5th February 2024

Weekly Index Movement

Aussie All Ords+1.9%

Lots of news last week to get through but all you really need to know is US indexes finished at new all-time highs. The bull market is in full force and seems unstoppable.

Let’s get into the macro first.

The markets were giving around a 50% chance of interest rate cuts at the March meeting. The Fed met last week and Powell poured cold water all over this idea. No cuts in March. The market reaction was odd.

Stocks fell 1.2%. But the odd move was in the pricing of longer-dated interest products. Interest rate futures pricing changed such that the chance of 6+ cuts this year WENT UP. That is weird. Powell says we will not cut in March and the markets interpret this as they will need to do more cuts later then.

The only reason I can think is because the markets said, you are getting this wrong Jerome. If you don’t cut early then high rates will break something and we will have a recession which will cause you to cut more later.

Before you run off thinking there is recession coming, the futures pricing is just a probability and the increase wasn’t huge. But it caught my attention as an odd reaction.

Back to the story. No rate cuts in March makes no difference to anything. We all know the next move in rates will be down. Whether it is March or September or 2025 does not matter. It is coming.

It was just silly why stocks fell 1.2% on that news. Which is probably why they went straight back up by the same amount the very next day.

When bad news only makes 1 single day of selling, and that gets reversed the very next day….you are definitely in a strong bull market. So keep riding it higher.

The second piece of macro news was the jobs report on Friday. The US economy added 334k jobs in January. Way above expectations and demonstrates how strong the economy is. You simply cannot have a recession when everyone has a job. It is what I have been saying all along and nothing has changed.

There will be no recession. But I do think this means interest rates will remain higher for longer. That won’t be enough to topple the bull though. The economy is too strong for Powell to back off rates yet. He will be worried that strong employment will be inflationary.

Stay long. If you are not long, get long.

Looking at the micro, Lot’s of earnings news last week

Firstly, Microsoft (MSFT), the largest company in the world at a market cap of over $3trn and fresh off an all-time high. The company’s commercial cloud revenue continues to soar, topping $33bn for the first time. This is a business that is growing 24% YoY at a $120bn+ annual run rate. The scale is frankly unbelievable. Management claimed Azure cloud growth was boosted six percentage points by the company’s AI initiatives. That’s just the start. Wait til you see what it looks like by end of year.

Just look at that consistency of growth. I don’t know how they do it time and time again. But they do and keep doing. Brilliant stuff.

As far as other metrics go, total revenues beat by 1%, all segments beat estimates, operating incomes and margins beat, and adjusted EPS beat by more than 5%. There was no guidance with the release (as is usually the case).

I can’t find a reason not to own this one. Everyone should. A $3Trillion company growing at 17% per year? Unheard of.

Results were less strong at Alphabet (GOOGL). While adjusted EPS were 3% higher than expectations, revenue ex-TAC was 2% above estimates, and revenue beat for all lines of business save the search engine legacy business, the stock immediately dropped 5%. Recall that in Q3, Google Cloud missed while Search was strong, and the result was a 9.5% drop. I am not sure what GOOGL needs to do to impress the early responders to earnings data, but the last two efforts haven’t played out! All of that said, I should also mention Cloud’s numbers: revenues 3% above estimates, up 26% YoY and approaching a $40bn annual run rate.

Again, amazingly consistent growth which is why everyone owns it. You don’t? Why not?

One final little observation, while Google Advertising did miss, it was still up 11% YoY. A year ago, that business was declining at a mid-single digit rate. Clearly, the global economy is holding up just fine.

The next big Tech name reporting noteworthy results was AMD (AMD). Adjusted EPS were inline and revenue beat by less than 1%, as revenues missed in Data Center, Client, and Embedded segments; gaming beat dramatically. Gross margins also missed as did adjusted operating margins. Guidance was weak too: Q1 revenue is seen as 1% to 12% below consensus including flat sequential data center revenue. A more optimistic spin would be that management is staying cautious as they position for a “strong” product ramp-up in 2024. AMD stock was down around 10%.

Then we come to META’s results and they were frankly remarkable. Starting with Q4 results, daily active users beat by 2% and monthly active users were very slightly above consensus. Revenue rose 25% YoY and beat by 3%. Advertising revenue rose 24% YoY and beat by 2%. Ad impressions rose 21% YoY versus 25% estimated while prices were firm up 2% YoY versus -4% estimated. Q4 adjusted EPS beat by 9% in an impressive showing of profitability.

Next to guidance, where Q1 is looking downright fantastic. Q1 top-line was guided 3% to 10% above consensus. The top end of the capex forecast for next year was also raised from $35bn to $37bn. Longer-term plans spoke of even greater confidence.

META announced an increase in its buyback and declared a first ever dividend of $0.50.

Market reaction? – the stock price jumped by 15%.

Apple (AAPL) was the last major report, announcing a very large miss in its China business where revenues were 11% below estimates. Revenues overall topped by 1% despite misses in Wearables/Home/Accessories, iPad, Mac, and Services. iPhone bailed out the broader business, which reported adjusted EPS 3% higher than expected. Of all segments, Mac revenue grew slightly YoY, iPhone revenue rose 6% YoY, and all other segments reported lower revenues year-over-year. Of the “nearly $40bn” of operating cash flow generated in the quarter, about two-thirds was returned to shareholders.

Apple is beginning to feel like a mature company with a caretaker CEO. Where is the innovation of new products? But the sheer cash generation being fueled into buybacks should ensure acceptable, if not fantastic, levels of share price appreciation over time.

The hot stocks used to be FANG. Then we had the magnificent seven, which became the magnificent six when the market realised Tesla is just another car market. Well, now we have MnM. The leaders of the AI world. Microsoft, NVidia, Meta.

Make sure you own those three.

Next Week

Next week we will get more earnings announcements, but the big interesting ones all happened last week. We will have McDonalds and Catepillar on Monday, Ford and Eli Lilly on Tuesday, Alibaba and Walt Disney on Wednesday, and Pepsi on Friday.


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