Chris Hussey: This is The Markets. I'm Chris Hussey, and today is Thursday May 28th, and I'm here on the Goldman Sachs trading floor with Pete Callahan, who is the US tech, media, and telecom sector specialist within global banking and markets. Pete, thanks again for taking the time.

Peter Callahan: Thanks for having me, Chris.

Chris Hussey: Okay, let's start with the markets, Pete, because we've had a – almost historic run in tech off the March 30th lows. Hasn't been as Mag 7-y as we've seen in the past. What do you make of the rally?

Peter Callahan: Yeah, I'd say three things stand out to me. One, narrow breadth. Two, high velocity. And three, anchored by earnings growth and earnings revisions. So what do I mean by that? If I look back over the last three months, the Nasdaq is up twenty percent, but when you look under the hood, only about half of the stocks in the Nasdaq are even up at all over that stretch. So you have narrow breadth, again led by semiconductors, which are up nearly eighty percent this year. Best year since 1990.

Chris Hussey: Ooh.

Peter Callahan: Second, high velocity. The Nasdaq is off to its second-best start to a year in over twenty-five years, and so we've really had a really rapid rise this year in tech stock prices. And finally, in terms of earnings growth, if you looked at sort of AI stocks within the S&P five hundred, that group was about thirty-- up about thirty percent this year.

Incidentally, their earnings have also risen about thirty percent this year. So you are seeing multiples kept in check, driven by strong earnings revisions in tech this year.

Chris Hussey: All right. So, you know, you pointed to those earnings. Let's talk about them a little bit here. First quarter results, what'd you make of it?

Peter Callahan: Yeah. It was good earnings from tech. I think the standouts were CapEx, right? You had another big wave of CapEx revisions. I think CapEx estimates for calendar '27 went up to twenty percent, so you're now looking at something like north of nine hundred billion dollars of CapEx in 2027.

So that story is still intact and still pushing higher. I think secondly, within software, I would say results were mixed. We may talk about software later, but some good, some not good. But the nice thing is you're actually starting to see some dispersion in that space, and that's been a welcome sign for investors.

And I think finally, and perhaps tied to that first point on CapEx, you are still seeing relatively tight capacity across compute and in the AI supply chain. And in turn, you're hearing companies starting to talk about visibility extending out into calendar '27, where semiconductor and AI infrastructure companies are starting to get orders pushing out that far, given the shortages we're seeing today.

Chris Hussey: Let me drill down to that software point, because you pointed we were going to talk about it. I do want to talk about it, because the software troubles even bled over into the credit markets, where private credit started to go through a problem because people were worried that they'd had too much software exposure. But lately, you're starting to see the software stocks working again. What's going on?

Peter Callahan: Yeah. Listen, the odds have been tough this year in software, no doubt about it, but you are seeing dispersion in the group, and I think that's something that all investors, whether long-onlys or hedge funds, are happy to see, right?

It's all about dispersion, trying to pick leaders and laggards within the group. So there are still debates from here. Investors are curious about how you think about subscription and seat models versus consumption models and where we may be headed over the next couple of years. Investors are trying to figure out if software is able to deploy AI at the point of sale, or you have this sort of, like, incumbent versus startup debate from here.

And then of course the environment's been a little bit choppy to start the year, right? You have new AI budget that's getting spent across enterprises. We obviously had the conflict that is still ongoing. And so it's been a little bit of a noisy stretch, but at least investors are saying, "I can pick winners and losers," and that's a change from what you'd seen over the last couple of years. It was sort of correlation one type of pressure across the group.

Chris Hussey: And does that winner or losers in software just come down to your ability to employ AI versus your not ability?

Peter Callahan: Yeah. I think, frankly, yes. At the moment, it's whether you are able to indicate that AI is helping your business and driving faster revenue growth, and if it is, the market is very happy to re-rate shares.

Chris Hussey: Yeah. It was interesting because everybody wanted to sell software because they thought they would get disintermediated by AI, which is software.

Peter Callahan: That's exactly right. So the argument here is, "Hey, we are the companies that are actually at that point with all this context in an enterprise and customers will lean on us to help deploy AI for them."

Chris Hussey: So you mentioned semiconductors having their best year since 1999. On the one hand, 1999 is, you know, enthusiastic. As a Knicks fan, we're partying like it's 1999. On the other hand, 1999 didn't end well, even for Knicks fans. We're hoping for something better this year.

Talk to us about positioning. Are we over our skis? Where are we?

Peter Callahan: Yeah, it's a good question.  I think for semiconductors, listen, it's been a great start to the year. I think any time a group's up 80% like it is in five months, there's of course-- you have sort of these momentum dynamics. You have too far, too fast.

You have all that type of stuff that kind of matters over the short term. But I think over the medium term, what really matters is earnings revisions, right? And as long as you are getting earnings revisions for this group, which helps keep multiples in track, I think investors will be comfortable adding to this group on pullbacks or momentum unwinds or different pockets of positioning pressures that can show up, of course, when you have moves like this.

So I think at the end of the day, just keep tracking the earnings growth and I'll do my best to keep this group informed.

Chris Hussey: Please, we're going to be tapping into you. All right. What's the trade?

Peter Callahan: Yeah, one group we haven't talked about yet is US internet. The group, the way I cut the data, is about lagged software on the year, which is probably surprising to people.

There's ongoing debates about sources of funds, about  ongoing investment cycles, about the health of the consumer, and of course, where AI in the consumer world goes over the next couple of years. But as of late, you're starting to see a little bit more innovation from the product side on US internet companies tied to AI.

The temperature on the consumer seems to be coming down as oil prices have reset off the highs. And so given that backdrop and cleaner positioning, I'll be watching the US internet sector from here.

Chris Hussey: Yeah, no, it makes sense.

All right, we're going to go into June, believe it or not, next week. What are you watching for?

Peter Callahan: Yeah, I mean, just two things really, right? It's macro data, so you're going to get the sort of new monthly data, NFP data, and then mid-month CPI. And so we're just looking for the mix of jobs data, and then of course, what the inflation story is given the geopolitical conflict.

And then otherwise, in tech, we have a bunch of user conferences and things like that across software and semiconductors, and so I'll be looking to see how that sets the temperature and the tone on generative AI into the summer months.

Chris Hussey: You mentioned inflation. Historically, tech has been correlated with rates. Do rates matter to tech anymore?

Peter Callahan: They could matter. At the moment, the market's okay with that. Candidly, there's been so many cost inflation inputs into tech when you think about what the, sort of, AI supply chains had to weather in terms of input costs. So I think the market looks at it and says, "In the context of everything we're dealing with it, to deliver this AI infrastructure," it's something to keep an eye on, but at these levels, it has not been a primary concern

Chris Hussey: No, it really hasn't been. All right, I'm not looking at any of those things. I'm just looking at Wednesday night, we start the NBA finals. So last question, can the Knicks win the championship?

Peter Callahan: Why not?

Chris Hussey: Why not. All right; I'll take that as a rave. Pete, thanks so much for joining

Peter Callahan: Thanks for having me.

Chris Hussey: That does it for this week's episode of The Markets. I'm Chris Hussey. Thanks for joining us.

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