Hello and welcome to Download. I'm your host, Dave Richardson. And this is a very special edition of the Download. We hosted a conference for a bunch of advisors in Montreal back in March and I've rarely seen as much excitement around a presentation as the one that was delivered by our guest today, a portfolio manager with the North American Equity Team at RBC Global Asset Management, David Tron. David, you just had the room buzzing with your presentation. And I hope I'm going to be able to steer the conversation or just get out of your way, so the listeners get the opportunity to benefit from your wisdom. But thanks for doing that. And thanks for being here this morning.

Thanks for having me. No pressure.

No, no, we're not doing that. We're just going to have a chat here. And well, actually, when we're talking about the US in particular, which is where we're going to focus the conversation today, it actually isn't that difficult to generate interest because there's all kinds of stuff going on down there. And I guess this week, well, really, since the results of the election in November, and then since inauguration day, tariffs have been front and center. We've had a lot of news in the courts this week. Other than that, just one tip, I had my cousin, Jeremy Richardson, on the podcast yesterday, and he referred to what was happening as a Bobby Ewing moment. Do you know who Bobby Ewing is?

I don't.

No, and I don't think anyone else does either. I tested it with my team, and I've got people in a whole range of age groups. Bobby Ewing was a character on a show. The actor who played the character, a contract dispute, took a year off the show, but he was a central character. Bobby Ewing of the Ewing family was the whole center of the show, Dallas. He comes back after settling the negotiation, and the whole season where he was away, they just dismissed it as a dream that one of the other characters was having. So they just started from scratch. So the idea was, okay, well, we started all this tariff stuff and then when we got to yesterday, we had a court injunction that wiped out all the tariffs. So everything that happened in between—and we've had a market recovery—is just a Bobby Ewing moment. So a reference that nobody knows, but there you go. That was the sense of it. How do you make sense of all of this?

Well, I think you have to start on April 2nd, on Liberation Day. Sometimes I imagine an analogy whereby Donald Trump, on his desk in the oval office, has a tariff dial with a scale from 1 to 10—1 being no tariffs, 10 being the most tariffs we could imagine the US would impose on the global economy. On April 2nd, he turned that dial to 11, which we didn't even necessarily think was possible. The financial markets priced that risk accordingly in as much as tariffs are sand in the gears of the global economy. Of course, we had a sell-off, which was reasonably material. What we saw in the subsequent weeks was a reasonably quick de-escalation. The dial was turned back to, say, a 4 or a 5. Again, financial markets priced that risk accordingly, and we rallied. Just yesterday, a court in US effectively took the dial off of his desk, no longer allowing him to turn that dial, which I think is a good thing for the equity markets in as much as the floor has been lifted a bit. That being said, Donald Trump and the administration are savvy. There are other ways to achieve tariffs of similar magnitude. No longer does he have that dial, but sometimes I imagine now, if you have ever seen an old bank vault and the wheel that is turned to open up an old bank vault is heavy and slow when it's time to look in the vault. He has that wheel in his office also. So he can achieve something similar, it is just harder, and it takes more time, months or quarters, as opposed to instantaneous. And that's where we sit today. So I think we're trying to understand the timing, the magnitude by which he's willing to turn that bank vault wheel and trying to price risk assets accordingly in our own funds. And that's where we sit.

And so I know when we were watching in Montreal, I've heard different commentators say, why is he starting with the tariffs now? Why didn't he start with some other policies? You've got the big, beautiful bill going through as well, which is the budget, which includes the extension of the tax cuts, maybe a few more tax cuts, and maybe you'd focus on that because that's pro-growth and kick things off with a bang. But you thought that maybe there was some method in this madness, and it sets up maybe a choppy 2025, which we're certainly seeing, and then a little bit better scenario as you move into 2026. By the way, great Spinal Tap reference there. We've got everyone getting into the pop culture realm here on the Download. So that's great to hear. So you're still in that line of thinking that that's how things are playing out?

