Feb 3, 2025, 12:10 PM ETWebinar

AI Shake-Up and US Exceptionalism

The recent "DeepSeek" AI shakeup is viewed as too early to fundamentally alter the long-term AI investment narrative, though it serves as a "warning shot" regarding market assumptions.
Dominic Wilson identifies that while faster adoption and lower-cost technologies are positive for real productivity, predicting persistent winners is historically difficult, citing lessons from the 1990s and 2000s.
A critical distinction is drawn between real innovation/productivity gains and the ability of companies to maintain above-normal returns by erecting barriers against new entrants.
The event marks a significant paradigm shift as it represents the first major AI innovation emerging from outside the U.S., challenging the previous "U.S.-only" narrative.
Josh Schifrin notes that despite a volatile Monday, the S&P 500 remained flat, with more stocks up than down, indicating the market quickly compartmentalized the event.
The "simplicity" of the previous AI trade (owning a few large-cap names) is replaced by a more complex ecosystem where investors must evaluate competitors versus champions.
The speakers maintain that the cyclical impulse for corporate spending on AI will persist due to competitive incentives, regardless of whether specific players are the ultimate winners.

The Fed is currently in a "watch and wait" mode, with policy described as "meaningfully restrictive," suggesting the next move is likely rate cuts if economic weakness emerges.
Triggers for further cuts are identified as a weakening labor market or clearer progress toward the 2% inflation target.
There is a high probability that the Fed could hold rates steady for a significant portion of the year, particularly until there is clarity on the new administration's full policy suite.
The speakers suggest the Fed may gradually raise its long-run terminal rate projection from the current ~3% to around 3.5% by year-end.
Dominic Wilson views the Fed's stance as reassuring; there is no hint of tightening, and they remain ready to act quickly to protect growth if a significant downturn occurs.
Josh Schifrin forecasts a "bull steepener" in the yield curve over the coming year, driven by potential Fed cuts and term premium increases.
Josh adds that oil prices are expected to trend lower through 2026-2027, supported by ample supply held off the market and an administration focused on cost-of-living issues.

The market has priced in a "Goldilocks" scenario (strong growth, low inflation) following a start to the year that has been better than initial fears regarding the new administration.
Dominic Wilson warns that tariffs and trade policy risks may be underpriced, creating potential "downside tails" to growth that the market could not fully anticipate.
U.S. Exceptionalism remains a core view regarding growth and earnings, but the trade has become more complex due to pricing in tariff risks and potential dollar weakness.
The dollar is viewed as having a "tariff premium" embedded; while long-dollar exposure remains valuable for tail risk protection, the one-sided bullishness of late 2024 has diminished into a two-sided trade.
Josh Schifrin sees the administration's pro-business attitude as validating a strong growth environment, though he cautions that the path will likely be choppier with higher volatility than previous years.
The S&P 500 has gained approximately 3% for the month, while the AI sector is up 6-8%, suggesting a pattern of higher returns accompanied by increased friction.

Josh Schifrin maintains a conviction in long global equities, viewing the current environment as the continuation of a bull market.
The team expects the yield curve to grind to steeper levels, though the specific mechanics (front-end rally vs. back-end sell-off) depend on the interplay between fiscal policy, tax plans, and economic data.
The speakers acknowledge the likelihood of a new Fed Chair being appointed in 2026, which could introduce volatility regarding the term premium and long-end rates.
Dominic Wilson suggests that portfolio construction must now account for tradeoffs between U.S. equities, the dollar, and interest rates that were less apparent at the end of 2024.

The speakers identified mundane tasks such as locating remote controls and cleaning as the most immediate desires for AI intervention.
For financial professionals, the highest-value AI application is the rapid aggregation of historical data (e.g., analyzing assets across 15 past Fed easing cycles) which currently takes hours to execute manually.
A primary constraint on current AI utility for work is reliability; the technology requires rigorous cross-checking and source verification to be trusted for critical decisions.
The speakers express optimism that AI capabilities to iterate quickly, challenge conclusions, and verify sources will advance rapidly, potentially compressing research time from hours to seconds.