The current economic landscape is undeniably "addicted to AI spending," a stark reality highlighted by Sarat Sethi, DCLA managing partner and portfolio manager, during a recent discussion on CNBC's 'Squawk Box.' Sethi, also a CNBC contributor, spoke with the anchor about the pervasive influence of artificial intelligence on market trends, the distribution of investment opportunities, and the underlying currents of volatility. His commentary provided a crucial perspective for founders, venture capitalists, and AI professionals navigating an increasingly concentrated market.
Sethi’s primary observation underscores a critical insight: the substantial capital expenditure in data centers, power infrastructure, and advanced chips, largely driven by AI, is fueling a "K-shaped economy." This phenomenon sees a select group of AI-centric companies skyrocketing in value, while other sectors struggle to keep pace. While the big tech "hyperscalers" like Meta and Google are indeed pouring massive investments into AI, ensuring their continued dominance, Sethi cautions that much of their anticipated growth may already be priced into their valuations. This creates a competitive environment where future margins could face significant pressure.
The frantic pace of deals and partnerships among these tech behemoths, from Nvidia's collaborations with Oracle to Meta's potential alliances with Google, illustrates a collective effort to secure positions and prevent any single entity from achieving monopolistic control. AMD, Intel, and Broadcom are also deeply entrenched in this battle for AI infrastructure supremacy. These companies are generating positive cash flow and exhibiting robust growth, yet the sheer volume of investment suggests a future where competitive intensity will likely erode some of the extraordinary margins currently enjoyed.
This leads to Sethi’s second core insight: the market, while undeniably shaped by AI, demands a broader investment perspective. He employs a compelling military analogy, stating, "The generals are leading, but where are the soldiers going to be? Are the generals going to come back or do we need the soldiers to catch up? And I think that's where the opportunity is." This analogy suggests that while the AI giants (the "generals") have commanded the front lines, the next wave of opportunity lies in identifying and investing in the "soldiers"—the diverse sectors and companies that have been overshadowed but possess strong fundamentals and significant growth potential.
Sethi advocates for strategic diversification, urging investors not to "put all your eggs in one basket." He points to sectors like healthcare, citing Johnson & Johnson (JNJ) as an example. JNJ, by shedding its orthopedic products and focusing on pharmaceuticals, robotics, and vision, is poised for double-digit growth, trading at a reasonable 17 times earnings. Similarly, financial institutions like Morgan Stanley (MS), with its wealth management division, offer compelling growth prospects. Even the "dogs of the Dow," companies that have lagged, such as Air Products (APD), might present undervalued opportunities, having seen their stock decline by 20% over the year.
The travel sector, too, presents overlooked potential. Despite current geopolitical uncertainties, the "premiumization of flights being full" indicates strong underlying demand that could translate into significant returns for companies like Delta Air Lines (DAL), which has remained relatively flat for the year. Sethi emphasizes that these sectors offer viable pathways for growth, especially as the broader economy normalizes and interest rates potentially decline.
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Sethi's third insight addresses the recent market volatility, attributing it to "some breakage in the system, especially with leverage and credit." While he notes the decoupling of Bitcoin from traditional markets as a positive sign, preventing widespread correlation, the true extent of credit exposure within pension funds and insurance companies remains an open question. This underlying fragility suggests that while the market has shown resilience, future "pullbacks" driven by geopolitical events or dollar decisions are probable.
Ultimately, Sethi maintains an optimistic outlook for the overall markets in the coming years, but he cautions against expecting a smooth upward trajectory. "It's not going to be the straight ride we had from Liberation Day. It's going to be bumpy going into year-end and the first quarter." For sophisticated investors, this implies a need for vigilance, strategic rebalancing, and a willingness to explore opportunities beyond the immediate, high-flying AI narrative. The crowded AI trade has, in effect, created fertile ground in other areas, making "exposure to other sectors besides AI really important," as they have been "crowded out just by the AI trade."