Yeah, we've thought about this from the beginning. This is what we heard as to what the administration's mind is thinking also. Our tune hasn't really changed too much on that front. The midterm elections are in 2026. It is our belief that the Republican administration is likely to want to do well in those midterms. In order to do well in those midterms, the average US consumer should probably be feeling pretty good about the economy. It made sense to us that the more painful policy approaches that the administration was going to take were done up front, get those out of the way, and then invoke some of the more growth-stimulative policies later this year, early next year, to make the consumer feel good into the midterm elections. Next year could be an interesting year to the upside for earnings growth. That is how we've been thinking about it. We haven't changed our tune. Then another facet of that equation, which we could talk about, is AI and the practical applications of AI inside of businesses, which we see happening today and will likely happen in greater magnitude next year, which could also help margins of certain businesses. So twofold.

So let's make that shift to AI. I'll go there before we come back to markets and outlook. As we think about AI and the impact that is going to be felt, not just in companies that are building the infrastructure of AI, but also actually in companies that are going to apply AI to some benefit. That's what you're talking about. Why don't you talk about AI, where we've been and what you're starting to see happening as more and more individuals and companies have access to these tools, and they can build them into the way they run their businesses.

Yeah, this is where our team is spending a lot of time, I should mention. It is one of the most interesting aspects of the economy. It is making us as investors more efficient. We can look at more companies in any given day than we've ever been able to. It's the most exciting time that I've ever had in this job, and I've been doing it over 15 years. So we are very excited for AI. I hear some skeptics talk about there's no killer app, there's no great use case as yet. And I take issue with that because there is a very practical productivity enhancement use case, and that is coding assistant. Software developers are using these tools to enhance efficiency quite immensely, measurable efficiency. We get a great portion of having to talk with a lot of businesses, and businesses tell us that these tools enhance the productivity of the average software developer anywhere from 10 to 30%, which is quite astounding, considering how new this all is. Now, what's interesting is that for a lot of businesses, the largest cost line item on their income statement is paying people. And for software companies, for some tech hardware companies, for internet companies, that line item is oftentimes developers. So to the extent that these companies can generate more revenue using the same number of developers because those developers are able to generate more lines of code than they ever have in their entire history, leads to the logical conclusion that they might be able to see margin expansion. And we think that will actually start showing up in late '25, early '26. It's an exciting thing for the global economy, but particularly for the US equity market, because the US equity market, as you know, has quite an aggregation and a concentration of these businesses that tend to have digital business models that rely on software developers as their key line item. When you look at the US relative to any other global equity market, we do believe there is the most amount of margin upside by virtue of AI being infused into these businesses.

Wow. What would be another great example, if we get outside of that space, outside of the technology space? So we work for a bank, and we're obviously using AI or other businesses where, again, you're just going to get these cost savings or opportunity to generate more revenue in different space. What are some of your favorite examples of where you're seeing this application run more broadly than just tech?

As I mentioned, we're very fortunate. We get to talk with business leaders at very large companies. Two weeks ago, we spoke with a CFO of a very large Canadian digital-oriented company. When you spend R&D dollars in Canada, you can get R&D tax credits from the government, but to obtain those tax credits is a fairly monotonous and arduous form filling out process, and it takes time. In fact, historically, it took a couple of weeks for them to do this work, and they would actually pay a third-party accounting firm, a consulting firm, to the tune of $5 million to do this work. They have subsequently decided to do it themselves using their own artificial intelligence tool. So they're no longer paying the consulting firm $5 million. Rather than doing it in a couple of weeks, they did it in a matter of minutes. That's just one simple example.

Wow. And then we're going to see that pass across. Virtually any business you can think of will find multiple benefits for this.

I'm less of the view that there will be mass headcount reduction and more of the view that this is just an absolute productivity enhancement tool for every single employee at every company. The companies that truly institutionalize this inside of their businesses, I think market share shifts will happen. We've seen this happen in white-collar industries historically. ERP software inside of businesses caused share shifts. Barcode adoption took place at Walmart before it did at Kmart. So Walmart took shares from Kmart. This has happened time and time again in history. So we're actually on the lookout and trying to build a score for non-tech businesses and the extent to which they are truly taking this seriously and institutionalizing inside of their businesses such that they can then take share from their competitors inside of their profit pool. So this is something we're thinking a lot about.

