The Week Ahead - Big Tech Earnings & the Fed
January 29, 2024
We have an eventful week ahead with more than 650 earnings reports, including those from several of the Splendid Six, the usual start of the month economic data, and the conclusion of the Fed's next monetary policy meeting. As we enter that gauntlet, the Relative Strength Index (RSI) for both the S&P 500 and Nasdaq Composite sits above 70, signaling overbought status, and the Fear & Greed Index is registering “Extreme Greed”, meaning that investor sentiment is running hot. Expectations for company forward guidance and Fed rate cuts are running high while the US economy continues to surprise to the upside.
All of this sets up the latest “priced to perfection” scenario, which leaves little room for disappointment in the market given the significant gains posted since late October. As the week unfolds, we could see some profit-taking emerge as investors revisit the expected path ahead. The evolving geopolitical landscape could also introduce more uncertainty into the market equation.
Economic Data
Last week's surprisingly strong Q4 2023 GDP print of 3.3% paired with the strength seen in the Flash January PMI data from S&P Global (SPGI), especially for the manufacturing sector, gives the Fed room to wait on rate cuts. That level of GDP growth came even with Fed policy being "sufficiently restrictive" according to central bankers.
Our view is that the Fed is likely to be wary of turning up the gas on the economy with rate cuts, risking a potential rebound in inflation. Further, while the market focuses on the progress shown in last week’s December core PCE Price Index reaching 2.9% on a year-over-year basis, the Fed isn’t going to simply forget that the December core Consumer Price Index was 3.9% on that same basis. Rather than risk having to reverse its position or language, especially given supply chain issues tied to the Red Sea, the Fed will want to see an all-clear reading across all its inflation metrics before signaling it is getting ready to begin rate cuts.
Following the Fed's rate decision and comments, Thursday and Friday bring us another look at the manufacturing economy in January Manufacturing PMI and the January Employment Report. Both will be key pieces in framing GDP expectations for the current quarter. Currently, the Atlanta Fed's GDPNow Model puts that figure at 3.0%, putting it above trend line growth but we have a long road to travel with numerous data updates before that forecast begins to firm up. Setting up the January Employment report is the December JOLTs Job Openings report, which will be another indication as to how tight the labor market actually is, and the January ADP Employment Change Report.
While this latest data from ADP is expected to decline compared to December’s 164,000 jobs figure, the forecast of 135,000 jobs is still well ahead of the 99,000 jobs averaged through September, October, and November. A hotter-than-expected January jobs figure from ADP would be another data point supporting the Fed easing into rate cuts.
Earnings
As we noted above, with more than 650 companies reporting and more than 100 S&P 500 constituents, it's going to be a busy week on the earnings front. We will see the typical cadence that leads to the largest cluster of reports on Thursday, but what is reported earlier in the week will shape and potentially reshape expectations. So far, corporate earnings have mostly fared better than expected, especially for tech, but this week’s batch of reports will see a wider array of companies reporting.
Even so, the market will be laser-focused on earnings and guidance from Big Tech – Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Meta (META), and Amazon (AMZN) in part because of their strong share prices moves, but also because they collectively account for just under 24% of the S&P 500 and close to 40% of the Nasdaq Composite. With Apple and Microsoft being the two largest components of both market indices, those results and guidance will have implications for both shareholders and the broader market.
For more, be sure to read our Daily Markets column published each day by Nasdaq.
Model Musings
Artificial Intelligence
“In nearly every segment of our lives, AI (artificial intelligence) now makes a significant impact: It can deliver better healthcare diagnoses and treatments; detect and reduce the risk of financial fraud; improve inventory management; and serve up the right recommendation for a streaming movie on Friday night. However, one can also make a strong case that some of AI's most significant impacts are in cybersecurity… The future for AI in cybersecurity is not all rainbows and roses, however.” Read more here
CHIPs Act
The Biden administration is expected to award billions of dollars in subsidies to Intel (INTC), Taiwan Semiconductor (TSM), and other semiconductor firms in the coming weeks for new factories. The subsidies, part of the $53 billion Chips Act, are expected to be announced before Biden's March 7 State of the Union address to Congress. Read more here
Safety & Security
“The Biden administration has approved the sale of F-16 fighter jets to Turkey following the Turkish government’s ratification this week of Sweden’s membership in NATO… The State Department notified Congress of its approval of the $23 billion F-16 sale to Turkey, along with a companion $8.6 billion sale of advanced F-35 fighter jets to Greece…” 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.
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.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
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.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
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.
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.
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.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
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.