Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is a legitimate Stu’s Days. You know that we had an imposter Stu in last week's show?

Yeah. It happens.

Somebody who's doing portfolios and stuff like that, but not the real Stu. You're back in the flesh here in our exciting Stu Kedwell studios.

Well, you have to be careful. I did my first AI video on the Sora app, from OpenAI. I took a picture of myself, and then I said, put me in a Ferrari. And it had me sitting in front of a Ferrari driving along. My voice was high pitch, like the Ferrari engine a little bit. That was one thing that was off. But a 10-second video of me driving a Ferrari around having a good time, that's as close as I will likely ever be to driving a Ferrari. But Stu’s Days is legit. This is the real us.

I know that. I thought you had four or five Ferraris at home. That's just not the case. We're still looking for ways to monetize this podcast, and we're failing in many ways. Although, Stu, look at this. We've got this new studio. Look what I can do. I can move around. This is like a real podcast now, which is pretty cool. But anyway, Stu, you talk about AI, and I guess that's one of the things we wanted to talk about today. We continue to see just incredible enthusiasm and then stock performance out of all these different AI names. We look at all the things that are driving this market. And we've talked about a lot of them. And again, go back and listen to Stu's on pretty much every week—except when we get an imposter sneak in like last week—subscribe, and watch for us on YouTube, because now we actually look pretty good on YouTube. So subscribe, give us a thumbs up, and make some comments. We'd love that. But Stu, the thing that has a lot of people focused on right now is the Federal Reserve, which later this week is going to make an announcement on rates. I think it's anticipated we'll see a 25-basis point cut. But one of the things we've been talking about over a number of months now is the idea of the steepening of the yield curve. In other words, short-term yields falling as longer-term yields rise, which creates a steeper curve. If you think of the yield curve—maybe I can just draw a picture here since we're on YouTube now—you got the short term over here, you've got the long term. Long-term rates go up, short-term rates go down. That's actually steeper, that line between my two fingers there. That is good for some stocks, it's bad for other stocks, it's good for some parts of the market, bad for some parts of the market. When the Fed lowered rates for the first time in this loosening cycle last September, something happened in the bond market, and it's different this time, and it's something that you wanted to highlight.

Yeah. So last year on the interest rate cut, the 10-year bond actually backed up by about 0,5%. So the yield curve became quite a bit steeper. And whether or not that was the bond market's way of saying, we're not sure if this monetary stimulus is necessary, whether or not it's the same time as large fiscal deficits, or we're a little bit worried still about inflation, that was a bit more of a hawkish response to an interest-rate loosening. This time around, we had an easing in September, and the 10-year bond has dropped by about 10 basis points, which, again, it could be due to the reverse of any of those three factors that the inflation looks a bit more benign than some concerns. Maybe fiscal deficits won't be quite as large. People are a little bit more worried about the economy slowing, so they think that the central bank lowering interest rates is a pretty good idea. But that's a meaningfully different reaction to an interest-rate cut a year ago versus what we saw this year. We expect to see another interest-rate cut from the Fed and the Bank of Canada, for that matter, coming up. The other thing that's happened is the slope of the yield curve, and you did the fancy robotic dance. Two things on that. We were joking before, my daughter's taking physics at university, and the only help that I am when it comes to physics is the first and second derivative. The first derivative is the rate of change, and the second derivative is the rate of change of the rate of change. The slope of the yield curve is still healthy when we compare it to last year, but it's about the same as it was three or six months ago, maybe even just a little bit lower. So the rate of change is starting to slow. And that's something that, again, is sending a bit of a signal. It could be any one of those three variables we just discussed, but that's something noteworthy. The slope of the yield curve has been positive for financial stocks, so we just have to think through that. Any time you get into a period of a lot of market volatility, you're always looking for one of these things isn't like the other. The last time we were here, these ten things were here. This time, only eight of them are with us. You tend to pay attention to a divergence. This is one thing that is a little bit different than some of the past times we've been in this environment.

