Day: October 14, 2024

(Bloomberg) — Stocks hit fresh all-time highs as investors looked ahead to Corporate America for further vindication of soft-landing bets.

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Without much in the way of economic data this week, earnings reports are poised to drive Wall Street sentiment. The S&P 500 rose almost 1%, notching another record — its 46th this year. That’s a hint investors are not deterred by the reduced forecasts for third-quarter results, and are instead betting this reporting season will once again deliver positive surprises.

Strategists are predicting S&P 500 firms will post their weakest results in the past four quarters, with just a 4.3% increase compared with a year ago, Bloomberg Intelligence data show. Meantime, corporate guidance implies a jump of about 16%. That solid outlook suggests companies could easily beat market expectations.

“Wall Street has underestimated Corporate America lately,” said Callie Cox at Ritholtz Wealth Management. “This environment is tough to get a read on, and I don’t blame anybody who’s approaching this rally with a bit of skepticism. We still think the biggest – and most expensive – risk here is to miss a rebound and an eventual rally higher.”

The S&P 500 hovered near 5,860 amid thin trading volume. The Nasdaq 100 added 0.8%. The Dow Jones Industrial Average climbed 0.5%. Nvidia Corp. led gains in megacaps, Apple Inc. gained on a bullish analyst call and Tesla Inc. rebounded after last week’s plunge. Goldman Sachs Group Inc. and Citigroup Inc. advanced ahead of results.

Treasury futures were marginally lower while cash trading was closed for a US holiday. The dollar edged up. Bitcoin jumped 5%. Oil declined after China’s highly anticipated Finance Ministry briefing on Saturday lacked specific new incentives to boost consumption in the world’s biggest crude importer.

Earnings season unofficially kicked off on Friday, led by financial bellwethers JPMorgan Chase & Co. and Wells Fargo & Co. On top of other big banks reporting this week, traders will be paying close attention to results from key companies like Netflix Inc. and JB Hunt Transport Services Inc.

An initial round of third-quarter financial results last week showed Corporate America is benefitting from lower rates early into the Federal Reserve’s easing cycle, according to Bank of America Corp. strategists.

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Easing rates pressure was seen in a surge in debt underwriting, mortgage applications and refinancing activity, as well as signs of a bottom in manufacturing, the BofA team including Ohsung Kwon and Savita Subramanian said.

To Solita Marcelli at UBS Global Wealth Management, third-quarter results should confirm that large-cap corporate profit growth is solid against a resilient macro backdrop.

“We maintain our positive outlook for US equities, supported by healthy economic and profit growth, the Fed’s easing cycle, and AI’s growth story,” she said. “While valuations are high, we think they are reasonable against the favorable backdrop.”

Marcelli reiterated her S&P 500 price target of 6,200 by June 2025, and continues to like “AI beneficiaries and quality stocks.”

An improving trend in US macro data should continue to offer support for stocks tied to economic momentum, according to Morgan Stanley strategist Mike Wilson.

“Further stabilization in the economic surprise index should support quality cyclicals even if it comes amid higher yields,” Wilson and his team wrote in a note.

Better US data and supportive policy have helped lower downside risks near-term, according to Goldman Sachs Group Inc. strategists led by Christian Mueller-Glissmann. They shifted to overweight equities and underweight credit for the next three months.

The strategists noted equities can deliver attractive returns driven by earnings growth and valuation expansion in late-cycle backdrops, while credit total returns are usually constrained by tight credit spreads and rising yields.

While they think the risk of a bear market remains relatively low, the analysts see potential for volatility due to geopolitical shocks, US elections, and less favorable growth/inflation mix.

“Last week, the S&P 500 index surpassed our year-end price objective of 5,800,” said Craig Johnson at Piper Sandler. “We are leaving it unchanged for now but realize some ‘fine-tuning’ is needed as we expect equities to continue trending higher after the US presidential election.”

