? Vanguard Canada crunched the historical data in a report last year and concluded that Canadian investors could achieve the best balance between risk and reward by devoting only about 30 per cent of their equity holdings to Canadian stocks.

This seems to be more or less in line with what many Canadian pension funds currently do. They have about half their portfolio in equities, so devoting 30 per cent of that half to domestic stocks works out to holding about 15 per cent of their total portfolio in Canadian equities.

That modest allocation to Canadian stocks is a useful model for Canadian investors of all sizes. And if Ottawa doesn’t like it? Perhaps it could do more to make Canada an attractive investment destination.

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You might not think it’s possible to outperform the average Wall Street professional with just a single investment. Fund managers are highly educated and steeped in market data. They get paid a lot of money to make smart investments.

But the truth is, most of them may not be worth the money. With the right steps, individual investors can outperform the majority of active large-cap mutual fund managers over the long run. You don’t need a doctorate or MBA, and you certainly don’t need to follow the everyday goings-on in the stock market. You just need to buy a single investment and hold it forever.

That’s because 88% of active large-cap fund managers have underperformed the S&P 500 index over the last 15 years thru Dec. 31, 2023, according to S&P Global’s most recent SPIVA (S&P Indices Versus Active) scorecard. So if you buy a simple S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO), chances are that your investment will outperform the average active mutual fund in the long run.

Why is it so hard for fund managers to outperform the S&P 500?

It’s a good bet that the average fund manager is hardworking and well-trained. But there are at least two big factors working against active fund managers.

The first is that institutional investors make up roughly 80% of all trading in the U.S. stock market — far higher than it was years ago when retail investors dominated the market. That means a professional investor is mostly trading shares with another manager who is also very knowledgeable, making it much harder to gain an edge and outperform the benchmark index.

The more basic problem, though, is that fund managers don’t just need to outperform their benchmark index. They need to beat the index by a wide enough margin to justify the fees they charge. And that reduces the odds that any given large-cap fund manager will be able to outperform an S&P 500 index fund by a significant amount.

The SPIVA scorecard found that just 40% of large-cap fund managers outperformed the S&P 500 in 2023 once you factor in fees. So if the odds of outperforming fall to 40-60 for a single year, you can see how the odds of beating the index consistently over the long run could go way down.

What Warren Buffett recommends over any other single investment

Warren Buffett is one of the smartest investors around, and he can’t think of a single better investment than an S&P 500 index fund. He recommends it even above his own company, Berkshire Hathaway.

In his 2016 letter to shareholders, Buffett shared a rough calculation that the search for superior investment advice had cost investors, in aggregate, $100 billion over the previous decade relative to investing in a simple index fund.

Even Berkshire Hathaway holds two small positions in S&P 500 index funds. You’ll find shares of the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) in Berkshire’s quarterly disclosures. Both are great options for index investors, offering low expense ratios and low tracking errors (a measure of how closely an ETF price follows the underlying index). There are plenty of other solid index funds you could buy, but either of the above is an excellent option as a starting point.

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Want to Outperform 88% of Professional Fund Managers? Buy This 1 Investment and Hold It Forever. was originally published by The Motley Fool

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