Election Day Today, Then The Fed -How We See It
"Unwavering" AI, housing data points, ISM October Services PMI
Equity futures are up modestly this morning with investors digesting “unwavering” AI demand per Palantir (PLTR)and October revenue from Apple (AAPL) partner Foxconn (HNHPF). Amid the digestion of those reports and numerous others coming today as well as the October ISM Services PMI, the mood hanging over the market will be the 2024 presidential election. After months of campaigning, today is Election Day, and being the policy-specific people that we are, all we’ll say is get Rock the Vote! Be sure to get out and cast your vote.
While we could see a winner declared tonight or early tomorrow, we recognize it’s possible it could be a bit longer until we know who the next president-elect is. We’d also point out that while attention has been focused on the next commander-in-chief, as investors we must also pay close attention to the composition of Congress. The outcome on both fronts will tell us a great deal more about the potential policy roadmap ahead and that is what investors will need to puzzle through when it comes to analyzing various market segments.
“Unwavering” demand for AI
Last week Microsoft (MSFT) shared demand for AI and cloud was outstripping demand. Last night on its earnings call, Palantir added another layer of strong support for AI adoption. “As America rapidly embraces the AI revolution, this increase in AI demand has driven the outperformance in our U.S. business, which grew 44% year-over-year. Our U.S. commercial business grew 54% year-over-year and 13% sequentially. Our U.S. government business grew 40% year-over-year and 15% sequentially, a seven-fold increase compared to the prior year period growth rate and the strongest growth we've seen in 15 quarters.”
Building on Palantir’s comments, Foxconn’s October revenue rose 9.8% sequentially and ~8.65 year over year hitting record levels with continued strength in AI servers, computing products, and smart consumer electronic products. The next data point for AI, smartphones, and AI PCs will be Taiwan Semi’s (TSM) October revenue report, which could come later this week or early next week. We’ll also be paying attention to comments after today’s market close from Lumentum (LITE).
The above comments bring additional layers of support for our Artificial Intelligence and Digital Infrastructure models, but they weren’t the only data points. The sequential improvement in NXP Semiconductor’s (NXPI) Communication Infrastructure segment is constructive for our Digital Infrastructure model. We’ll match that against end-market demand comments this morning from Global Foundries (GFS) and its comments about chip capacity and capital spending will be something we watch for our CHIPs Act model.
Homebuilding data points on deck
For our Homebuilding & Materials model, we have a triple-shot of data points coming from LGI Homes (LGI)Builders FirstSource (BLDR), and TopBuild (BLD). In recent weeks, homebuilders have guided for stronger deliveries in 2H 2024 but as mortgage rates rebounded, new home mortgage applications have slowed. This could lead to more conservative guidance from these three companies, but our play with this model is more attuned to the Fed getting monetary policy back to a more neutral footing over time and the ensuing rebound in housing activity.
What to watch in the October ISM Services PMI data
Turning to today’s economic calendar, following last week’s issue-riddled October Employment Report, the focus will be on the October ISM Service PMI and what it says about the part of the economy that has been carrying the overall economy. We won’t be the only ones leaning on the data and what the picture it reveals for October job creation in the service sector. Our thinking is between those findings and ADP’s far stronger-than-consensus October jobs print, the Fed will have a clearer picture of the strength of the labor market than indicated by the October Employment Report.
Getting ready for the Fed
That same October Employment Report also gives the Fed ample cover to deliver a 25 basis point rate cut Thursday afternoon. The odds of Fed Chair Powell issuing overly dovish comments about the pace of future rate cuts is likely to disappoint. Outside the October Employment Report, the bulk of data has pointed to a resilient economy and recent inflation figures have been sticky. This suggests Powell and crew are more likely to stick to the Fed playbook of making decisions meeting by meeting and remaining data dependent.
