Hey, everyone, I'm Kevin Gordon, Senior Investment Strategist at Schwab, and I'm here today to answer your questions on the markets and economy. Here we go.
Alright, here's a good one. "AI investments can tie up a lot of cash. Are firms over-investing in that space?" Well, first of all, over-investing is in the eye of the beholder. It depends on the sector. It depends on the size of the firm. It depends on where they're investing that money. I will say if you do look at the larger companies in the S&P 500, typically, today, they are proxied as the Magnificent Seven, or Mag 7, for short. If you look at how much they're spending on capex and how much of that has grown as a share of the overall S&P 500, it's a pretty significant chunk of overall capex in that index that is just seven companies. So by definition, or mathematically, you can look at that and say, yes, they're over-investing. But I think that you need to also look at it in the context of the sectors that are involved in the AI trade or in that theme. It's not just tech. It spans communication services, it wraps in utilities with it, it also wraps in the energy sector, and to some extent industrials and materials. So it is pretty broad-based and far-reaching across sectors. But when you're analyzing this at the company level, at the industry level, especially from an investment perspective, I think you need to keep in mind what the company or what the industry's balance sheet looks like, what the strength and the fundamentals look like, and then use that to judge whether it is classified as an overinvestment.
Alright, this next one says, "Will foreigners continue to buy our debt?" So this was a really big topic and issue, actually, earlier this year where a lot of investors were wondering whether foreigners are going to step back from buying U.S. assets or buying U.S. debt in the wake of the Liberation Day announcement for the pretty extreme and aggressive tariffs that the US had announced for imports coming from all over the world. And the concern was that if foreigners stopped buying a lot of our debt, what was that going to mean for interest rates? What was that going to mean for growth here? Because when we're running such large budget deficits in the United States, which we've been doing for quite a while now, really for the better part of the past couple of decades, if you don't have a lot of people willing to step in to buy that debt, there are concerns around interest rates going higher, bond prices moving lower, and in all, becoming a little bit of an issue for the treasury system and the treasury market. But so far in the data that we've seen, and we really actually only have it through the end of July, it's just the lag nature of the data that we get from the Treasury Department, but so far what we've seen is that there hasn't been this widescale push away from U.S. debt. Foreigners have been acquiring U.S. treasuries at a pretty solid pace, and there hasn't been much disruption, whether you're looking over the past six months, or whether you're looking over the past 12 months. So all in all, we haven't seen many foreigners pulling back from buying our debt.
Alright, this is a good question. "What was that chart behind you when you were on the Prof G Markets podcast?" So for someone who looks at a lot of charts, that is by far my favorite chart of all time. It is the emotional roller coaster when it comes to investing. So if you look at it closely, there's a lot of emotions in there. There's panic. There's despair. There's optimism. There's euphoria. And for me it really puts into a picture one of my favorite quotes of all time, certainly my favorite investing quote, which comes from the late, great Sir John Templeton. And he said that bull markets are born out of pessimism, they grow on skepticism, they mature on optimism, and they die on euphoria. And I think that's a great quote for investing because in nowhere is there anything about earnings or anything about multiples. It's really all based on emotions and how people respond to markets.
Okay, someone asks, "Is PE as relevant today as it was in the '90s, and how do we compare multiples in this AI age with similar companies from 30 years ago?" So this is a topic of conversation all over Wall Street and Main Street today, especially when I'm at client events. And I think that the one thing to keep in mind with any multiple, whether it's price-to-earnings, whether it's price-to-sales, you can actually use it as a gauge of sentiment. So you can look at times when PEs get really high or when they get really low, and that actually tells you that either investors are willing to pay a lot of money for companies like they were in the late '90s or the early 2000s in the tech space, and even today. So my thinking about this and how we think about this when we look at markets is as the US economy has become more tech-centric over time, more of a knowledge- and innovation- and services-driven economy, the tech sector has grown alongside that in the market. So it's justified in that sense, but that doesn't mean that you can't get stretched multiples sometimes, that doesn't mean that something like price-to-sales or price-to-earnings can't get incredibly stretched. So I think that that becomes a really important point, especially today when you have really large tech companies that actually have really strong earnings and actually have profits. That wasn't necessarily the case in the late nineties or into the early two thousands. So making sure you understand that distinction is really crucial. But again, it doesn't mean that you can't get in periods where multiples get too stretched and then companies can't meet those higher expectations.
