finance
Jeremy Schwartz, Global Chief Investment Officer …
Michael Friedman noted that Microsoft's recent earnings report reassured investors as Azure accelerated, M365 growth picked up, and forward guidance came in strong. Unlike other tech giants experiencing pressure, Microsoft delivered the performance investors were looking for.
Michael Friedman and Sam Rines discussed Alphabet's difficulties regarding its search ad business and AI monetization. Friedman highlighted that Google reported consecutive quarters of negative cash flow and struggled to mitigate the cannibalizing effects of AI bots on traditional search ads.
Michael Friedman and Sam Rines evaluated Intel's latest earnings, noting that the stock dropped heavily due to weak guidance. Rines pointed out that government investments did not magically fix the business fundamentals, and expectations had gotten too far ahead of reality.
Blake Hyben highlighted that Oracle's investor day presentation was met with strong positive market reactions after the company provided a clear path to fiscal year 2030 earnings, showing capital expenditures peaking in 2027 and 2028 before stepping down.
Blake Hyben and Michael Friedman discussed memory manufacturers like SK Hynix, Samsung, and Kioxia, noting that while capacity is sold out through 2027 and into 2028, lack of technological moats and the risk of aggressive cyclical downturns keep valuations low.
Sam Rines pointed to a strong Redbook reading of 9.3%, representing roughly 5.5% real spending growth, as evidence that consumers continue to spend in a meaningful way despite negative sentiment heading into the midterms.
Professor Jeremy Siegel noted that the Russell value index and S&P Barra value both reached all-time highs amid a significant rotation out of growth and into value stocks. He pointed out that declining interest rates and the 10-year Treasury yield dropping below 5% largely drove this rotation.
Sam Rines reported that Ukrainian President Zelensky stated in a Fox News interview that he would be willing to discuss pausing and ending the conflict along current front lines. Rines highlighted this as a significant shift from previous stances requiring pre-invasion borders.
Discussing Meta's recent earnings, it was noted that ad impressions grew 10% year-over-year while ad pricing rose 14%, resulting in 26% revenue growth. Mark Zuckerberg indicated plans to continue investing heavily in AI despite negative free cash flow.
Guest Patricio discussed investment themes in emerging markets, highlighting Taiwan and South Korea as essential monopolies for AI memory and chips, alongside a political swing to the right in Latin America and growth in Eastern European banks.
The US economy is demonstrating considerable strength, with real rates rising by 40 basis points in the last three weeks. Despite this, inflation expectations remain stable, and GDP growth expectations are increasing. This economic resilience suggests that the Federal Reserve may need to implement multiple rate hikes, potentially two in December, to manage inflation.
Despite a challenging bond market and rising yields, Meta's stock has performed well. The company has been a favored value stock, and its recent performance, even after a period of unfavorable trends, indicates resilience. This comes as Meta explores AI technologies like 'Muse'.
There are reports that Amazon is blocking the AI tool 'Muse'. This situation requires the companies to navigate how they will coexist and collaborate in the future. The speaker notes that 'Muse' has seen significant user interest, with nearly a million downloads.
The market is pricing in a high probability of a rate hike by the Federal Reserve, with futures markets indicating around a 90% chance. This decision is seen as crucial for Fed Chair Walsh's credibility, especially with potential backlash from the President. The speaker suggests that a rate hike might actually lead to a decrease in long-term rates as the Fed demonstrates its commitment to fighting inflation.
Oil prices have surged, with yesterday's price going above $100 and showing a slight decrease today. However, diesel prices have climbed even more significantly, crossing the $6 mark. The speaker notes that diesel could see daily jumps of two to four cents if oil prices do not decrease, and the outlook on this front is not positive.
The speaker predicts a flat market performance over the next three to four weeks, citing high discount rates and a lack of new positive catalysts. Despite the current outlook, the speaker expresses impressment with the equity market's resilience, attributing it to significant liquidity and positive buy sentiment. However, the current valuation challenges suggest caution without further positive news.
The two-year Treasury yield is reportedly 100 basis points higher than the Fed funds rate, which the speaker identifies as a significant market signal. This discrepancy, along with other yield curve slopes, suggests that the market believes the Fed needs to raise rates. Credit expansion data is also cited as confirmation of this market sentiment.
Chairman Walsh previously mentioned credit expansion as a key metric he monitors in his Jackson Hole speech. The speaker notes that this metric, along with a diffusion index measuring the number of items above a certain threshold, can provide insights into economic trends. However, the speaker has not yet computed the diffusion index for the current data.