I tend to agree. I have conversations with friends and family, and they always say, oh, the robots are coming for my job, and none of us are going to have any work to do. But if you look through history—and there's been game-changing technology innovation throughout history, and it does shift where the jobs are—but again, for the most part, they're just ways of enhancing the aggregate productivity, and different jobs arise. We get different jobs, and they're generally better jobs as well, higher paying. Everyone gets wealthier. So it ends up being a really good thing. So this scorecard, you're going to use that to identify which companies you think take advantage of it first and then are able to create a new competitive advantage for the future?

Precisely. They'll be able to do more, quicker, better than the competitors and steal market shares. That's our belief.

That's fantastic. Now, if we go back to the US market in general, we've had a lot of people on the podcast. By the way, if you want to hear some of these other conversations—including the initial drop of Bobby Ewing—you can subscribe anywhere that you listen to the podcast. We're also on YouTube, as you can see. We got the fabulous David Tron here in person, live and in color. You can subscribe to the YouTube channel. Give us a like. Tell your friends, follow along, and you won't miss any of these conversations. But we've had guests on talking about the idea that the US market is expensive, all the other markets are cheap, and that we're going to go to a rotation away from the US to all these other markets. And you've seen a little bit of that happening this year. But it's probably not as simple as that, right? There's a nuance to being in the US. Anyway, I'll let you talk through your thoughts on that.

I think it's a good conversation to have. We have it all the time internally. As you know, the S&P 500 is a funny benchmark in as much as it's remarkably concentrated in the hands of less than 10 stocks, all of which are very large today. We are of the view that incremental earnings growth out of these businesses going forward are going to look a lot different than it used to, simply because a lot of large numbers has caught up to these businesses. They've eaten so much of the economy that incremental growth is slimmer and more expensive than it used to be. So this cohort of businesses that used to be capital-light with a tremendous amount of greenfield growth are now capital-intensive and more cyclical than they've ever been, which isn't necessarily a bad thing. These are still some of the best businesses in the world. It just so happens that they used to look significantly above average relative to the average stock in the S&P 500, and now they're looking a little bit more average. The average player in the NBA is still one of the best players in the world. Likewise, the average stock in the S&P 500 is still one of the best businesses in the world. We're not bearish on this cohort of stocks by any stretch of the imagination. We do think that there's going to be a lot of stock picking potential within that group of large businesses. Historically, a lot of investors have treated them as one homogenous group of stocks and businesses. We've never thought about it like that. They all have their own end markets, their own risk-reward on the stocks. That being said, the aggregate S&P 500 multiple is trading richer than it has in the past. We have been advocating to some clients that they should consider perhaps recycling some of that capital from the S&P 500 that's done so well for them over the past decade into US midcap stocks, which in and of themselves are very good businesses. They're large businesses. The largest US midcap stock would be one of the largest publicly traded stocks in Canada, if you compared it like for like. There are oftentimes winning businesses and growing industries that can get better during periods of slowdown in the economy, which we may or may not be going through. We think the next cohort of MAG7, 5 or 10 years from now, are likely to be born from the US mid-cap sphere today. These are also digital-intensive businesses that also have potential for productivity enhancement inside their crossline items. You can oftentimes buy a lot of these US mid-cap stocks at a discount to that of the S&P 500 for superior free cash flow share growth. So we think it's an interesting time. We're not suggesting ever to sell S&P 500 to buy anything else, but just to recycle a portion of US mid-cap has made sense to us. That's what I've done personally with my own capital.

It's a really important point you just made there. Whenever we talk about reducing US exposure, a lot of it does come just from the outperformance that you've seen over the last decade and a half. And as you say, just recycling some of that outperformance down the chain from these big, large caps that have been big winners into some businesses that have some massive growth potential. I also like your point that today's US midcap stock is not your grandfather's US midcap stock. These are huge companies within the growth of the US. But just cycle down and spread out across some of these opportunities. And then one of the other points that I've been making on the podcast for listeners is, okay, you've been able to ride the index pretty easily and just own everything, which gives you that overweight in that certain group of companies, but the market that we're moving into is more of a market for investors like yourself, a professional investor who has a better chance of finding those companies that are going to be the next big winners and separate those companies from companies that are going to be, as you say, Kmart. And so it's more of a stock picking market that we've moved into. Am I right or wrong on that?

