The new AI craze has many investors wondering where to put their money. Liz Ann Sonders, Managing Director and Chief Investment Strategist at Charles Schwab, joined TheStreet to offer a solution. Rather than investing in individual stocks, she suggests focusing on sectors that are embracing AI to benefit from its full potential.
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Full Video Transcript Below:
SARA SILVERSTEIN: And what's your advice to your clients and investors right now as far as how they should position from a sector basis or, you know, given the current market dynamics?
LIZ ANN SONDERS: Yeah so from a broader asset allocation perspective, you know, Schwab is $9 trillion of client assets. So we don't tend to suggest a lot of movement around in terms of your strategic asset allocation and exposure to equities. That's going to depend on where you sit on the risk spectrum, what your time horizon is, need for income, you know, et cetera. et cetera. But within the equity portion of the portfolio, we think you want to take a combination of both a sector approach, but also a factor approach. Factor is just another word, of course, for characteristics. So we have outperform ratings as of this moment on financials, energy and materials, and we have underperform ratings on REITs and consumer discretionary.
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Now that can change, but that's where the current ratings are, which leaves the remaining sectors at call it neutral or market perform. But we also think particularly for stock pickers out there that you don't want to just monolithically, you know, by the energy sector or by materials or by financials, you want to do additional factor based screening. And the factors we've been emphasizing kind of have a quality and almost GARP wrapper around them. So you want to look for quality type companies, you want to look for strong balance sheet, relatively low leverage ratios, high interest coverage. You want to have a combination of growth and value factors. So that positive earnings growth, earnings stability, but also somewhat reasonable valuations, you want to have that value component to it. So again, it's kind of a quality wrapper, but you want to bring into the mix a screening for factors. So that within sectors that might look attractive to us, you're also taking that additional step of screening for the highest quality companies.
SARA SILVERSTEIN: And I know tech it sounds like it's in one of your neutral areas, but AI is something that people are looking to get exposure to. Do you look at those the same and all the attention on Nvidia's movements. Not your opinion on Nvidia in particular, but just how that plays into the importance of the overall market?
LIZ ANN SONDERS: Yeah so, you know, you're right to point out that I don't cover individual stocks and I don't cover Nvidia, but we know through the psychological channels it's incredibly important. Not to mention the fact that and this is prior to the release of their first quarter earnings because we're not doing the math. We're not analysts. But prior to that you had Nvidia represent more than 3% in terms of contribution to overall S&P 500 earnings. One stock. Now that's in the third spot and it may have jumped since the release of their earnings relative to Apple and Microsoft, but their earnings growth rate for Nvidia is a lot higher than either of those stocks, even though those stocks contribution in terms of percent to earnings.
So as of, for instance, what that ultimately means is that the expectation for first quarter earnings for the tech sector is about 25%, but you exclude Nvidia from that and you drop down to about 10% or 11% So you can see that bifurcation in the importance in this case of one stock. broadly specific to AI. There's still a lot of attention on AI, but but things like mentions on conference calls has actually waned relative to what the recent peak was in the fourth quarter. And I do think the attention is not shifting, but it's morphing into just as much a consideration of the AI adopters of the users across a spectrum of sectors and industries and types of companies where the questions are more about how are you adopting AI, how are you using AI as opposed to last year, which was almost solely about the kind of creators or infrastructure associated with AI.
