A weaker-than-expected U.S. GDP reading is raising fresh questions about consumer strength and broader economic growth, even as AI-related investment continues to support corporate earnings and equity markets.
BNN Bloomberg spoke with Drew Pettit, director of U.S. equity strategy at Citi Research, about why AI infrastructure spending remains the key driver of U.S. earnings momentum, why traditional cyclical sectors are weakening, and why investors remain concentrated in large-cap technology stocks.
Key Takeaways
- U.S. first-quarter GDP growth came in below expectations, with weaker consumer activity contributing to the slowdown.
- AI infrastructure investment continues to drive much of the growth in the U.S. economy and corporate earnings.
- Consumer and traditional cyclical sectors are showing signs of pressure as companies lower forward expectations despite solid first-quarter results.
- Large-cap technology and AI-linked companies continue to dominate U.S. equity performance because of stronger earnings momentum and pricing power.
- Investors remain cautious on small-cap and broader cyclical trades until inflation and interest-rate expectations become clearer.
Read the full transcript below:
ROGER: We have breaking economic news for you now. We are just getting in the GDP figures from the U.S. first-quarter data, and joining us now to discuss this more. Let’s talk about the numbers. First one we have is 1.6 per cent for GDP annualized quarter over quarter. Survey was two per cent. So, joining us now to talk a little bit more about these numbers is Drew Pettit, director of U.S. equity strategy at Citi Research. Drew, thanks very much for coming into studio. Appreciate it joining Dan and I today. One-point-six, survey was two per cent, a little lower than expected.
DREW: Yeah, a little lower than we expected. It’s funny, I heard this when you were talking about this at the beginning of the show. Everyone wants to translate this right to what this means for the market, and you said about half the S&P is tech. We think over half of it is AI. When you start thinking about the industrials, market impact directly is pretty low to us, but when you start thinking about areas like the consumer, I would definitely say the consumer, that’s where you get a little bit of concern. This is why, to us, you probably stay in a little bit more of a narrow market range where we’re focused on secular growth, tech, AI, for example, and stuff like small-cap probably continues to underperform when you have macro readouts that look like this.
ROGER: What might have dragged it down?
DREW: Again, it could be the consumer. It’s a little bit of spending power. It’s kind of the traditional side of the economy. AI investment infrastructure buildout probably drove most of the growth. If you take that out, you’re probably looking at real GDP growth that’s flat or negative in the U.S.
DAN: What’s interesting about that conversation, too, is just the big release of the balance sheets of the big FANG stocks, the Googles, the Metas of the world. I wonder how much runway there is to go beyond what they’ve already done, because they basically spent most of their free cash flow at this point. So, that impulse of growth from here, I’d be curious what you think there.
DREW: What you’re starting to see in the hyperscalers generally is the cash ROI is levelling out, so I think there is runway. While they’re spending a lot of their free cash flow, there are ways for them to get more cash. They actually have good returns on cash in their underlying businesses, and the concern in the capex numbers is the volume they’re getting for the dollars. We always talk about dollars when it comes to capex, but when memory prices go way up, when server racks and building infrastructure go way up, for every dollar they spend, they’re not getting more compute. But now that you’re seeing levelling out in cash ROIs, you feel a little bit more comfortable, and I think that’s why you’re seeing the hyperscaler trade start to come back as of late.
ROGER: That’s true. And I’m just trying to pull up some of the numbers as we’re looking at them. Real final sales to private domestic purchasers increased 2.4 per cent. Real gross domestic income increased 0.9 per cent. What do those numbers tell you when you hear them?
DREW: You’re hoping you get maybe a better outlook into the back half of the year for the consumer again. It’s funny, it’s all backward-looking, right? And what’s the concern today? It’s oil prices.
ROGER: Forward-looking, yeah.
DREW: Yeah. So, to us, probably expected Q1 numbers for retailers and consumers are not really that bad. Let’s be honest with you. No one really misses a whole lot when you think about U.S. earnings. It’s how much you beat by. But the market right now is looking for, are you raising? When you think about consumer and traditional cyclicals, they beat in Q1 and then they implicitly lowered their numbers for Q3 and Q4. So, backward-looking, okay, we get that, but the forward-looking question is whether this is sustainable.
