Bring on Big Tech Earnings
These financial institutions see just one more Fed rate cut this year
Equity futures are little changed as we move further into the September quarter earnings season. As we discussed in yesterday’s The Week Ahead video, not only does the volume of earnings reports swell this week, but the market will have to contend with quarterly results from five companies that account for 23% of the S&P 500 and nearly 30% of the Nasdaq Composite. What Alphabet (GOOGL), Meta (META), Microsoft (MSFT), Amazon (AMZN), and Apple(AAPL) deliver and the guidance they offer will likely dictate the market’s next move as well as reshape earnings expectations for the S&P 500. With the P/E ratio for that market barometer trading above 24x consensus 2024 EPS, it’s fair to say expectations for those five companies are running high.
While investors will dig into quarterly results from McDonald’s (MCD) and Pfizer (PFE) this morning as they further digest tepid guidance from Ford Motor (F), the tech fun begins after today’s market close. Shortly after closing bells ring, Snap (SNAP), Reddit (RDDT), and Advanced Micro Devices (AMD) will share their September quarter results and guidance but the focal point will be on those from Alphabet. Shareholders will be interested in the usual Search metrics and the degree of margin improvement, while the pace of growth at Google Cloud becomes the hurdle for Amazon Web Services, Microsoft’s Azure, and Meta’s cloud business.
Comments on AI adoption and monetization, how Google is utilizing AI in search and advertising, and if Alphabet lifts its 2H 2024 capital spending further to meet the exploding demand for AI will also set the stage for other Big Tech results tomorrow and Thursday. Rising capital spending levels for cloud and data centers would give a boost to stocks like Nvidia (NVDA) as well as our Digital Infrastructure model but it may also raise questions about when these companies will start to reap the rewards of these investments in the form of revenue and profits.
Today also brings the start of this week’s barrage of employment data with the September JOLTs report. While the data will fill in the lines around the health of the overall jobs market in 3Q 2024, the jobs action many are waiting for will come tomorrow with ADP’s Employment Change report, and the 115,000 jobs it is expected to show were added during October. Should that be the reported figure, it would be a noticeable step down from the 143,000 jobs added in September and reaffirm the expected drop in Friday’s October Employment Report. The current consensus figures for that barometer on job creation is 123,000 jobs, less than half the number created in September.
Figures like that support expected 25-basis point rate cuts next week and again in December, but should the jobs market surprise meaningfully to the upside like it did in September, we are likely to see rate cut expectations between November and June soften further. Seeds for that potential upside surprise were found in S&P Global’s Flash PMI report for October which found “Employment fell for a third straight month in October, though the decline was again only very modest and less than reported in August and September.”
Interestingly enough, when asked about the prospect of two more rate cuts this year at Saudi Arabia’s Future Investment Initiative, not a single executive in a panel that included the heads of Goldman Sachs (GS), Morgan Stanley (MS), Standard Chartered Plc (STAN), Carlyle Group (CG), Apollo Global Management (APO), and State Street Corp (STT) raised their hands. The majority of those folks see one more reduction by the end of 2024.
As we wait for those earnings and jobs data, the White House announced that $3 billion from the Inflation Reduction Act has been earmarked to strengthen port infrastructure, the latest announcement that bodes well for our Rebuilding America model.
Model Musings
Artificial Intelligence
“The startup ecosystem is shifting due to the rise of artificial intelligence. AI favors larger companies, necessitating a change in mindset for startups from disruption to transformation. While startups will face challenges in accessing sufficient data and computing power, they still have opportunities to innovate by providing AI-driven services directly to consumers.” Read more here
Artificial Intelligence, Digital Infrastructure
“For competitive reasons, wireless carriers typically don’t reveal too many specifics about their network expansion and upgrade plans. So when T-Mobile executives were asked during Wednesday’s Q3 earnings call to elaborate on their plans for mid-band 5G upgrades, they steered the conversation to the tools they use to determine how they’re going to expand coverage – as opposed to detailing exactly where and when they will deploy. Their approach – and brace yourself, this is going to be a real shocker – is based on artificial intelligence (AI).” Read more here
Artificial Intelligence, Safety & Security
“President Biden issued a first-of-its kind memorandum Thursday meant to provide guidance for national security and intelligence agencies on how to effectively and responsibly use AI to further American interests… Alex Miller, chief technology officer for the Army’s chief of staff, said he appreciates the White House’s leadership on the issue, but he’s concerned a lack of access to and funding for core, enabling technologies like cloud storage and computing power is slowing down the Defense Department’s integration of AI tools. “We haven’t done all the infrastructure work to set up the core technologies to do AI at scale,” Miller said at the Military Reporters and Editors conference. “If we’re really serious about it, there is a lot more investment we should be making at a national level.” Read more here
CHIPs Act
“The semiconductor industry is currently grappling with insufficient capacity due to a recent surge in global demand. This has prompted major players to explore alternatives, consequently drawing related industries towards the high-margin semiconductor...” Read more here
Cybersecurity
“Russian, Chinese, and Iranian state-backed hackers have been active throughout the 2024 United States campaign season, compromising digital accounts associated with political campaigns, spreading disinformation, and probing election systems. But in a report from early October, the threat-sharing and coordination group known as the Election Infrastructure ISAC warned that cybercriminals like ransomware attackers pose a far greater risk of launching disruptive attacks than foreign espionage actors.” Read more here
“A U.S. government panel plans to investigate how Chinese hackers breached several U.S. telecommunications networks, seeking to spy on prominent Americans, including former President Donald Trump and associates of Vice President Kamala Harris’s campaign, according to people familiar with the matter. The probe by the Cyber Safety Review Board will examine the lapses that allowed the hackers, who are believed to be working for a Chinese intelligence agency, to orchestrate a series of intrusions that some Biden administration officials fear amount to a major espionage coup against the U.S.” Read more here
Digital Infrastructure
“Sunrun Inc. is in discussions with data center developers to supply distributed solar power generation for their facilities, Chief Executive Officer Mary Powell said. The San Francisco company, which specializes in residential solar and battery systems, is looking at “a couple different really cool models,” she said Friday at the Dervos 2024 conference. Those models could include working with electric utilities to provide bespoke solar systems for new data centers or leveraging existing Sunrun systems in nearby communities…” Read more here
Digital Infrastructure, Digital Lifestyle
“By the end of 2023, it is estimated that 57 percent of the global population, or about 4.6 billion people, were using the mobile internet. This is based on data drawn from the GSMA Consumer Survey, the GSMA Mobile Connectivity Index (MCI), and a range of other industry reports. This figure is up by 160 million people over the year, indicating a slowdown in growth compared to 2015-2021, when the world was adding more than 200 million people each year to the connected list… The International Telecommunication Union (ITU) and International Monetary Fund (IMF) have estimated that around $430 billion of investment would be needed to put in place the infrastructure required to enable universal access to mobile broadband by 2030, according to the report.” Read more here
Digital Lifestyle
“We're adding to that list by testing new homepage features and design elements on the Amazon Shopping app for iOS and Android for millions of customers in the U.S. These features bring customers a more personalized and easy-to-navigate place to start their shopping and showcase products and services from across Amazon that reflect their interests and shopping habits. We're testing these new experiences with select customers and look forward to sharing with more U.S. customers in the coming months.” Read more here
Luxury Buying Boom
“Brunello Cucinelli said it still expects to grow strongly in the coming years after quarterly sales climbed in defiance of a slowdown that is plaguing many of its rivals in the industry… The company—which has exposure to a more affluent clientele than some of its rivals—has been relatively insulated from the slowdown in sales that some of its peers with a more varied customer base have experienced in recent months.” 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.