Short-term market dynamics are 'relatively narrow': Strategist

Chip stocks have captured the attention of investors after becoming the heaviest-weighted sector within the S&P 500 (^GSPC) for the first time in history. BMO Wealth Management US Chief Investment Officer Yung-Yu Ma joins Morning Brief to share his insights on the market outlook.

Ma suggests that "the enthusiasm for AI is going to come and go in waves," acknowledging the unpredictable nature of sentiment shifts in the sector. He notes that it's "difficult to predict" exactly when and what developments will influence investor sentiment. While Ma believes that the "productivity gains and benefits from AI" will be enough to sustain continued gains in companies that contribute to the technology, he anticipates "a choppy path forward."

Regarding market rotation, Ma expresses concern about the current trend, stating: "It's certainly concerning in the short-term that we're seeing a relatively narrow market, and that narrowness has been increasing recently and really driven by fewer stocks... that's not what you want to see for market health."

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

This post was written by Angel Smith

Video transcript

With chips socks leading the rally this year.

And so far the sector overtaking software and being the heaviest weighted sector in the S and P 500 to break it all down where you can cash in on the A I hype.

We wanna bring in young Yu Ma BMO, a wealth management, us chief investment officer here, Young Yu I it's great to see you again.

So let's talk about some of that excitement that we're seeing play out from a broader markets perspective here.

When we look at the A I trade, it seemed to be losing a bit of steam going back to last week when you saw the reaction to Dell when we heard about some of the concerns here from sales force and the fact that hey, maybe demand isn't going to be living up to expectations here at least in the short term.

And now here we are Monday morning and we're seeing that excitement return once again when it comes to the A I trade.

What are you seeing just in terms of whether or whether or not you think this rally has legs?

Yeah, thanks Sean.

It's great to be here.

Uh we do think it has legs, but we do think the enthusiasm for A I is gonna come and go in ways and when the news and new information comes out, that sort of sparks new investor enthusiasm or renewed enthusiasm, it's very difficult to predict.

But over the medium term, we do think that the productivity gains and the benefits from A I will be apparent enough that the rally can continue and continue to increase spending in these areas that will help the companies that feed into this.

So overall, we're positive on A I, but we do think it's gonna be a choppy uh path forward.

And so all of these things considered, where do you think we'll continue to see overcrowding in certain trades or, or even some profit taking in their term?

Yeah, in the very short term, it's, it's a little bit difficult to gain.

I think that's a tricky play here because uh there is a lot of enthusiasm.

It's already baked into some of these A I stocks here.

And I do think that the trends for A I are positive in the medium term, but you know, when there's too much froth and when that sort of deflates a little bit and then re reflates is very difficult to play out here.

But we do think uh the medium term is quite favorable and you, I wanna bring up our chart of the day from our morning brief newsletter here this morning and talking about the fact that that broadening out that we had seen uh very briefly uh earlier this year and also at the end of last year that that's starting to lag just a bit and especially lagged in May.

It's like over the last several weeks when you take a look at that, some out there, some strategists have been saying that, hey, this is a bit worrisome given the calls that we started the year with.

And the importance here in order to see more of that rotation, are you at all concerned by some of the patterns that we've been seeing?

It is concerning.

It's certainly concerning in the short term that we're seeing a relatively narrow market and that narrowness has been increasing recently and really driven by fewer stocks.

So, you know, that's not what you want to see for market health.

We have seen at least uh recently last week as well.

A little bit of pick up in the small caps, which was nice to see.

So there are few areas of this sort of monitoring, but we don't want to see much more deterioration from here in terms of that breadth of the market and the, the sort of underlying fundamentals of the rally.

So it, it is concerning, but it's not something that right now would lead us to shy away from the market overall, you know, as you kind of think and, and assess the earnings season that we, we've in large part made through, I mean, there's a couple more retail companies that are gonna trickle out over the course of this week and a few B to B companies crowd strike later on this week as well.

All those things considered looking back at how some of the companies that have missed on earnings have been punished more than the historical averages and, and even those that have topped out, they're not getting rewarded to the same extent that we've seen before.

What's that set up for the rest of the year as we go through the future earnings cycles?

Yeah, there was just a lot of enthusiasm coming into the earnings season and as you mentioned, you saw huge punishments for uh, companies that didn't meet or exceed expectations by a sufficient amount.

Um, I think it depends when we go into the next earnings cycle, how it plays out going into them.

Is there a big enthusiasm ramp up pre earning cycle?

Did then the earnings, uh, announcements really have to meet and exceed or do we see some muted expectations going in?

So I think it's really about where we started the cycle and then how things play out and you have to take those two things together.

So I think it remains to be seen what the next month or two will be like if we get a renewed bout of enthusiasm that could, uh set us up for very high expectations going into the next earning cycle.

Is it, is it clear though that artificial intelligence can't just be the silver bullet that that gets deployed by companies at this juncture?

Well, I I think artificial intelligence intelligence is gonna be a big productivity enhancer over the medium term.

But when that actually shows up in the date is gonna be quite some time, probably a 2025 story.

Is it a silver bullet?

It can be a silver bullet.

Uh But that's something that plays out over time.

That's not going to be a silver bullet over the next month or two.

So, you know, we're going to get data, we're gonna get information.

Uh We saw another announcement by uh NVIDIA recently about the launch of some of its new and enhanced chips.

So this date and information is going to come and go in ways and that's going to create different bouts of enthusiasm in the market.

Uh in the medium term, we're very optimistic in the short term.

It's just a lot of uh choppiness and, and uh inflation and deflation that we have to uh deal with in the markets.

Y Ya BMO Wealth Management, us Chief Investment Officer.

Thanks so much for kicking off the week with us.

Thanks re