Next question. "The gold/silver ratio is at historic highs. What fundamental or macroeconomic drivers do you think could lead to convergence, and what factors could cause further divergence?" So I will say I am not the gold or silver analyst here at Schwab, but when you look at something like gold or any metal, there are times when you use that as a sentiment gauge as well. When gold is really turning higher and really in a strong bull market that tends to be consistent with investors becoming a little bit more fearful of what's going on in the economy, what might be coming in the economy, or what might be happening with inflation. And what's interesting right now, especially with the surge in gold prices that we're seeing, is that it's not happening in conjunction with a very defensive equity market trade. And what I mean by that is these traditional defensive areas, like consumer staples or utilities or healthcare, they're not surging alongside gold. And also, gold is not picking up at the same time that treasury yields are picking up, for instance. So there's not as much of this concern over it becoming this economic problem because that's not what the equity market is telling us. And there's not this big concern that it's becoming a treasury market or a fixed income problem because yields are not rising significantly alongside gold. So I think when you're looking at any ratio, whether it's gold to silver, or whether it's gold to the stock market, you have to keep that in mind and you have to look at other areas of markets and other asset classes as context clues.
"Are economic downturns becoming less severe over time as a result of faster policy responses from the Fed?" So this is interesting because before the pandemic-induced recession that we had, the recession that was most recent was the global financial crisis, which was a while ago. It ended in 2009. If you look at what happened in 2020, there is an aspect of the Fed getting a little bit more creative, maybe working in conjunction with a fiscal policy response from the government. And you had this double-barreled stimulus actually in early 2020, where the Fed was cutting rates aggressively, brought rates down to zero almost overnight. But then you also had massive fiscal stimulus in the form of checks that were going out to households in several rounds. So you had both of those working in conjunction, which has happened before. I mean there was a lot of rescue and triage that was going on in the wake of the financial crisis back in 2009, but the policy response was definitely fast in 2020. I would argue also equally as fast when the Fed was hiking rates to combat a lot of the inflation that was coming out of the pandemic as well. So it has worked in almost both directions in the past five years.
"What traditional playbook guidelines has the Federal Reserve been using over the last four to five years that you believe are outdated, and what would you do differently going forward?" Well, I always like to say that there is often a big difference between what people think the Fed should do versus what the Fed is actually going to do. And this is actually a really interesting and important instance where the Fed just concluded its framework review of its inflation target. They do this every five years. And they really didn't touch anything about the 2% inflation target. So a lot of people think that might be outdated, but if you just look at what the Fed has decided, and what they're going to do moving forward, they haven't deviated from that 2% target. They're a little flexible around it, with the actual name being Flexible Inflation Targeting around that 2% goal, but the goal of 2% has not changed. So I think moving forward policy, and Fed policy in particular, is going to be made specifically around their dual mandate goals of full employment and also keeping prices stable. But the important thing to consider here is that the Fed makes its decisions, nobody else does it for the Fed, and they've decided that they're not going to change the inflation target for now.
Alright, this is a little bit of a longer question. "Energy constraints are emerging as a key bottleneck for AI growth given the power demands of new data centers. How do you see this shaping the trajectory of AI adoption, and what are the broader economic implications considering that data centers occupy large amounts of real estate but create relatively few jobs?" So this is a really important topic, and I'll break it down into two separate answers. The first one being the power generation and the power demand that we're seeing and that we could potentially see in this country. And I think that from an inflation standpoint, this has become a very big focus for the majority of the population, especially because when you look at something like the electricity component of the Consumer Price Index, or the CPI, which broadly measures inflation in the country, it's actually been running at a pretty brisk pace post pandemic, and we haven't seen a decline in year-over-year terms since 2021. That's very different and unusual, actually, relative to history because you tend to see periods where electricity prices go up, and then periods where they actually decline. It sort of keeps that average in check kind of around zero. Now electricity prices have actually gone up at a pretty persistent pace, which is a little concerning in the context of all of this buildout from a data center perspective, and all the power generation that is required and needed for that. So that's on the inflation front.
If you think about it on the labor front, there's also a little bit of a constraint there because there isn't this expectation right now that with all this data center buildout, there's going to be this significant upturn in employment growth and in payroll growth, partially due to, or maybe more so in the future, driven by the fact that our labor force is not growing as much. We've seen a pretty significant constraint on labor supply growth in this country, driven mostly by the lack of immigration that we've seen this year, but also a pickup in deportations. So the concern from the worker's perspective is that a lot of this data center buildout is not necessarily going to result in a pickup in payroll growth, but vice versa, if you look at it from an overall GDP or an overall business perspective, there is actually a stronger productivity story there because there's a lot of output and there's a lot of activity with fewer people actually doing those jobs to push that output. So by definition and mathematically, that means that the productivity story does improve.
Alright, this one is short and sweet. "What is the shortest period after a market high that a recession occurred?" So I'll give two answers because the most recent case, some people don't necessarily consider it with a lag between the market peak and the actual recession occurring because it was in February of 2020. So if you don't count that instance, then you could look back to the instance that we did see the shortest period, which is actually October of 2007, when the S&P 500 peaked, and then December of 2007 when the economy peaked, and then we went into the recession that became known as the global financial crisis.
All right. Well, this has been fun. Thanks for watching and we love getting your questions, so please make sure to keep sending them our way. And don't forget to comment below.