As you think about this, let’s remember the Fed will deliver its next set of updated economic projections with the results of its December meeting. From our perspective, the greater point of focus should not be whether the Fed is cutting this or that time but rather the stated goal to get Fed policy back to neutral over time. The challenge will be contending with a market that more often than not gets ahead of itself when it comes to rate cuts.
Model Musings
Artificial Intelligence
“Walt Disney is forming a new group to coordinate the company's use of emerging technologies such as artificial intelligence and mixed reality, as the media giant explores applications across its film, television and theme park divisions. The newly formed Office of Technology Enablement will be led by Jamie Voris, the film studio's chief technology officer who spearheaded development of Disney's app for the Apple Vision Pro mixed reality device…” Read more here
“Revenue from cloud businesses at Amazon, Microsoft, and Google reached a total of $62.9 billion last quarter. That figure is up 22.2% from the same period last year and marked at least the fourth straight quarter in which their combined growth rate has increased. Accelerating growth in cloud computing is the surest sign yet that spending by AI customers is beginning to justify the huge investments tech giants are making in infrastructure to power the technology.” Read more here
“Visa is leaning on staff to quickly drum up generative AI use cases even as the payments giant streamlines its international business and cuts jobs. President of Technology Rajat Taneja said the company already has more than 500 generative artificial intelligence applications in use, the result of a go-fast strategy designed to reap the AI’s benefits sooner and keep pace with bad actors whose fraud methods are becoming more sophisticated.” Read more here
Artificial Intelligence, Digital Lifestyle
“OpenAI on Thursday launched a search feature within ChatGPT, its viral chatbot, that positions the high-powered artificial intelligence startup to better compete with search engines like Google, Microsoft’s Bing and Perplexity.” Read more here
Cash-Strapped Consumer
“Nationwide child care prices continue to rise: the average weekly cost of a nanny for an infant in 2023 was $766, up 4% from a year earlier. For daycare, the average weekly expense is $321, up 13% from 2022 levels, according to online caregiving platform Care.com. As these costs outpace inflation, there’s increased pressure on working women and the financial state of their families, the Bank of America report found.” Read more here
“Big food companies have increased prices in recent years for everything from cereal to ketchup to potato chips, citing higher costs for ingredients and labor, among other things. Many small manufacturers that have raised their prices have another explanation. They say they also are being squeezed by the distributors who act as gatekeepers to many supermarkets. Distributors are the middlemen of the grocery business. They buy products from food makers—many of them too small to run their own distribution networks—then store, sell and ship them to supermarkets.” Read more here
Digital Infrastructure
“Telecom companies are sitting on thousands of old central office (CO) facilities sprinkled across the U.S. that could be just right for serving latency-sensitive artificial intelligence (AI) applications. And it seems they’re waking up to this fact as they continue efforts to retire the old copper network gear previously housed in these structures… AT&T, Lumen Technologies, Frontier Communications and Ziply Fiber are among the operators which have started using their old COs for colocation and other cloud deployments.” Read more here
Guilty Pleasure, Cash-Strapped Consumer
“Soda’s growth comes as consumers are closely watching their purchases and passing up anything they don’t perceive as a good deal. Companies have hiked prices by as much as 40% since the pandemic began in 2020, and consumers are walking away from brands whose prices they feel have gotten out of control. They’re also eating out less, making quicker trips to the store — rather than loading up their carts with expensive grocery hauls — and buying stores’ cheaper private-label brands.” Read more here
Luxury Buying Boom
“Women’s leather goods are a highly segmented market, with major brands covering virtually every price point that could conceivably be characterized as luxurious, from “accessible” brands that can be sold at any suburban mall for a few hundred bucks to five-figure trophy purchases from Hermès and Chanel. These bags have status-signaling power in different contexts: Those priced at the low end of the continuum are particularly useful for demonstrating middle-class consumer comfort or working-class upward mobility, and they serve as a crucial (for the industry, at least) introductory vehicle to fashion for young people eager to impress their peers.” 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.