04 Nov 4th November 2024
Weekly Index Movement
| S&P500 | -1.4% |
| Nasdaq | -1.6% |
| Aussie All Ords | -1.0% |
Third-quarter earnings season for S&P 500 companies is well underway, and the results have been positive thus far. The expectation heading into the quarter was that corporate earnings would grow about 4% year-over-year. With about 70% of S&P companies having reported already, third-quarter growth looks on pace for about 5%.
Last week we saw numbers from mega-Tech. Overall results were good, but the market slid on the results.
Alphabet’s (GOOG) result was good. Revenue this quarter was up 15% on last year, fueled by a 12% growth in search and a 35% rise in cloud. An interesting point was the adoption of Google Lens. They are seeing a fast uptake of the product where users are taking photos of things they see and asking where they can buy it. Some fear AI will take away from Googles revenue. I disagree. There is no sign of this happening yet and I suspect AI will only add to Googles advertising dominance. Sundar Pichai, chief executive at Alphabet (GOOGL) said that 25% of all new code at Google is being generated by AI.
Alphabet trades on a PE of 20 and is growing. It is sitting on enough cash to buy several other large companies. It actually seems cheap to me now. Add to your positions.
Microsoft (MSFT) posted Q3 sales of $65.6 billion, up 16% year-over-year. Profits rose 11% during the same time frame to $24.7 billion. Satya Nadella, chief executive officer, said Q4 sales should be in the range of $68.1 billion to $69.1 billion. Although this was modestly lower than the previous forecast, Nadella was quick to point out that sales are still being impacted by out-of-stock data center infrastructure. Microsoft shares were trading at $408.60, down 5.3%.
The numbers at Meta (META) were even more impressive. The social media company posted Q3 revenues of 440.6 billion, up 19% from a year ago. Profits during the time frame rose to 15.7 billion, a gain of 35%. The company now has $70.9 billion cash on hand. And free cash flow during Q3 was $15.5 billion, according to a statement from Investor Relations. Shares sank 4.5% to $565.
The weakness for both Microsoft and Meta is about the sizeable investments these companies continue to make in artificial intelligence infrastructure. Analysts are worried the reward from AI will never match the investment. This is nonsense. We haven’t yet seen the real impact of AI and when it does come it will be the companies that made the big investments that benefit the most.
Amazon (AMZN) also reported, and EPS came in at $1.43, beating estimates of $1.10. Online store sales beat estimates by almost 3% at $61.41 bn while AWS revenues continue to surge, accelerating to a 19% YoY growth rate. The company projected profit and revenues for Q4 to exceed estimates too, and the stock reacted positively to the news adding 6% on Friday.
Embattled chip stock Intel (INTC) also reported, and revenues were stronger than expected, coming in at $13.3 billion compared to $13.02 billion expected. Data center & AI revenues were stronger than expected ($3.35 bn versus $3.15 bn) as was Network & Edge revenues. The company was expected to report a Q3 adjusted EPS loss of 2 cents, but that came in much weaker at 0.46 cents. The company took a $2.8 bn restructuring charge, and gross margins remain a shell of their former self. Sales guidance for the fourth quarter was reported as slightly above estimates in the range of $13.3 bn to $14.3 bn ($13.6 bn was expected by analyst). CEO Pat Gelsinger also commented on restructuring saying the he intends to keep the company together. The market’s response to this – the stock added 8%.
Apple (AAPL) reported a top line beat with revenues rising to $94.93 bn, 0.6% above estimates. For the product category, iPhone revenues were the only segment that came in higher than expected, although, the installed base of devices is at a record high. Service revenues were also light at 1.2% below expectations. China revenues were also lower than forecasts. The company maintained its dividend. In response, the stock is down 1.3%.
Overall, Mega-Tech produced good numbers but stock prices did not react positively. The negative reaction was all around the next quarter where most warned of lower revenue and greater spend on developing AI products.
I see this as positive not negative and this is an opportunity to buy into the weakness. Companies always try and lower expectations so it is easier for them to beat next time. This is standard practice. As for AI spend, the reason Mega-Tech became Mega is because their founders saw a future no-one else saw and invested a lot of money into it early on. Decades later the company is making billions every quarter and everyone looks back and says, wow that was a genius move investing all that money early to build the infrastructure. AI will be no different when we look back in a decade. It is moves like this that made these companies into Mega-Caps and moves like this that will keep them there.
US Election
The US go to the polls on Tuesday and at this stage Trump is favourite. I have no idea who will win but we do have history to guide us on what the play might be in each situation.
Following the Trump win in 2016 Financials were the standout performer on the backs of hopes for deregulation. Industrials underperformed despite Trump’s focus on infrastructure spending. Energy was the second best sector, again on hopes of deregulation.
The Biden win in 2020 saw Energy lead but this was on hopes that vaccines would open trade and the subsequent rally in Oil rather than an Biden policy. Financials and Technology were the other winning groups.
In the event of a Trump win next week, the 2016 period suggests that Financials and Energy still have room to run into year end. While both groups have outperformed recently, it is highly unlikely these stocks are discounting 100 percent odds of this outcome. Offshore gambling sites only give a 62 percent probability of a Trump win at present.
There is no clear capital markets playbook for a Harris victory, at least based on recent history, and that’s both good and bad news. On the plus side, without a clear template investors will have to refocus on fundamentals rather than relying on heuristics. On that count, US stocks are in good shape: the economy is chugging along and earnings growth is solid. As for the downside, markets may worry about incremental regulation and a less-clear path to the renewal of 2017’s tax cuts. In the end, I remain positive on US equities regardless of which candidate wins next week.
Getting this election out of the way is a positive for stocks. Once done we can forget about it and refocus on the fundamentals of asset prices.
Personally I am hoping we get some unusual result and a large drop in stock prices. Because it will only be temporary and I will be smashing my buy button faster than an online Boxing Day Sale. I rarely get what I wish for from stocks though, so it is much more likely absolutely nothing happens and it is all very boring.
Interest Rates
Lastly this week we have interest rate decisions in both Australia and the US. The Fed will likely drop by 25bps. Especially after last weeks Jobs numbers. They only added 12,000 jobs against an expected 100,000. But this could have been impacted by Hurricanes Helene and Milton. It is hard to say what impact the Hurricane’s had but there is clear evidence of a slowing in the jobs markets.
Demand for new workers continues to decline, showing the US labor market shortage is easing. This takes pressure off wages and hence inflation and gives more reason for the Fed to lower rates. Expect a 25bps cut on Thursday.
The story in Australia is different. Yes headline inflation came in at 2.8% last week, but the RBA looks at trimmed mean which was 3.5%. That is still above the band so we will not get a cut tomorrow. In fact, I don’t think we will get an interest rate cut in Australia for quite some time.
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.