Why you shouldn't be afraid of AI slashing jobs: Strategist

While Nvidia (NVDA) is set to report its earnings this week as Fedspeak is underway, HSBC Global Private Banking and Wealth Management Americas CIO Jose Rasco joins Catalysts to discuss how the two may impact the market (^DJI,^GSPC, ^IXIC).

"The market is rebalancing risk and reward, and that's what you're seeing play out," Rasco explains. He points to the diffusion of new technologies, as companies across all sectors are looking to find efficiencies and expand revenues: "That's how we view the next phase of investing in this bull market, is the broadening out of the tech sector and the broadening out of these technologies throughout the other sectors in the economy."

He adds that there are signs of growth momentum despite the cyclical side of the economy slowing. While consumers are cutting back on spending habits, "real earnings, real incomes are still positive. That's a huge factor." Rasco explains that secular drivers are a sign of an economic slowdown rather than a recession and that investors can play the broadening in a higher-for-longer environment by focusing on the technology, communication services, and healthcare sectors.

As all eyes are on the Federal Reserve's next interest rate decision, Rasco believes the next move will be a cut. He says that Nvidia and the AI boom will contribute to deflation across several sectors, ultimately resulting in lower prices for goods and services: "I think over the next 12 to 24 months, that's going to help push the inflation rate down as well."

He explains that AI flooding the market is not necessarily bad news for jobs, comparing the situation to the "Amazon effect." Rasco says, "Many, many politicians talked about the Amazon effect and how horrible that was because we lost 300,000 jobs in retail in the last business cycle. We gained 1.4 million jobs in logistics, distribution, warehousing, trucking, and they were higher-paying jobs. So yes, we're in for change. And yes, change is scary. But we think we're going to have a better economy, more resilient economy, and we think smarter cities and all that will benefit the average American."

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

This post was written by Melanie Riehl

Video transcript

As markets are stalling a bit ahead of those in video.

Earnings fed speak is continuing.

We had fed Governor Christopher Waller saying this morning that he needs to see several more months of good inflation data before from his perspective, cutting back on rates.

Now traders still pricing into rate cuts this year.

That is according to our beloved CMF watch tool.

But even in a higher longer environment, our next guest thinks that earnings growth could give markets more room to run here in studio.

We have Jose Roscoe HS BC Global Private Banking, America's Chief Investment Officer, Jose, thanks for coming in studio.

We appreciate it.

We're talking a little bit here about the NVIDIA of it all and the fed.

Speak of it all from your perspective.

Which one is going to drive us into the close at the end of this week is gonna be Jensen or Jay.

I think uh a little bit of both probably.

But I think and, and the market is rebalancing risk and reward, right?

And that's what you're seeing play out which we see all the time.

And I think what you just talked about is key, really key remember 9495 you guys weren't, aren't old enough to remember that, but I am clearly.

Um And if you look at 9495 the internet came in.

Internet companies did well, but they made no money.

Multiple soared, right?

And that was risk, multiples have not soared.

Here.

We have a long way to go on multiple expansion on this market.

Still.

Number two, the broadening out the con the convergence of technologies one in one equals three and the diffusion of those technologies throughout the economy.

You talked about A I, if you're in the movie business, if you're in the energy business, you're using A I, you're using light or you're using all these new technologies to make yourself more efficient on the cost side and to expand revenues.

That is just beginning the essay, if you look at the tech sector X the Magnificent Seven, it was under performing the market as of two weeks ago, year to date.

Now it is almost with the Magnificent Seven.

It has soared past.

So we're seeing that broadening out already happen.

And that's how we view the next phase of in investing in this bull market is the broadening out of the tech sector and the broadening out of these technologies throughout the other sectors in the economy.

Jose what do you think that upside then looks like given the fact that we're almost just to getting started and multiples aren't near those concerning levels at least at all.

Now.

Well, the, the problem is we assign, you know, these, these time frames, right, because year end, because everybody gets paid year end.

Right.

We, and more, more money managers want mark to market at year end.

But if you look at the 9495 experience, again, the fed raised rates, they doubled rates from 3 to 6 and they cut them 75 basis points over the next 79 months.

