While We Wait for the Fed, Earnings Season Questions
Plus the latest helping of model signals
Equity futures point to a modest decline when stocks start trading later this morning, but this morning’s flow of earnings reports could alter that trajectory. Roughly an hour before the open, we’ll get some additional rear view-facing data in the form of the Employment Cost Index for 1Q 2024. The figure is expected to clock in at 1.0%, up from 0.9% in the prior quarter, but the market is going to pay attention to the 1Q 2024 Wages figure vs. its 0.9% print in the prior quarter.
Quarterly results out earlier this morning from Samsung (SSNFL) spoke to artificial intelligence’s (AI) positive demand driver for memory chips with demand expected to remain strong for memory as well as AI chips. That has positive implications for several of our models, including Artificial Intelligence, Cloud Computing, and Digital Infrastructure & Connectivity. With those models in mind, earnings after today's close from AMD (AMD), Amazon(AMZN), and Super Micro (SMCI) will give us another vantage point on AI and data center spending.
When Eaton (ETN) reports it will likely discuss rising electrical power demand associated with expected AI and data center growth as well as infrastructure programs that are driving our Rebuilding America model. With that model in mind, we’ll be tracking comments from Martin Marietta (MLM) about the demand pull for concrete and aggregates from infrastructure spending programs.
California’s minimum wage for fast food workers is making headlines for rising food prices and that will have the market look to comments from McDonald’s (MCD) this morning. Questions will center on the potential demand impact of those higher prices and the margin implications of higher wages. Other topics are likely to include how McDonald’s intends to weather sky-high beef prices and what if California’s new minimum wage catches on in other states. Our thinking is those answers will support our Consumer Inflation Fighters models.
As the answers to those and other questions are had, investors will be getting ready for the deluge of economic data out tomorrow - April Manufacturing PMI reports from ISM and S&P Global, ADP’s Employment Change Report for April, and the March JOLTs Job Openings and Quits data. Those insights on the speed of the economy and inflation will be the last set of data before the Fed renders its next monetary policy decision tomorrow afternoon. The wide expectation is the Fed will leave interest rates as is, however, the far greater focus will be on Fed Chair Powell’s presser comments about rate cut prospects in 2H 2024.
We expect Powell will remain “data dependent” but acknowledge recent inflation data hasn’t provided the Fed with more of the “good data” it needed to see to begin a rate-cutting cycle. Our view has been Powell’s comment about wanting to see “more good data” was a means to let the market come to grips with the likelihood of much fewer rate cuts compared to the 5-6 it expected entering 2024. That strategy is working because the CME FedWatch Tool now only shows a 39% probability for one rate cut following the Fed’s December meeting. The question the market will soon face is what if rate cut expectations shift to 2025?
Model Musings
Artificial Intelligence
“Samsung Electronics on Tuesday reported a 10-fold increase in operating profit for the last quarter as the expansion of artificial intelligence technologies drives a rebound in the markets for computer memory chips… Samsung projected the memory chip market to remain strong in the coming months, driven by the expansion of generative AI technologies, which is increasing the demand for both conventional chips used in servers and advanced chips designed to process AI, including high-bandwidth memory, or HBM.” Read more here
“Business solutions and services company Conduent launched an artificial intelligence-focused agreement with Microsoft. The partnership will begin by exploring generative AI use for healthcare claims management, customer service and fraud detection.” Read more here
Artificial Intelligence, Cloud Computing
“Microsoft will invest $1.7 billion over the next four years into expanding cloud services and artificial intelligence in Indonesia, including building data centres, visiting chief executive Satya Nadella said on Tuesday.” Read more here
“Amazon Web Services (AWS) announced plans to invest an estimated $11 billion in Indiana, creating at least 1,000 new jobs and marking the largest capital investment in the state’s history. With the support of Governor Eric Holcomb and the Indiana Economic Development Corporation (IEDC), AWS will build new data centers in St. Joseph County.” Read more here
CHIPs Act
“The CHIPS and Science Act grants of $6.1 billion will support Micron’s plans to invest approximately $50 billion in gross capex for U.S. domestic leading-edge memory manufacturing through 2030. These grants and additional state and local incentives will support the construction of one leading-edge memory manufacturing fab to be co-located with the company’s existing leading-edge R&D facility in Boise, Idaho and the construction of two leading-edge memory fabs in Clay, New York.” Read More Here
Consumer Inflation Fighters
“One of the questions regarding California’s wage increase is how it might spread out. While it applies to a specific group (60-plus unit fast-food concepts), the idea you can lift the tide in one place and not another is thin at best. That same employee now able to make $20 at Chipotle is going to command more in the kitchen of a casual-dining concept… The labor pool was tight to begin with, from gig opportunities, like rideshare, to the notion of navigating a marketplace where people can earn money creating their own content on social media. And so, it’s not just quick-service restaurants with 60-plus locations raising price across California; it’s nearly everybody.” Read more here
“Prices are top-of-mind for many shoppers today. The PYMNTS Intelligence study “New Reality Check: The Paycheck-to-Paycheck Report: Why One-Third of High Earners Live Paycheck to Paycheck” drew from a survey of more than 4,200 U.S. consumers. It found that half of consumers have switched to cheaper retail merchants due to product price increases.” Read more here
Luxury Buying Boom
“What’s old is new again, and the longstanding phrase couldn’t be more apropos when it comes to pre-owned and vintage luxury watches by the likes of Rolex, Patek Philippe, and Audemars Piguet — or “AP,” if you’re in the know. “The demand is so high, and the supply is so low,” said Sotheby’s veteran and creative consultant Brynn Wallner, who founded the women-focused luxury watch resource Dimepiece in 2020.” Read More Here
Nuclear Energy & Uranium
“The second of two new nuclear reactors in Georgia has entered commercial operation, capping a project that cost billions more and took years longer than originally projected. Georgia Power Co. and fellow owners announced the milestone Monday for Plant Vogtle’s Unit 4, which joins an earlier new reactor southeast of Augusta in splitting atoms to make carbon-free electricity.” Read More Here
“A month after the US offered $1.5 billion to restart one shuttered nuclear power plant, there’s a growing sense among officials in the industry and government that it may not be the last. ‘There are a couple of nuclear power plants that we probably should, and can, turn back on,’ said Jigar Shah, director of the US Energy Department’s Loan Programs Office.” Read More Here
“Group of Seven nations have agreed to target the first half of 2030s to phase out coal, according to the UK’s energy and nuclear minister, a key milestone for some of the world’s most industrialized economies seeking to switch to more sustainable fuels.” 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.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
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.
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.
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.
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.