21 Oct 21st October 2024
Weekly Index Movement
| S&P500 | +0.8% |
| Nasdaq | +0.3% |
| Aussie All Ords | +1.2% |
The Middle East is in the thick of war, the election is 19 days away and the result is a coinflip based on the polls between two very different candidates, the Russia-Ukraine war shows no signs of stopping, China’s economy is extremely weak, and tensions with Taiwan have been escalating. It may not sound like a great recipe for stocks, but the S&P 500 just wrapped up its sixth week in a row of gains rallying over 8% to new all-time highs in the process.
Despite the broader macro concerns, equities have managed to rally as the US economy has taken the global economy on its back and earnings season has gotten off to a strong start. Inflation pressures, not just in the US but around the world, continue to ease and commodity prices have been cooperating despite the geo-political tensions. With inflation behaved, central banks can maintain the global easing cycle.
Even market internals are positive. For most of the first half, the number one complaint towards the market was the lack of breadth, but that trend has reversed itself in a big way. Earlier this week, for example, over 20% of the S&P 500’s components traded at a new 52-week high during the day while no stocks traded at a 52-week low.
Whilst on the topic of market internals, FactSet put out another nice piece of research on the weekend.
Early in the year there was a lot of talk about the Magnificent Seven. That talk has died down recently as other sectors have begun to outperform these seven stocks.
However, if we look at earnings, these guys still account for all the growth in this quarter’s earnings. As the following FactSet chart shows, without their contribution the “S&P 493” are expected to only show a 0.1 percent improvement in bottom line results versus last year. The “7” should post 18.1 percent growth versus Q3 3023.
Now you know exactly why US Big Tech was market leadership earlier this year. Markets look out 3-6 months when deciding which sectors and stocks to favor on a daily/weekly basis. No wonder, therefore, that Big Tech did well in the first half of 2024. It was these names that would be responsible for any aggregate corporate earnings growth in Q3, with the rest of the field collectively at a standstill.
The story changes dramatically in Q4 2024 and through 2025, however, when the “S&P 493” are expected to post 5 consecutive quarters of +11 percent year over year earnings growth. The following FactSet chart shows those expectations in green as well as those for the Mag 7 in blue.
This expected resurgence in non-Big Tech earnings growth has helped fuel the rotation out of a handful of Tech names and into the rest of the S&P 500 that began in July and continues to the present day.
That said, the Mag 7 are still expected to post superior (and presumably more reliable) earnings growth than the rest of the index, by anywhere from 20 percent (Q3 2025) to 55 pct (Q2 2025) versus the “S&P 493”.
FactSet’s data clearly shows that 2024 was a year when S&P 500 index earnings growth was split between haves (Big Tech) and have-nots (the 493 other names), but as we end the year this imbalance has been corrected. Going forward, the path to outperformance will be assessing whether Big Tech or the rest of the S&P 500 will exhibit better earnings momentum.
My take on this…….if it is hard to pick what will outperform, just stick with the Magnificent Seven. It is much easier to buy 7 stocks than go looking among the other 493 and there is a good chance the seven are the best anyway.
Nuclear Power
Utilities has been the best performing sector of the S&P500 in 2024. This is fairly unusual. In the last 16 years, Utilities has only been in the top half of all sectors, six times. Normally thought of as boring defensive energy supply companies that only pay dividends and do not grow, something is different in 2024 with the sector even outpacing semiconductors.
That difference is AI. More specifically, the power it will take to run the AI data centres. The top names in the sector are Vistra Corp (VST), Constellation Energy (CEG) and NRG Energy (NRG).
The interesting part is major tech companies have realised just how much they are spending on electricity and want to make their own.
Microsoft signed an agreement with Constellation Energy to restart a reactor at Three Mile Island. Google partnered with Kairos to buy power from small modular nuclear reactors, known as SMRs. And Amazon is leading a $500 million funding round for another SMR company, X-Energy.
The nuclear energy industry has largely stagnated in the US. While the country has 94 nuclear reactors, according to the Energy Information Administration, their collective generating capacity has remained at around 20% of total electricity since the late 1980s. When the Vogtle plant in Georgia opened its third and fourth reactors earlier this year, they were the first new units in seven years. One main reason for the slow pace is the stringent safety and design standards imposed by regulators.
If Big Tech’s investments are any indication, that might be poised to change. Chips and energy are the picks and shovels of the AI movement, making re-examining nuclear power a logical conclusion.
Nuclear power needs Uranium and Uranium producers have been on a years-long tear. The world’s largest, Cameco (CCJ) is knocking on the door of all-time highs.
The recent interest from Big-Tech in nuclear power could be the catalyst to kick-off the next leg higher.
But my favourite play in the sector isn’t a producer. Rather it is an Australian Tech company.
Before I start, I must disclose I have hold a position in this stock. Have done for several years.
Silex Systems (SLX) is based in Sydney and listed on the ASX. They have a couple of technologies but the important one uses lasers to refine Uranium.
Before you can throw a stick of Uranium in a nuclear reactor you have to refine it. Presently Russia refines around 70% of the world’s Uranium. That is why I initially bought SLX. When the US slapped sanctions on Russia, it seemed a good bet that an Australian company that could assist the US refine their own Uranium would be appealing.
Since then, SLX has formed a major partnership with Cameco (CCJ) and are proving the technology in the US. This site should be completed and begin proving the technology by the end of 2024. They have uptake agreements with several nuclear energy companies should it work.
The bit I missed back in 2022 when sanctions were first imposed on Russia was that they would not sanction Uranium as they need it. They were happy to sanction Oil, as the US producers more than it consumes. But they needed the Uranium
Imagine my joy when, in May 2024, the Prohibiting Russian Uranium Imports Act was passed into law and is now effective – with some limited waivers until 2027. Finally the story I have been waiting for is playing out.
It very much looks like the US suspect the new SLX technology will work and they will be able to move away from Russian uranium.
I am happy to add to my SLX position here, and if you don’t have it then recommend you do to.
This link will take you to their most recent investor presentation
On a final note, it is frustrating to see how many opportunities we miss here in Australia. We dig massive amounts of Uranium out of the ground, have a home grown ability to enrich it and plenty of space to do it in. How easy could it have been to create a new industry and take away 70% of the world’s enrichment business from Russia?
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