I must have missed that in physics. I got kicked out. My physics teacher was trying to connect two wires, and I was sitting in the front row of the class, and I was going like, zzzzzz, every time he pulled them together. And he just lost his mind and kicked me out of class. So I'm glad I'm finally learning some physics. Who knew I was going to learn it on this podcast? What I was saying to you when you were talking about this in terms of the rate of change of the rate of change—and I was even talking to some advisors about this, so I'm glad you're correcting me here—but I was thinking about it like last year, again, as you say, if I think of the short term and the long term, so we lower the short term, the extreme end of the short term, which is the Fed reducing rates or the Bank of Canada reducing rates. That's a bunch of people getting into a room together and hammering out ideas around what's going on in the economy, looking at this data and that data, and then deciding what they're going to do with rates. So they lower the rates. Then last year, as you said, the longer term, the 10- and 30-year, spiked up when they made that initial cut in rates. That gives you, again, that steepening of the curve. I was thinking, though, that it's still a steepening. So my 10-year rate is held steady around 4%, a little bit below, but the Fed has now lowered rates. They're going to lower it again. That still, to me, creates more steepening. But the long end is fixed and the short term is the only one moving. You're saying that in your second derivative of the second derivative, it is different?

Yeah, because it's a function of two interest rates. To your point, earlier in the year, maybe you had the Fed lowering interest rates, but the 10-year was actually rising a bit. So one minus the other was call it 100 basis points, whatever it might have been. And now that 100 is slightly smaller. So even though it's a healthy slope in absolute terms, it's not quite as robust as it was three or four months ago. So a lot of times people focus on the absolute level of interest rates, the absolute level of shorter-term interest rates or the absolute level of longer-term interest rates. One minus the other sends a powerful signal about some things in the economy. It's just another variable that we look at. If you thought about this big dashboard for someone doing asset allocation, they have momentum, they have valuation, they have short-term interest rates, long-term interest rates, slope of the yield curve, credit spreads, high-yield credit spreads. You have all of these things on your dashboard that you're thinking about as you're moving certain things around an asset mix. But if you had the yield curve losing slope, you might worry about credit spreads. And then you'd have to sit there and say, is the yield curve losing slope because inflation expectations are coming down, because fiscal deficits aren't quite the worry, or is the economy slowing? There's a lot of things that come into play inside of these variables.

Yeah. Then if the Fed or Bank of Canada is cutting rates, at the very short end of the yield curve, and you're seeing that spike up in the long end, that sends a message to them about how much space they have to lower rates. And the fact that this time when the Fed cut last month, it held steady, that gives them more room to cut rates.

That's right.

And we're expecting still some fairly significant cuts between now and the end of next year.

Yeah, at least probably two out of the Fed and at least one out of the Bank of Canada. And then we'll see as we get into next year. There has been more volatility on the trade file. We get into next year, and that's where today we're negotiating. When we get into next year, the rubber hits the road on, will Congress call for a review of the CUSMA or USMCA, whatever you want to call it. You start to hit some of the deadlines for a more official review early into next year. So we'll just see how that plays out.

I think it's all dependent on whether the Jays beat the Dodgers That's probably the bet that Trump and Carney have. That's not true, as I think you probably know. But I think what's really interesting is we've had this government shutdown—and I'm glad we've had you and Eric on talking about the government shutdown in terms of, yeah, it has some effects, but it's not long term and people look through it. It's the politicians going back and forth and they'll ultimately come to a resolution, whatever it might be. It's largely not going to have an effect, and you're really seeing that. The effect that it's had, though, is that we're not getting a lot of numbers. Now all of a sudden, because ADP, for example, has gone in and retooled the way they do their jobs report in the absence of the Bureau of Labor Statistics in the US producing a jobs report. They've got this new jobs report. That's giving us a signal. We had to get the CPI out this month so that they could get the COLA rates for pension, cost-of-living-adjustment rates for pensions, Canada, US. You needed that CPI to figure out the longer-term inflation to set up what raises you're going to give next year in pensions and other government programs. We're starting to see that data trickling out along with the combination of lots of earnings reports. Then this week is where a lot of the big tech companies come out with their earnings. I think it's five of the Mag7 are out this week. And the numbers are mixed. The earnings are mixed. Is there anything you're seeing in terms of the market reaction? Because in general, the market just seems to be chugging higher despite any of the news. But is there some nuance to what you're seeing as you dig in deeper to the numbers?