ROGER: So, what will you be looking for going forward?
DREW: It’s growth. We talk a lot about the Nasdaq. It still looks really attractive to us, and everyone says, “Oh, that’s the easy trade, isn’t it?” because it’s worked. I would say it’s getting more and more uneasy because it’s worked so much. So, instead of thinking about traditional valuations, because we’re in a completely different growth regime that’s disconnected from macros, we think about what’s priced in. We think the market is pricing in five-year growth of, let’s call it, 17 per cent for the Nasdaq. The street consensus is modelling 18 per cent. You can still buy that. You can buy high valuations if growth comes through and you have upward revisions. So, to us: growth, pricing power, any company that can expand margins, and efficiency improvement where you’re starting to see sales grow faster than assets.
DAN: How do you think about this concentration in the U.S. equity market? I personally don’t think it’s a problem, so it’s a bit of a leading question, but how do you think about the big companies already scaling at such huge levels and, as the returns on the capex do flow through, that implies a lot more crowding out of the rest of the economy as a whole?
DREW: Yeah, this is interesting to me because all of your U.S. portfolio managers now have to deal with stuff I would say your emerging-market and single-country managers have dealt with forever.
DAN: Or Canadian portfolio managers.
DREW: Yeah, completely. Concentration is a new thing in the U.S., but it’s never freaked us out because you sit there and go, this happens in other markets. You do have to change your toolkit as a strategist. This is why we don’t sit there — and please kick me off the show if I ever do this — “Oh, 20 years of history between rates and the S&P and economic growth, and that’s what it means for the S&P 500.” No, it doesn’t. Throw that all out. You’ve got to look at the market a little bit more bottom-up. You have to have a view on the bigger names, but concentration in and of itself isn’t bad if you’re comfortable with those big stocks in the market.
ROGER: And we had started at the end of last year to see a rotation away from it a little bit, and all of a sudden it’s all come back to it. Is it going to continue that way? Are there any reasons to look elsewhere right now?
DREW: Not until you get some clarity on inflation and interest rates. When we talk about the broadening trade, we do like diversified types of risk, but to have real conviction in it, more than a tactical bounce — let’s say U.S. small-cap again — I keep coming back to saying consumer and traditional cyclicals. It’s not an either-or. You need good growth and rates down. You need both, and it’s hard to get conviction in rates down and good growth happening. You’re already looking at the market pricing in a hike for the Fed this year, and even if they do cut, you get worried about how sticky the 10-year is because the Fed doesn’t completely control that. On the growth side, you still feel good about the cash returns. You actually feel better about the cash returns versus six months ago, and on the back-end infrastructure side, they have great pricing power and they’re continuing to beat and raise. So, we’re happy to stay there. I wouldn’t say just buy price momentum. Buy price momentum that has really good earnings momentum, and we’re comfortable being there.
ROGER: All right, Dan, I’ll give you a last question.
DAN: Yeah, what I think is interesting about that — fully agree on that — is the higher long end and the impact on the housing market and repair-remodel, housing velocity. How do you think about the role that the AI pull is driving on the long end, which is then filtering into the conventional housing market, which has historically been a huge source of jobs and economic confidence?
DREW: This is interesting because we talk about AI and productivity enhancements, and productivity enhancements should be okay for inflation, but in the short run, it’s pushing prices up. So, in the short run, it’s a negative when you actually look at the long end staying high. It’s not because real rates or what they think the Fed’s going to do longer term is more restrictive. It’s all inflation expectations. That’s what’s moved up. So, AI is now affecting short-run inflation expectations because of the prices that go into chips, into your phone, into your car, into even your coffee makers, which are pretty smart today.
ROGER: Yeah. Not so smart.
DREW: Well, my wife calls me the coffee maker, so she’d probably say the same thing.
ROGER: All right, Drew, we’ve got to wrap it up there. But thanks very much for joining us.
DREW: Yeah, thanks for having me. Appreciate it.
ROGER: Drew Pettit, director of U.S. equity strategy at Citi Research.
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This BNN Bloomberg summary and transcript of the May 28, 2026 interview with Drew Pettit are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