You're absolutely right. It's no longer just owning the Mag7 and expecting outperformance. There will be winners and losers in the Mag7 relative to the benchmark. We like some of those stocks. We don't like some of those stocks. Some of them are likely going to be range-traded stocks over the next couple of years. Some will be perhaps secular growers still. But never before in the past has it been more of a stock picker's market than it is today. I do believe that.

Yeah. And then so why don't we finish with that? Let's take a look at the Mag7. I know, again, you touched on this in your presentation. The ones that you like. They all win, but there are some that you like more than others. And what would be your examples of ones you particularly like versus ones you're not as fond of at the moment?

Meta and Google are often thought of as similar businesses, as they are both digital advertising stocks. They monetize eyeballs, basically. But we like Meta, and we don't particularly like Google at this point in time, and I can get into exactly why. We go to Meta, Instagram, Facebook to be entertained. We open the app and entertain ourselves. Google, we go to satisfy our curiosity. We have a query that we want to go get fulfilled. So in many respects, it's two very different forms of intent when we show up to those apps. What we see with Google, of course, is an increasing amount of competition to steal share from the monetization of curiosity. I oftentimes go to ChatGPT, more so than I do go to Google these days. It just is what it is. So we do worry about the Google search business. This is a tremendous debate inside of the stock market, of course. And they're facing competition for the first time in history. It's a bit of an innovator's dilemma. They're going to have to pivot, we believe, their search business to more of an AI model, which on the one hand may monetize at a lower rate—less revenue from a curiosity query, if you will—and the actual cost associated with that might actually be higher. So this will be a bit of a tricky transition for this business. We're a little worried about the earnings stream going forward in as much as they're going to have to spend a lot of money on CapEx to facilitate a transition that might be a little muddy from an earnings perspective. Now, we still like YouTube, we like Waymo, we like the Google Cloud. If you add up those three, you can get to a pretty good floor on the stock. We're not overly concerned about downside per se. But if you flip over to Meta, again, they do provide us entertainment. We all go to the Meta app to flip through stories or reels or the feed. This company is applying AI better than anyone on the planet, we do believe. How are they applying it? Well, they're doing a remarkably good job at improving the way they match eyeballs with ads. If you've noticed over the past 5, 10 years, the ads that you get shown on Instagram, for example, are remarkably good at knowing what you might want to buy. I myself have bought a number of things on Instagram that I never thought I would have ever bought. But the way that they do this is they buy a lot of NVIDIA GPUs to power these very large models and use an incredibly smart team of developers to create models that better match eyeballs with ads. So they are doing better than anyone else in the digital ad sphere to capture advertising dollars and to marry that with eyeballs. So we're really excited about the earnings growth inside of Meta from that perspective. They're not really seeing much competition outside of TikTok. Tiktok may or may not go away. We will see. If it does go away, Meta wins. If it doesn't go away, Meta wins a little less is how we think about it. You can buy the stock at a reasonable valuation today, particularly relative to the benchmark for the earnings growth that you get. And the cherry on top of all this, they are likely the best positioned to win consumer AI. What that means is that they are building a model called LLaMA, a series of models, that they're effectively handing out for free. Spending a lot of money to hand away something for free doesn't sound like a particularly good business model, but in this case, we do think it will be because all the developers that use this model are going to improve it themselves and then make the hardware more efficient to power that model going forward, which will then drive usage of the model inside of the application. And then we're going to be doing all sorts of funny things as consumers with AI. We're going to be creating our own little AI videos that we can share in the feed, and it will just look a lot like a news feed, but with AI content, and they're going to be able to monetize that with digital advertising. We like Meta a lot going forward, particularly relative to Google. An example of two businesses that have historically been thought of as very similar, but we think the risk-reward of each is very different.

Which ties in with your whole theme around AI and how it changes the landscape between winners and losers or winners and then even bigger winners. So that's just a fantastic walk through your space, David. Thanks. I think the listeners can see exactly why people were so excited about your presentation. Thanks for joining us today. Hopefully we'll get you back soon.

You bet. Thanks for having me.