Jack Janasiewicz, Natixis, joins 'Fast Money' to talk how AI bubble fears are weighing on markets.

New York

The release of Open AI's ChatGPT has accelerated the development of artificial intelligence and warnings about its impact on society.

Rise of AI

Natixis Lead Portfolio Strategist Jack Genesewicz addressed recent market volatility and investor concerns regarding the surge in capital expenditures (CapEx) for artificial intelligence projects. He noted that while the broader economy remains stable, with strong consumer spending and earnings, markets are reacting to uncertainties in Federal Reserve policy and a reset in the AI investment narrative.

Genesewicz emphasized that high-income consumers continue to drive spending, while lower-income groups have less impact on overall consumption. He advised caution in over-concentrating investments in major tech stocks, suggesting that broader technology sectors could benefit from ongoing CapEx trends, even as investors seek clarity on returns from AI investments.

Investors push back on AI capex surge, says Natixis strategist

All right, for more on the markets and tech rotation, Natixis Lead Portfolio Strategist Jack Genesewicz joins us here on set. Jack, great to see you in person, IRL. Thank you for having me, yeah. What do you make of, so basically, there are concerns about the AI narrative, there are concerns about the consumer that we were just talking about in the A Block. What is there for the markets to hang their hats on at this point? Sure, but I think if you kind of step back and look at the bigger picture backdrop, the economy's still doing okay. I mean, I think you can make some points where you see the labor market is slowly cooling. The risk is obviously that that picks up and accelerates at a faster pace where we start to lose jobs. But I think the bigger picture level is still decent, right? You still have, people are still spending money, the consumption numbers are still strong, the credit card data is still strong. Look at earnings, the earnings are still moving up and to the right, margins are still expanding. I think we've heard a little bit more questions maybe being raised during third quarter earnings calls about the health of the economy going forward, and I don't think we really heard that. So I think moving back and taking a big picture view here, the economy's still in decent shape. It's not terrible, it's not great, but it's not rolling over to a point where it's hit the eject button and start selling everything. So I agree with you on the market, sorry, the macro assessment, but the market's rolling over. So what do you think it is, Jack? I mean, is it the sense that suddenly the Fed is not as much of your friend? Because we all would say, you would say 25 bips one way or another in December doesn't change what the market should do, those earnings numbers. So what has been that proverbial straw on the camel's back? Yeah, I think it's a combination of a few things, right? It's the reset of the narrative on the AI trade. You know, it's no longer giving a free pass to the CapEx spenders, but there's also things like a data vacuum going on right now, right? The big thing for the markets with regard to the Fed, where do we stand on inflation? You know, where do we stand on the labor market? We don't really have the top tier data that we've been used to having, so we're sort of flying blind there and looking at second and third tier data. And as a result, market's really not sure how to price the Fed, and you've seen the VIX move up a little bit, you've seen the move index push higher, so you're getting that repricing of the potential for the Fed cut, maybe it's 50-50, a little less. You know, those questions all on top of leverage trades that are now starting to unwind because of the pickup in vol. It's not surprising that these crowded trades are putting a little bit more downside pressure. Now we suddenly just have a, hey, let's just risk off, deleverage, and this is now all of a sudden we're talking about a proper correction in the marketplace. Now when we're looking at the labor market, I know there's a lot of concerns that this is weakening, but I think we look a lot at the different types of consumers. So we talk about the lower income versus the higher income consumer, but I don't think what's talked about enough is the baby boomers hold a majority of the wealth of this country who aren't as affected by the labor market's changing, so how much should we be worried about a weakening in the labor market versus the overall consumer who may not be in the labor market? And this is playing right to that two-speed economy, right? And who's really supporting the consumption right now? It's sort of that higher income band, which are the income cohorts we were just talking about right there. So if you look at who's doing the bulk of the spending, it's really the 40 percentile and up quartiles that are spending the money. It's the ones that are getting pinched, that lower income cohort, but on a net basis, they account for almost less than 9% of total personal consumption expenditure. So at the margin, they're getting squeezed, but they're not really the ones that are driving consumption here. It's still the upper incomes that have access to the stock market. They're getting that wealth effect. They've locked in those mortgage rates at lower levels, so they're not getting impacted from higher interest rates, that sort of thing. And they're the ones that are benefiting from this, and they're the ones who continue to spend. So if you're taking a step back and taking a look at the economy as a whole, and just sort of taking it all in, given the market valuations here, Jack, I'm wondering, if we are headed for some sort of a downshift in the economy, then what would that correction look like? Because it feels like the markets want to sell now and ask questions later in terms of preparing, as you mentioned, deleveraging, preparing for some sort of a step back on the economy. Is that what we are, in fact, seeing? Because then, shouldn't we be paying attention, saying, you know what, even though things may be okay, we have to prepare for what's happening six months out? Five months out. Sure, and I think if you even look out to six months or more, again, go back to the Fed cycle. Maybe we get a cut this summer, maybe we don't, but the market's still looking at two more cuts by summer of next year. So I think the bigger point there is that financial conditions at the margin are still probably going to be supported because the Fed is not hiking. A pause, a cut, very different than a hike, and we still see the Fed easing as we start to push into the beginning of next year. And then you're going to get the bump from some of the tax rebates that are kicking in from no taxes on, tips, overtime, that sort of thing. So I think there's reasons to have a little bit more optimism as we rolled in the beginning of next year. We just got to kind of get through what we're seeing today. And that's, I think, more of a technical trade, if you will, more than anything else. So what are you doing with the AI trade at this point? Yeah, I think the big one here is simply, if you got to look at a portfolio, you don't want to be over leveraged to the Mag 7, per se. And you still also want to play the CapEx spend game, right? As we like to say, one company's CapEx spend is another company's earnings. And I think we've got pretty good visibility between now and the end of the year and into the end of next year that the CapEx numbers from the hyperscalers are still going to be very strong. You may not like the fact that they're spending because you don't have clarity on that ROI, but from a perspective of somebody else's earnings, that's still pretty strong. So maybe you're looking at not quite the same exposure to the Mag 7, but the broader tech complex is still going to be beneficiaries of the spend, which I think we still have pretty good clarity on.

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Investors push back on AI capex surge, says Natixis strategist

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