That was it fed funds averaged 5.4% throughout the rest of that bull market.

So in my mind, you've got a growth momentum and the cyclical side of the economy is slowing.

As you both mentioned, look at the retail numbers, consumers are going from steak to hamburger, right?

But real earnings, real incomes are still positive.

That's a huge factor.

Um And then you've got these secular drivers of growth that are absolutely monstrous and there are four of them, right?

Tech innovation and, and tech and health care in particular, the re ons showing of jobs and near shoring and the re industrialization of the US.

Look at construction and manufacturing facilities growing at more than 50%.

50 here in this country.

Number one economy in the world, most developed advanced economy in the world growing at 50% we're building and you talked about energy.

Look at micro grids, look at off off grid energy production, co location of facility facilities.

Now that is gonna help in a lot of ways, but that's not really in the public markets yet, but that's coming as well.

So how can investors play the broader a in a higher for longer environment, particularly when the debt picture looks so different across a lot of companies in the S and P?

Yeah.

Uh look, we, we think the consumer continues to look good, not great but good technology, obviously com services, obviously two sectors, we like a lot health care we think does.

Well, if you look from the fed pause, historically, when you go into a mid cycle slowdown, the key question is we're going into recession or slow down.

We think because of those secular drivers, we avoid recession, right?

So if you're going into a mid cycle slowdown, the markets from the fed pause, the three major indices 25 to 30% over the next 12 months.

So we're right on track for that.

We're fine and, and we think you wanna focus as well on financials.

We like financials because as the yield curve un inverts, right?

Or de inverts, I don't know what the made up word is of the day, you get that positive slope to the yield curve.

Financials should do well.

And as the cyclical side slows, we'll see some of that creative destruction.

You'll see some M and A right and a lot of new companies popping up.

So I'm curious what you make of the activity that we've seen in the bond market because here we are, we have the 10 year yield back just around 4.4.

What, what is the bond market telling you just in terms of the read that we're seeing for what the Fed is going to do?

What exactly that means for equity position and then maybe some of that volatility that we'll likely see at least in the short term.

Well, you know, it's interesting, right?

Because the Fed communicates and everybody listens Janet Yellen communicates and everybody seems to ignore it.

And I don't know why she warned us when we reached, when we pierced the debt ceiling last year.

She said we have to issue a lot of debt.

Almost a third of us government debt had to be reissued this year that is coming in blurbs and, and you know, like hu huge blobs that are hitting the market, right?

And that if you look at the fall, they issued a ton of paper, what happened in the market rates backed up?

We had trouble digesting it.

Right.

Same happened in March and April.

We think the direction for rates is down.

We've seen the the policy rate pause.

The next move we think is down, inflation will stubbornly continue to move lower.

Everybody talks about tech, right?

NVIDIA A I, all these wonderful things.

Nobody focuses on what, what it, what it, what does it contribute?

Deflation, deflation in certain sectors, health care et cetera.

Fin fintech.

You're gonna see a lot of lower prices for goods and services.

I think over the next 12 to 24 months, that's gonna help push the inflation rate down as well.

That's so important though, what you just said because that's what the F once, that's what's like really driving the conversation right now.

What is the main catalyst for that in terms of something that's not gonna cause too much pain?

Right.

How do we get the goldilocks of that scenario?

Yeah.

Well, and that's the fine line that Powell's talked about that.

He's walking.

Right?

And we think they can pull it off.

I mean, people act like there's never been a mid cycle slowdown.

It's happened twice that we know of and you could argue late night, you know, the most recent before COVID could have been another, right?

We were on our way to that we felt.

Um, so we've seen it before and, and the trick is to make sure that the unemployment rate doesn't go up too much.

There will be a long term rise in the unemployment rate due to A I but what nobody talks about is let's go back to the Amazon effect.

Many, many politicians talked about the Amazon effect and how horrible that was.

Right, because we lost 300,000 jobs in retail in the last business cycle.

We gained 1.4 million jobs in logistics, distribution, warehousing, trucking and they were higher paying jobs.

So yes, we're in for change and yes, change is scary.

But we think it's gonna, we're gonna have a better economy, more resilient economy and, and we think smarter cities and all that will benefit the average American.