Despite the above-average gain in the first two years of this bull market, history says that investors need to be prepared for a possible setback in the coming 12 months, according to Sam Stovall at CFRA.

The average return following the 11 bull markets that celebrated their second anniversary was 2% (5.2% excluding those that became bear markets before the third year was out, Stovall noted. What’s more, all experienced a decline of 5%, while five endured selloffs in excess of 10% but less than 20%, and three succumbed to new bear markets. Despite this unsettling intra-year volatility, three bulls posted double-digit gains.

While bull markets that have made it this long have tended to go on a lot longer before they finally experience a 20% drop, that doesn’t mean there haven’t been hiccups along the way, according to Bespoke Investment Group.

Overall, the S&P has seen weaker-than-average returns in year three of bull markets, the firm said. The index has averaged a gain of just 3.7% in the 12 months following day 503 of past bull markets — with positive returns just 55% of the time. That compares to an average gain of 9.26% across all rolling 12-month periods for the market.

“What we’d note, however, is that of the 11 bull markets shown, only two of them came to an end at some point during the 12-month window following day 503, so this period between years two and three of long-lasting bulls has been more of a consolidation phase rather than an endpoint,” Bespoke concluded.

Corporate Highlights:

• B. Riley Financial Inc., the money-losing broker-dealer and investment firm looking to cut debt, agreed to sell a majority stake in its Great American Holdings business to funds managed by Oaktree Capital Management LP.

• Adobe Inc. unveiled artificial intelligence tools that can create and modify videos, joining Big Tech companies and startups in trying to capitalize on demand for the emerging technology.

• Caterpillar Inc. was downgraded to underweight by Morgan Stanley, which flagged a disconnect between fundamentals and share price.

• Amgen Inc. was downgraded to hold at Truist Securities, which said upcoming obesity data is already priced into the stock.

• SoFi Technologies Inc. reached a deal to use $2 billion of Fortress Investment Group LLC funds for the origination of personal loans.

• Elliott Investment Management has called for a special shareholder meeting at Southwest Airlines Co., officially kicking off the firm’s first US proxy fight since 2017.

Key events this week:

• Eurozone industrial production, Tuesday

• US Empire Manufacturing index, Tuesday

• Goldman Sachs, Bank of America, Citigroup earnings, Tuesday

• Donald Trump will be interviewed by Bloomberg editor-in-chief John Micklethwait at the Economic Club of Chicago, Tuesday

• Fed’s Mary Daly, Adriana Kugler speak, Tuesday

• Morgan Stanley earnings, Wednesday

• ECB rate decision, Thursday

• US retail sales, jobless claims, industrial production, Thursday

• Fed’s Austan Goolsbee speaks, Thursday

• China GDP, Friday

• US housing starts, Friday

• Fed’s Christopher Waller, Neel Kashkari speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.8% as of 4 p.m. New York time

• The Nasdaq 100 rose 0.8%

• The Dow Jones Industrial Average rose 0.5%

• The MSCI World Index rose 0.6%

Currencies

• The Bloomberg Dollar Spot Index rose 0.3%

• The euro fell 0.3% to $1.0904

• The British pound was little changed at $1.3055

• The Japanese yen fell 0.4% to 149.78 per dollar

Cryptocurrencies

• Bitcoin rose 5% to $65,865.01

• Ether rose 6.5% to $2,619.04

Bonds

Commodities

• West Texas Intermediate crude fell 2.1% to $73.97 a barrel

• Spot gold fell 0.1% to $2,652.65 an ounce

This story was produced with the assistance of Bloomberg Automation.

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How long will the strong artificial intelligence buildout last? The market appears optimistic, with AI chip leader Nvidia (NASDAQ: NVDA) trading at 34 times forward earnings estimates and challenger Advanced Micro Devices (NASDAQ: AMD) trading at 30 times.

However, there is a considerable debate among investors as to whether this hypergrowth is sustainable, or whether the AI buildout is going to pop like the dot-com bust.