It's a great point. There is definitely more nuance. The market has narrowed again a little bit. So one of the statistics that a technician that we really like puts out is the percentage of stocks making a 20-day high or a 50-day high. So when the market makes a new high, you want that measure to be making a high with it. That's a signal of a lot of participation. And that has not happened this time around. When it comes to earnings, the earnings have been pretty good. They were strong in the financial sector, which was largely expected. The one thing that was pointed out in a piece of research was, if you beat expectations, the reward is not quite as good as it has been. If you miss expectations, the punishment has been more severe than it has been in the past, which is also, again, the stock market's way of saying, well, this is good news, but we knew that, so it wasn't incrementally good. On bad news, if you think things are getting better, then you tend to buy the bad news versus the environment we're in right now where people are a little bit more worried about something slowing. Bad news tend to get a bit more punished in that environment as well. So we are seeing that. The area that has their global markets have been still pretty good, where there's some more fiscal stimulus coming in pockets of Europe and things like that. And then in the United States, it has been back to AI-driven data center, build-out-driven enthusiasm. Some of the semiconductor stocks, some of the power stocks. This morning, we got a very large announcement of an $80 billion agreement between Brookfield and Cameco and the US government around more nuclear power in the coming years. I think the math is something like $80 billion buys you like eight pieces of equipment, like eight generators, and each one is like a gigawatt. I think the math is the United States has around 100 gigawatts of power. This is a lot of power, eight or nine gigawatts, if it all gets built out. We've seen a lot of announcements around building out power in the last little while. Again, as investors, right now in the enthusiastic period, good news is just good news. More good news, this is fantastic. And that can go on for a while. Eventually, people will want to see the business that forms around all this spending. And that will take some time, but eventually that will come and we'll see how that fits with the valuations because we're seeing some pockets of valuation, like price-to-sales measures and things like this that you really haven't seen in some time. When you get up into the double digits, the teens, in some cases almost 20-times sales, that's incorporating a fair amount of good news.

Yeah. I think we talked about this in reverse when we were talking about Canada earlier this year on one of the episodes. Well, actually, I think it was our kickoff episode for Canada this year. And you talked about on the other end, the bad news. So it's still bad news, but it's not as bad as the previous set of bad news. And then the next set of bad news is still bad, but it's not as bad as the previous two. It's like, now you're on the good side of that. I think the analogy I was drawing is I'm setting expectations for my wife when I'm going to get home, when I'm out and saying, okay, I think I'm going to probably be home at 10:00, but I'm going to tell her 9:30. And then I show up at 9:25 and she's really excited. Or at 10:30, and then I show up at 10:25, and she's excited, even though I wanted to set it up at 10:00. Well, then I show up at 10:20 the next time and 10:15 the next time, and now she's thinking to herself, well, next time, he's going to be home at 10:10. But I show up at 10:15—which is still well above my 10:30 expectation—but she's disappointed because she wanted me to do even better. You get to that with the earnings on some of these companies where it's just set up to be perfect. If it's not or even better than perfect, sometimes it just gets to a point where it's just not good enough. That's what you're saying. You see that through this earning cycle where you're still being rewarded for the beats, you're being punished for the failure, but you're being rewarded for the beats. But you actually get to a point in the cycle where even the beats aren't good enough beats to keep the stock price where it is and you still see the pullback. It's good that we're not there, but you're seeing some parts of the market that are really stretched in ways you haven't in a long time.

Yeah, there's, I would say, some shifting under the sand, or the sand is shifting a bit under your fitting just ever so slightly. I think the other thing that happens is if you start to worry, if the economy becomes a bit of a discussion point for the average stock, the AI-related companies, they don't really seem to be affected by the here-and-now economy because it's a number of years into the future. So that's where the money tends to gravitate towards that during periods like this. And we'll see how far that goes. It's not about being skeptical of the power of artificial intelligence. It's not that at all. Eventually, there's a scale where it's the good news against the valuation that you pay. That's the harder part as we get at it. When I start to use both hands, I watch my kids with this 6-7 thing. It's like 6-7 is where we're at. So that’s something that we have to always take into consideration.

Just speaking of AI and a couple of different stories that struck me as fairly interesting this week, I guess there was a report out of the US that suggested that the payoff for the return on investment on AI was going to be significantly lower than most people expect at the company level. Then you look across, and Amazon is announcing one of the largest corporate layoffs, well, in this cycle, anyways, but one of the larger ones in history in terms of the size and number of people that they employ. As you're looking at the reports, the quarterly reports that are coming out right now, the earnings reports, are you starting to get a sense of the impact that AI is going to have? Is it going to have the impact that people are expecting? Is it going to end up being different than we might have expected, or are we still way too early to see that?

