Market volatility and pressure on growth stocks are complicating portfolio decisions, particularly in technology-linked sectors. One strategist says selective exposure to AI infrastructure and fintech could still offer opportunity as investors rotate between different types of risk.
BNN Bloomberg spoke with Drew Pettit, U.S. equity strategist at Citi, about why he favours small- and mid-cap AI enablers, how valuation concerns are weighing on software stocks, and where fintech firms tied to consumer and small-business credit could benefit if liquidity improves.
Key Takeaways
- Small- and mid-cap AI infrastructure companies offer exposure to artificial intelligence at lower valuations than mega-cap peers.
- Cash flow strength and balance-sheet flexibility are key factors in determining which AI-linked companies can withstand volatility.
- Fintech firms focused on alternative credit and payments could benefit if consumer liquidity increases.
- Buy now, pay later providers may continue gaining share as consumers rely more on non-traditional credit.
- Volatility is concentrated in high-growth innovation stocks, while cyclical and profitable small-cap names have been more resilient.
Read the full transcript below:
ANDREW: It’s never easy for investors to make heads or tails of markets, but it’s especially challenging right now. Our guest says he’s still generally comfortable with value stocks, particularly small- and mid-cap names tied to artificial intelligence. He looks for what he calls AI enablers.We’re joined by Drew Pettit, U.S. equity strategist at Citi. Drew, always great to hear from you. Thanks very much for joining us. We’ll get to some of your stock ideas shortly, but first, what do you mean by AI enablers?
DREW: We think about AI from a value-chain perspective. It’s not just about creating large language models. On the back end, you need infrastructure. The enablers are really the front end of the supply chain. That can include building physical infrastructure, chips in data centres and power. It’s not just software or the tools people see and use every day.
ANDREW: What about the big names we think of as AI plays — Alphabet, Meta, even Amazon, given how much AI capacity the cloud will require?
DREW: We still like having some exposure there. If you’re going to play that end of the value chain, you want to stay up-cap with companies that have a lot of cash. They’re investing heavily, and investors are trying to decide whether those investments will generate future returns. If we’re going to make a bet there, we’d rather own high-quality companies generating strong cash flow that can pivot as circumstances change.When you move back in the value chain, small- and mid-cap names become more interesting because you’re paying a lot less. They’re not expensive by any means. If you’re looking at, say, 25 per cent growth in 2026, we’d rather pay 20 to 25 times earnings than 30 times for some mega-cap enablers.
ANDREW: You also have some fintech ideas. Let’s start with SoFi Technologies on the Nasdaq. Remind us what they do and what draws you to the name.
DREW: This is a bit of a different trade and talking point. We’re thinking about fintech. When people were looking at changing dynamics in U.S. politics heading into the midterms, they were asking how to trade a consumer getting juiced up. Many focused on consumer stocks, but we thought fintech actually had more leverage.SoFi delivers financial services to smaller consumers who may be underbanked. They provide lending, crypto investing and a broad set of financial services targeted to people who may not get the same level of service from large banks.
ANDREW: Another name you’ve mentioned is Affirm, which is well known for buy now, pay later credit.
DREW: Exactly. If you give the U.S. consumer an extra US$100 they didn’t have before, they may want to spend two, three or even US$400, which means they need credit. Alternative credit is likely to continue taking share in lending. Affirm — and another name like Klarna — fits into that buy now, pay later theme.
ANDREW: Klarna as well. Remind us what Klarna is all about.
DREW: Same idea — buy now, pay later and alternative credit, particularly for consumers who may not be getting as much credit from traditional banks.
ANDREW: And Block is another fintech name, though it’s more involved in payments.
DREW: Yes, but on the back end, beyond Cash App and peer-to-peer transactions, they also do micro-lending and provide payment platforms for small and medium-sized businesses. If you’re going to juice the lower end of the U.S. economy, these are disruptive companies that can take market share.That said, in risk-off environments, these stocks don’t trade well. They’re high-beta, satellite-type names you add to a portfolio when liquidity improves and risk appetite returns.
ANDREW: Leave us with a final thought. Do you think we’re going to see investors avoid volatile assets for a while?
DREW: I think it’ll come in phases. So, no, not broadly. There are parts of risk and volatility that are actually holding up. You opened by noting we still like value, especially cyclicals. If you look down the cap spectrum, profitable U.S. small- and mid-cap names showing inflecting growth and improving margins are still up 10 to 12 per cent this year.That’s cyclical, risk-on exposure. Most of the volatility is concentrated in innovation and growth risk. We think we’ll rotate from one type of risk to another. We still believe we’re in a bull market, but it’s later stage and likely to be more volatile.
ANDREW: Drew, thank you very much. We appreciate it. Drew Pettit, U.S. equity strategist at Citi. Have a great weekend.
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This BNN Bloomberg summary and transcript of the Feb. 6, 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.