This week, CEOs of AI chip leaders Nvidia and AMD made announcements, each of which gave even greater weight to the bull case for their stocks and AI chips stocks generally.

Bulls vs. bears on AI

AI stocks pulled back hard over the summer after a strong 18 months or so of performance, as skepticism worked its way into the story. After the Magnificent Seven, who are the main buyers of AI chips, reported good but not blowout earnings in July, investors appeared concerned that these big chip buyers weren’t seeing a requisite return on their investments in Nvidia chips. Most big tech stocks and AI chip plays sank in response.

Giant hedge fund Elliott Management piled onto the skepticism, giving especially bearish commentary on what it perceives as an AI “bubble.” Elliott wrote in its latest letter to investors that AI stocks were overhyped, declaring AI applications aren’t, “ever going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy.” Elliott dismissed the technology as only good for a few things such as summarizing reports and helping with computer coding.

That’s certainly a point of view that should be considered. It may even be true of the current models that are out today. However, virtually everyone participating in the technology industry believes in the benefits. If benefits weren’t likely going to be there, it seems unlikely every major technology company would be greatly expanding its AI investments today as they are.

For his part, Oracle Chairman Larry Ellison dismissed these concerns, declaring the race for AI supremacy “goes on forever, to build a better and better neural network.” Ellison believes that AI capabilities will improve with more compute and better models, and that the large tech companies can’t afford to cede the AI lead to competitors. With big tech armed with a ton of cash, he doesn’t see the buildout ending for five to 10 years.

Jensen Huang and Lisa Su just dropped the mic

This week then saw two massive announcements from the number one and two AI chip companies that should allay near-term fears about the durability of the AI trade. At the beginning of the month, Nvidia’s CEO Jensen Huang said demand for its next generation chip Blackwell was “insane.” Fast forward to last week, and analysts at Morgan Stanley revealed Blackwell is already sold out for the next 12 months, after the firm hosted Nvidia executives at their offices.

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Then on Thursday, AMD held its “Advancing AI” event during which it unveiled its new EPYC 9005 CPUs and Instinct MI325X GPUs. During the presentation, CEO Lisa Su increased her projection for the market size for AI accelerators. Last year, Su surprised investors by forecasting the AI accelerator market would increase from $45 billion in 2023 to a whopping $400 billion in 2027.

So, has the past year made her more skeptical or anxious about all that spend, as Elliott surmises?

Just the opposite, in fact. During the conference, Su raised her guidance for the AI accelerator market to reach a whopping $500 billion by 2028, saying, “Since [last year], AI demand has continued to take off and exceed expectations. It’s clear that the rate of investment is continuing to grow everywhere, driven by more powerful models, new use cases, and actually just a wider adoption of AI use cases.”

If Su’s and Huang’s projections hold, more companies will benefit than just Nvidia and AMD. Any company with a strong competitive position in the related foundry, semicap equipment, server, or AI-integrated software industries should also see a benefit from this medium-term demand. Additionally, electricity and transmission providers should also see strong growth, as AI data centers consume a huge amount of energy.

Bubble brewing? Not just yet

While the dot-com bubble burst in the year 2000, remember that there was a five-year “boom” that preceded it. The boom coincided with the period after the Federal Reserve cut interest rates between 1995 through 1998. Looking at today’s situation, the AI boom is only about two years old, and the Fed similarly just began a rate-cutting cycle in September.

To this investor, it appears we may be more in the “mid-90s” analogy rather than the precipice of an enormous bubble bursting. There’s also a case for the boom to go on for a longer time than the internet boom did, as the companies investing AI, the Mag Seven, are all extremely strong financially — much stronger than a lot of the newer start-up tech companies of the mid-1990s. In addition, for all their success, the Mag Seven really don’t trade at the crazy valuations seen by big tech in the late 1990s.

That doesn’t mean the AI buildout couldn’t become a bubble — it could. But it still seems early, and AI stocks are too reasonably priced for a huge fall, barring any outside exogenous shocks.

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