Well, we're seeing some companies put numbers around. I think the most obvious one is some of the efficiency gains. Those are quite believable. People are establishing targets and then showing sight lines to some of those being better. New revenue opportunities, maybe are a little bit slower to immediately visualize. But investors are still—at this juncture, mostly anyways—giving the benefit of the doubt to the arrival of a business plan. We've seen the emergence of maybe new social media networks, new search engines with AI included, new business models, new agents that are being formed. There's a lot of things where people can see the potential, and it's just a little bit far enough on the horizon that there doesn't need to be numbers associated with it today. But 12 months from now, if we haven't seen those numbers, that'll be a bit of a different story. And that's where every investor has to weigh the price they pay versus what eventually needs to come out to justify some of the valuations we're seeing.

So, Stu, as you've often said, the long nose of the market is sniffing out a long way out in front a year from now. So again, all-time highs. We've talked about this. The lower interest rates at the short end anyways, and it seems like it's pretty anchored at the long end. That should drive economic growth. And inflation is a little bit higher than we'd like, but it seems to be at least sticking in around the same area and may end up going lower. We still have to find out about the tariffs, but when stocks start to look into 2027 and 2028, what are you worried about what they might be seeing now?

Well, it depends on the market for sure. When it comes to the US stock market, it is going to be highly dependent on some of these AI economics presenting themselves in 2027. I think the earnings estimates for next year are a tad over $300 or around $300, for the S&P 500. And the early '27 estimates are up 9, maybe 9 to 10 %, up to around $330. That's above trend growth after above trend growth. You're definitely going to need the artificial intelligence benefits to kick into gear to get you there. Then the second thing you worry about is when you get movements in unemployment—as you say, we're flying a little bit in the dark—but even surveys that come from Indeed and some of these data services, suggest that unemployment is softening a little bit, and you wouldn't want to see that go too far. And that's why we're seeing some movement on interest rates. Those are two things to really think about in the United States. In Canada, the stock market has different components. We've seen a big move upwards in the price of gold then a quick corrective type activity. Both are, unfortunately, normal during a bull market. We've seen improvement in the banks. We have to go through sector by sector. When you get to some of the foreign markets, it's the same. I think the couple of things as we think out as well is the US dollar. Will it weaken is one thing, it's not likely to strengthen to the degree it is. So that provides maybe a bit of less of a headwind for some of the foreign markets, and you're getting better valuations. Then, I mentioned it earlier, but we're seeing signs of higher fiscal spending on a relative basis, maybe outside of the United States where it's been very large. So again, the rate of change of fiscal spending outside of the United States might be a little bit higher.

Yeah, it seems like these have been the same themes we've had now for several months, or actually even a couple of years, particularly around US dollar and then what that does for foreign markets, valuations in the US and certain parts of the US versus other parts of the US and the rest of the world. It just keeps carrying on. But then, hey, for people who have stayed invested—and I hope that most of the people who are listening to this podcast on a regular basis are staying invested—and if they're adding new money, because we're at an all-time high, there’s an approach they may want to use. What is it, again? I've forgotten because I don't think we've talked about it for a couple of podcasts.

Well, dollar cost averaging has been a great tool. When you get into a market that has been strong, you could say, well, I should have just invested, but still, dollar cost averaging gave you the template and may have given you the ability or the courage to do something along the way. And you still got lots left if we hit some bumpy times as well. The one thing we know for sure as investors is that we will see good times and we will see bumpy times. So it's better just to be upfront about that. And dollar cost averaging is just a great way to deal with both environments.

I wanted to make sure we got that in before Halloween because the kids are going to go out, they're going to collect that candy, and the temptation is to eat it all at once. But a dollar cost averaging approach to Halloween is a way that you can teach your kids about investing using the candy. The other thing, make sure you've got the right level of risk. You want to make sure that that candy is safe. Then dollar cost average, the consumption, and it's going to be a better experience for everyone. I like it when my kids would dollar cost averaging instead of binge eat their Halloween candy. Because that meant there was more around for dad when they went out and did a good job collecting candy. What's going to be for kids stopping by the Kedwell mansion this Halloween? What are you giving them?

We put the decoration out on the weekend. We got lights and ghosts and all sorts of things. So yeah, it's always great to see the kids.

Clean windows, no leaves, good candy, and a nice decoration. That's what you find at the Kedwell house. And great advice is what you get on Stu's Days when we have Stu Kedwell, the head of global equities at RBC Global Asset Management. Stu, great to catch up with you, and we'll see you next week.

Great. Thanks, Dave.