Big Tech Digestion, Prepping for the October Employment Report
Big Tech Digestion, Prepping for the October Employment Report
Microsoft and Meta earnings with Apple and Amazon on deck
Equity futures are under pressure this morning as the market digests quarterly results published last night from Microsoft (MSFT) and Meta Platforms (META). Both companies posted consensus topping September quarter revenue, but both reaffirmed plans for higher capital spending in the coming quarters, joining Alphabet (GOOGL) in that endeavor. As Meta explained it is earnings press release:
“We anticipate our full-year 2024 capital expenditures will be in the range of $38-40 billion, updated from our prior range of $37-40 billion. We continue to expect significant capital expenditures growth in 2025. Given this, along with the back-end weighted nature of our 2024 capital expenditures, we expect a significant acceleration in infrastructure expense growth next year as we recognize higher growth in depreciation and operating expenses of our expanded infrastructure fleet.”
While these increasing spending levels may lead some to ask fresh questions about the timing of AI monetization, examining the earnings reports from those three Big Tech companies as well as those from ServiceNow (NOW), IBM(IBM) and others indicates that is already underway. In short, we see those findings and related signals, like the ones below, supporting our Artificial Intelligence model. As far as those increasing spending levels go, more demand for the companies inside our Digital infrastructure model is how we see it. The continued buildout of data center capacity also bodes well for another model we’re currently developing - more on that before too long.
Quarterly results out this morning from Mastercard (MA) will give us another look at the consumer and spending prospects for the holiday season. We suspect there will be at least some comments supporting our Cash-Strapped Consumer model as well as our Digital Payments during Mastercard’s earnings conference call.
We’ll also want to dig into comments from Samsung (SSNLF) for its smartphone segment as well as its capital spending plans, which could influence the constituents of our CHIPs Act model. While best known for its smartphones and other connected devices, Samsung is one of the largest spenders on semiconductor capital equipment.
The September quarter earnings fun will continue after today’s market close with Amazon (AMZN) and Apple(AAPL) on deck. Amazon should benefit as AI accelerates cloud adoption and its July 16-17 Prime Day event should support favorable digital shopping results. While the company tends to shy away from formal guidance, we’ll be parsing what it says about digital advertising and the 2024 holiday shopping season with an eye toward our Digital Lifestyle model. When it comes to Apple, expectations are all over the map for iPhone shipments but we continue to think that as Apple releases more Apple Intelligence capabilities through upcoming software releases, the expected iPhone upgrade cycle should materialize.
Before we turn to the economic data coming at us today and tomorrow, we first have to discuss yesterday’s much stronger-than-expected ADP Employment Change Report for October. That along with the findings in the October Flash PMI report from S&P Global (SPGI) suggests we are likely to see a much stronger October jobs report compared with the market consensus of 115,000 nonfarm jobs.
If that is the delivered outcome, we could see the Fed telegraph a slower pace of rate cuts over the coming months, something the market is anticipating given the climb we’ve seen in the 10-year Treasury yield (see the graph below) and some shifting in probabilities found in the CME FedWatch Tool.
Currently, that tool still shows the market penciling in two 25-basis point rate cuts for the remainder of this year. Now let’s see if this morning’s September PCE Price Index and the October Employment Report support that level of activity or point to a market having to once again revisit the expected pace of rate cuts.
Model Musings
Aging Population
“Societies worldwide are navigating the challenges and opportunities presented by a growing aging population. As birth rates decline and life expectancy rises, communities are adapting to meet the needs of older adults. The shift toward an older demographic is evident, driven by declining birth rates and improved healthcare. This trend has led to a larger proportion of older adults, prompting changes in how societies plan for the future.” Read more here
Artificial Intelligence
“Tech behemoth OpenAI has touted its artificial intelligence-powered transcription tool Whisper as having near “human level robustness and accuracy.” But Whisper has a major flaw: It is prone to making up chunks of text or even entire sentences, according to interviews with more than a dozen software engineers, developers and academic researchers. Those experts said some of the invented text — known in the industry as hallucinations — can include racial commentary, violent rhetoric and even imagined medical treatments.” Read more here
“Apple's artificial intelligence features are finally rolling out today, but you might find yourself saying, “Is that it?”… The features that may indeed take the iPhone to new “heights” are only available in iOS 18.2. These include Image Playground, which lets you call on AI to generate images from text; Genmoji, to create new emojis from text; and Visual Intelligence, which can identify what's in front of you and provide context (like the name of an actor on a poster). I fully expect Genmoji to be the next hot thing because who doesn't want to create custom emojis?” Read more here
Data Privacy & Digital Identity
“Italian police have placed four people under house arrest as part of a probe into alleged illegal access to state databases, and are investigating dozens, including Leonardo Maria Del Vecchio, son of the late billionaire founder of Luxottica, a source said on Saturday… The illegal access to confidential data, which was allegedly sold to customers or used to blackmail businessmen and politicians, went back to at least 2019 and continued up to March 2024, a court document seen by Reuters showed.” Read more here
“LinkedIn earned itself a €310 million ($335 million) fine by European Union regulators on Oct. 24 for its violations of the General Data Protection Regulation (GDPR) data privacy rules. Ireland's Data Protection Commission (DPC) cited concerns regarding the lawfulness, fairness, and transparency of personal data processing for the professional networking site's advertising purposes.” Read more here
Digital Infrastructure
“AT&T said on Monday it had struck a $1 billion multi-year deal with Corning to buy fiber, cable, and connectivity solutions, as the U.S. telecom giant looks to expand its high-speed internet services. With the U.S. wireless market facing a slowdown, telecom companies such as AT&T and rival Verizon have doubled down on their high-speed internet businesses, an area that has long been dominated by broadband companies such as Comcast…” Read more here
EV Transition
India's Tata Technologies reported a drop in profit for the third consecutive quarter, hurt by slowing global demand for electric vehicles… Use of electric vehicles has grown rapidly in recent years to account for 2% of India's annual sales of 4.2 million cars, but sales growth is now faltering, which analysts blame on high prices and a lack of charging facilities.” Read more here
“South Korean battery maker LG Energy Solution said on Monday it had a "conservative" view of revenue growth next year and that it will significantly reduce capital expenditure due to slowing electric vehicle demand, after booking a 39% third-quarter profit drop. The company, which supplies Tesla, General Motors, and Hyundai Motor also expects the result of the U.S. presidential election next week to have a significant impact on EV market direction…” Read more here
Homebuilding & Materials
“Currently, there are about 30 renter households for each available home for sale, up from less than 10 in 2006, according to Freddie Mac’s latest market outlook report. The supply shortage dates back to the Great Recession, which dealt a major blow to new home construction. Since then, construction has slowly increased, but failed to keep pace with demand, resulting in a shortage of at least 1.5 million homes.” Read more here
Safety & Security
“The US Army is looking to speed up weapons development and procurement to keep up with evolving technology and make sure new equipment isn’t out of date before it gets into the hands of American soldiers, the Army chief of staff said in an interview… One focus is buying cutting-edge weapons, including drones and electronic warfare systems, in smaller tranches instead of waiting on long-term purchase orders. The process has been piloted as part of an army initiative called “transforming in contact,” which looks to flood select brigades with advanced equipment. The Army has worked with about two dozen companies including Anduril Industries Inc., Palantir Technologies Inc. and Elon Musk’s SpaceX as part of “transforming in contact.” 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.