A Rich Market Valuation Means Companies Will Walk a High Wire as Earnings Season Heats Up
Will the September CPI and PPI data support a no-landing scenario for the economy?
With Hurricane Milton knocking out power to an estimated three million people in Florida, equity futures are modestly in the red ahead of this morning’s September Consumer Price Index (CPI) report. When that data is released at 8:30 AM ET, we’ll see how on the money the market consensus forecast is, which calls for headline CPI to fall to 2.3% YoY while core CPI for September remains at 3.2% YoY. Sequentially, lower oil and gas prices should have a positive impact on headline figures but higher wage data found in the September Employment Report and spiking price data contained in ISM’s September Service PMI data signal the market may be disappointed with the published figures.
Investors will also be interested in post-CPI report comments from four Fed officials making the rounds today, especially because the September Employment Report has tilted the market narrative closer to a no-landing scenario for the US economy. Yesterday’s upward revision for the Atlanta Fed GDPNow model to 3.2% for the current quarter did little to argue against that scenario, supporting the potential for fewer rate cuts by the Fed in the coming months.
We’ll go through this again tomorrow with the September Producer Price Index (PPI), and the same September Service PMI data from ISM argues we could see another tick higher in core PPI data following the one recorded in August. That would be another flag for the Fed officials as they monitor the rebound in oil prices that has unfolded in the last few weeks.
With the S&P 500 closing last night at 23.9x expected 2024 EPS, it’s more than fair to say that the P/E valuation multiple is stretched. As we head deeper into the September quarter earnings season, which will refresh S&P 500 EPS expectations for the 2H 2024, it shouldn’t be lost on folks that the latest P/E ratio for the S&P 500 is back near levels last seen since 2002.
Could a better-than-expected set of inflation data today and tomorrow propel the market higher?
It’s possible, but that would only serve to extend the market multiple even further and potentially push the S&P 500 into overbought territory. Should that come to pass, it would bring extremely high expectations for September quarter earnings and guidance for the coming quarters. That’s a high tightrope for companies to walk amid election uncertainty, hurricane destruction and damage, and selective consumers.
Model Musings
Aging Population
“The population of people aged 65 and over in Japan was estimated at 36.25 million as of Sunday, up by 20,000 from a year earlier and hitting a record high, the internal affairs ministry said ahead of Monday's Respect for the Aged Day. Such older adults accounted for 29.3% of the country's total population…” Read more here
“Italy faces the most severe demographic decline in Europe, with Scope Ratings projecting an almost 19 per cent reduction in its working-age population by 2040. This far surpasses the expected drops in countries like Germany (14per cent) and France (2 per cent). The alarming statistic is compounded by Italy’s birth rate, which fell to a historic low of 379,000 in 2022, marking the 15th consecutive year of decline — the lowest since the country’s unification in 1861…” Read more here
Artificial Intelligence
“Meta Platforms Inc. is expanding its AI-powered chatbot to 21 new locations, including the UK and Brazil, where the social media giant has significant numbers of users, the company announced Wednesday. Meta AI, the company’s chatbot, lets users converse and get recommendations on its Facebook, Instagram, WhatsApp and Messenger apps. It’s also available as a voice assistant in the social media giant’s smart glasses and mixed reality headsets.” Read more here
“Amazon.com Inc. unveiled a new artificial intelligence tool designed to solve a major pain point in its quick delivery apparatus: drivers rummaging through cluttered vans at each stop searching for packages… Called Vision Assisted Package Retrieval and in development since 2020, the tool will be deployed in 1,000 Amazon vans next year and will shorten the typical delivery route by about 30 minutes…” Read more here
Cybersecurity
“The largest regulated water and wastewater utility company in the United States announced Monday that it was the victim of a cyberattack, prompting the firm to pause billing to customers.
New Jersey-based American Water — which provides services to more than 14 million people in 14 states and on 18 military installations — said it became aware of the unauthorized activity on Thursday and immediately took protective steps, including shutting down certain systems.” Read more here
“Today, Proofpoint, Inc., a cybersecurity and compliance company, and Ponemon Institute, an IT security research organization, released the results of their third annual survey on the effects of cybersecurity in healthcare. The report found an increase of 77 percent from last year in patient care disruption due to cyberattacks.” Read more here
Digital Infrastructure
“Taiwan Semiconductor Manufacturing Co. on Wednesday beat forecasts in posting a sharp increase in its third-quarter revenues in a sign of ongoing demand for high tech chips driven by the continuing artificial intelligence boom. The Taiwanese chipmaker, which is the main supplier of advanced semiconductors to Apple and Nvidia, reported September sales worth NT$251.87 billion ($7.82 billion), in what marks a 39% increase in its revenue compared to the same month last year.” Read more here
Digital Lifestyle
“In today’s digital age, streaming media has woven itself into the fabric of daily life in America. The recent survey reveals a striking statistic: on average, Americans are dedicating a substantial three hours and nine minutes each day to streaming digital media. This engagement translates to over 21 hours per week—equivalent to the commitment of a part-time job. This significant investment of time underscores the central role that streaming services play in entertainment and information consumption for the average American.” Read more here
Homebuilding & Materials, Rebuilding America
“Hurricane Helene tore through the Southeast at the end of September, destroying roads and bridges, knocking out electricity and cell service, sweeping away homes… Preliminary estimates place the price of rebuilding from Helene in the tens of billions: On the lower end is $30.5 to $47.5 billion, from CoreLogic, a California-based financial and consumer analytics company, while forecasting company AccuWeather pegs it from $225 to $250 billion. “ Read more here
“Hurricane Milton’s once-in-a-century potential could cause damage of more than $50 billion, with the potential to leave behind devastation approaching $175 billion or more in a worst-case scenario, according to leading Wall Street analysts. That would be on top of the carnage already left behind by Hurricane Helene, posing a potential record-breaking path of wreckage…” Read more here
Safety & Security
“There’s no shortage of excitement on NATO’s eastern flank over military hardware nowadays. Put together, 14 member states have ramped up defense spending since Russia’s invasion of Ukraine to a level unseen since the fall of communism. It amounts to $70 billion this year alone. Yet the orders for jets, helicopters, tanks and missile systems have exposed just how much more needs to be done to catch up with NATO standards at the most perilous time since the Cold War.” Read more here
“The Norwegian government proposes to increase the defense budget for 2025 by NOK 19.2 billion, up to a total of NOK 110.1 billion. The proposal fulfills the first major promise of the Norwegian long-term defence plan and exceeds NATO's target of its members spending 2.16 percent of their gross national product (GDP) on defense.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
Digital Payments - This model focuses on companies benefitting from the accelerating structural adoption of digital payments and financial technology (FinTech).
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.