29 Apr 29th April 2024
Weekly Index Movement
| S&P500 | +2.8% |
| Nasdaq | +4.0% |
| Aussie All Ords | +1.5% |
I trust you followed my advice last week and bought large cap tech after the 5% pullback?
I got long the Nasdaq 100 (you can use QQQ or if you want more excitement QLD) and am very happy with my weekly gains.
So, is the correction over?
I don’t know for sure, but based on what happened last week I would say the most likely answer is – yes.
There are only 3 topics driving prices at present
- Company Earnings
- Interest Rates
- Middle-East tension
You can forget 3. Until something very significant happens any minor news will be ignore.
On interest rates – we started the year with the market expecting 6 rate cuts. That was just ridiculous. I still don’t believe we will see any. Markets have been adjusting the cuts down and we are now at 3, but that is still too high.
Last week gave us the latest PCE inflation number (this is the Fed’s preferred measure). It came in at +2.8% (flat) against an expectation of +2.7%. A 0.1% difference really does not matter to anyone.
There are calls about inflation becoming stuck. That’s also rubbish. Sticky is not stuck.
We also had a low GDP number, +1.6% against an expectation of +2.4%. That shows a slowly growing economy which will help to reduce inflation.
Yes, interest rates have moved higher, but they are just adjusting back to where they should be before the ideas of six cuts got markets too far ahead of themselves.
The interest rate story is basically over, and the market knows this, which is why everything now depends on company earnings.
Which is convenient as we are in the middle of earnings season.
46% of S&P companies have now reported Q1 results. Earnings have been good, but revenues are coming in below their usual beat rates. Slow revenue growth is in line with slow GDP growth. So the narrative all makes sense.
Corporate America is aware that it needs to maintain earnings momentum and whilst revenues are struggling companies will focus on cost cutting and margin management.
Cutting costs will help reduce inflation
You can see how it all works and why everything we are seeing is constructive to higher stock prices.
Big Tech Earnings
META – beat on both revenue and earnings, but announced an increase in spending to between $35 and $40 billion on AI and its Metaverse idea.
“We expect capital expenditures will continue to increase [in 2025] as we invest aggressively to support our ambitious AI research and product development efforts,” said CFO Susan Li.
The market did not like this and sold the stock down 10%+
Microsoft and Alphabet both beat expectations and saw increases in stock prices. Alphabet also announced a first ever dividend. Not that a shareholder will even notice as it came to just a 0.1% yield.
MSFT reported an across-the-board beat. Revenues were 2% higher than expected with all units beating consensus. Capex was actually less than expected despite more investment than forecast for GOOGL and META. Operating income came in 5% above estimates as management continued to emphasize “a new era of AI transformation” led by Microsoft’s Copilot product.
I have seen some promotional videos for Copilot and they are truly impressive. This product will definitely be putting some people out of business. Mainly the creative types. I remember the day when being creative was a hedge against technology for your career. Not any more. Tech is even coming for those roles now.
I suspect my time writing opinion on stocks is limited. Some AI will do a much better job in the very near future.
GOOGL was arguably stronger. Revenue beat by 2% as advertising revenues came in a bit higher than estimates on that basis. EPS beat by 24%. While the company’s Network and Subscriptions/Platforms/Devices revenues missed, all other segments topped views as did margins, capex, and operating income (by 14%). The result was a massive gusher of cash that management deployed to capital returns. A $0.20 per share dividend will be $1.2bn of capital returns per year (11 bps yield) while the new $70bn buyback is equivalent to 3.6% of market cap.
Cadence Design Systems (CDNS) is a favourite of mine. It reported in-line Q1 revenue and a small adjusted revenue beat, but Q2 guidance for revenue was 5% to 7% below consensus while Q2 adjusted EPS guidance was 13% to 16% below estimates. On the conference call, the company discussed its Cadence.AI portfolio, which optimizes chip design and verification processes, and the launch of the third generation of its hardware systems, the Palladium Z3 and Protium X3, which are designed to meet increasing demands for complex, high-capacity semiconductors. Results in Q1 add to what is now 24 consecutive quarters of reporting better-than-expected EPS and revenue. That’s why I like this company. 6 straight years of outperformance in every single announcement.
Tesla (TSLA) reported after the close on Tuesday. Earlier this month, the electric car company reported an unexpected drop in deliveries, so this was widely understood to be a weak quarter already. Results missed expectations and revenues fell 8.7% YoY, but the company “remains committed to a company-wide cost reduction”; that includes more than 6,000 layoffs announced earlier today for Texas and California. Tesla reiterated a focus on a still unannounced mass market vehicle targeted for a mid-$20,000s price. Management also indicated it would “accelerate the launch of new vehicles” more generally. The beaten down stock was up 12% in trading on Wednesday on the news.
B Riley Financial (RILY)
This was a company I tipped last year around $20 when the stock price fell on a tenuous link between an fraud at a different company and one of the Riley employees. Then the company failed to lodge returns due to an outstanding audit…..
The audit was filed last week, along with annual reports and minimal adjustments to financial numbers.
The stock price has jumped to $37 so if you still hold it, now is the time to take profits.
Have stocks peaked for 2024?
A bit of humor to end with this week.
Last week I made an argument that stocks haven’t peaked for 2024 and the current correction is just a buying opportunity.
All week I’ve been thinking about making these calls and some classic examples from history when people got it very wrong. So, in the theme of me being very wrong, here are some examples that show I am in good company.
“Even God himself couldn’t sink this ship.” – Capt. Edward John Smith, Captain of the Titanic.
“The Federal Reserve is currently not forecasting a recession.” Fed Chair Ben Bernanke January 2008, just one month into the worst US recession in a generation.
“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these credit default swap transactions.” That was from the head of financial products at AIG in 2007. AIG went on to lose $99 billion from credit default swaps.
Irving Fisher in October 1929, shortly after the roaring 20’s peak, that the stock market had reached “what looks like a permanently high plateau.” The Dow fell 90% after that.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.