Is Big Tech's rapid growth under AI trends conflating to a potential bubble scenario for the sector? BlackRock Americas iShares Investment Strategy Head Gargi Chaudhuri discusses the quality and value characteristics artificial intelligence stocks tend to have, outlining the two industries that may catch a second wind later in 2024.

Chaudhuri describes the two lovable laggards as being "areas that investors haven't really reached into in terms of flows or when we look at flows it's what's revealed to us as really under-owned..."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: We have been discussing about Big Tech here. And there has been some increasing discussion as of late about the B word, the bubble word, right? And it seems as though the bulk of strategists are coming out and saying, this is not a bubble. We're not there yet, that they're not seeing those characteristics. How are you thinking about tech and whether we're there?

GARGI CHAUDHURI: Good afternoon, Julie and Josh. It's great to be here. Congratulations on your new show. Very exciting. So first things first, I think that, you know, we think broadly about the growth and quality space.

So, you know, as you and I have discussed before, obviously AI is huge. It's a mega trend that we are focusing on. But really investors are much more thoughtful around adding quality in their portfolio. So that's what we have seen garner a tremendous amount of inflows.

And again, when we talk about quality, what we do mean is some of those characteristics that AI companies tend to have, which is very strong and stable earnings, which is low leverage, which is a lot of excess cash flows. And I think all of those are in vogue now.

I think even in a world where the Fed-- and this is not the base case. But even if we can envision a world where the Fed probably just goes a few less times than what is priced in the market right now, I think that still bodes well for the quality as well as the large cap theme, which is what we like.

JOSH LIPTON: And you also call out specifically, Gargi, you see opportunity, what you call lovable laggards. What is that-- what does that mean, Gargi, exactly? Which sectors fit that criteria?

GARGI CHAUDHURI: Yeah. So, you know, when we came out with our year ahead outlook, which was back in December, the two areas that we felt that were most likely to catch up to the rest of the market were financials and health care.

And with the reason that we chose each of them were a little bit different. For financials, it was very much around that procyclical move. It was around our expectation that the yield curve may steepen a little bit or at least not continue to flatten.

For health care, it was very much about the expectations of growth. Obviously, the first couple of months of the year, we've seen health care do very well, keep up with the S&P financials as well. We still do think actually there's a little bit more room to run there, especially if we continue to believe that a steepening or at least a lack of flattening is in the stores for us for the next couple of months as well.

So the lovable laggards-- areas that investors haven't really reached into in terms of flows, or, you know, when we look at flows, it's what reveals to us as really underowned-- continue to be that health care and financials and the growth dynamics-- earnings growth dynamics, especially for health care, you know, sort of beginning to turn in the second quarter or so of this year.