The latest US jobs report showed a 'blowout' performance, with 162,000 jobs added, exceeding estimates. Revisions to previous months added a significant 555,000 jobs. The participation rate is also up, indicating a healthy labor market.
Despite discussions around AI boosting productivity, current economic data does not yet show a significant surge. The speaker notes that while hiring and hours worked are up, output per hour has not dramatically increased, questioning if AI is the primary driver.
The speaker suggests that Federal Reserve rate hikes might be influenced by upcoming midterm elections. If not for the elections, a rate hike would be more likely, but political considerations could affect the Fed's decision-making.
The M2 money supply has increased at a 10% annual rate since the beginning of the Iran war, which is significantly lower than the 'blowout' rates seen during the pandemic. Previously, the M2 growth was around 4%.
The speaker suggests that the current Fed funds rate is considered 'easy' because people are borrowing readily. This is attributed to the short rate being kept below the neutral or natural rate, making borrowing cheap and encouraging more economic activity.
Shelter inflation is showing signs of slowing down ('quiescent'), but data indicates that prices for high-end homes are increasing again. Other segments of the housing market have stabilized without price growth.
The ongoing situation with Iran and oil markets is highlighted as a potential wildcard for the next two months. While crack spreads are decreasing, WTI is rising, and gasoline futures are priced close to retail, any escalation in the Iran conflict could significantly impact markets.
Professor Jeremy Siegel lauded the Federal Reserve Chair's recent speech at Jackson Hole, particularly his emphasis on the money supply and commodity prices as key indicators. Siegel found the Chair's acknowledgement of potential rapid changes in inflation expectations and the limitations of forward guidance to be a positive and substantive development.
The market experienced a significant boost following Nvidia's and Salesforce's strong earnings reports and optimistic outlooks. Nvidia's projected 70% plus growth and Salesforce's positive performance contributed to a broader market rally, particularly in growth stocks.
Following the Jackson Hole symposium, Professor Jeremy Siegel stated his confidence in the Federal Reserve Chair has grown. He believes the Chair's more substantive remarks and acknowledgement of past guidance errors were a positive development, leading to a more optimistic outlook.
The Federal Reserve Chair, in a speech at Jackson Hole, admitted that the central bank had been wrong about the extent of forward guidance needed. He suggested that the reliance on such guidance might have been excessive given that interest rates are no longer near zero.
Recent retail sales data showed a significant weakening, prompting revisions to Q3 GDP estimates. However, other high-frequency indicators do not suggest a broad economic downturn. Oil prices remain a key factor supporting market highs.
There is disappointment with recent Federal Reserve communication, particularly following the FOMC meeting. Speakers are waiting for Fed Chair Walsh's speech at Jackson Hole for clearer guidance on the Fed's rate-setting criteria.
A critique is voiced regarding the Federal Reserve's communication strategy, with specific disappointment expressed about the clarity following a recent FOMC meeting. The upcoming Jackson Hole speech by Chair Walsh is highly anticipated for a more detailed explanation of the Fed's decision-making process.
A significant portion of the expected increase in the Personal Consumption Expenditures (PCE) deflator may be attributed to portfolio management fees. Goldman Sachs estimates that these fees could account for half of the projected two-tenths of a percent rise in PCE for July.
The US jobs report for August indicated a lower-than-expected payroll increase, with a decline in leisure and hospitality employment. Analysts suggest special factors like the World Cup drop-off and seasonality in state and local government employment may have contributed to the miss.
The August jobs report showed a notable slowdown in wage inflation, with hourly earnings dropping. This data is expected to influence Federal Reserve decisions on interest rate hikes.
Despite a weaker-than-expected payroll increase, the US unemployment rate actually decreased in the latest jobs report. This suggests the labor market remains relatively tight, with fewer people actively seeking jobs.
The participation rate in the US labor market also fell below expectations in the latest report. This decline is partly attributed to the aging population, which is a long-term demographic trend.
The 12-month average of US payroll increases is now around 23,000 per month. This figure is considered the 'new normal' and aligns with the economy's labor supply capacity.
Professor Jeremy Siegel expressed disappointment with the Federal Reserve Chair's recent press conference, stating that the Chair failed to adequately explain his decisions regarding interest rates. Siegel suggested the Chair could have provided more information on factors like oil price shocks and productivity gains.
Jeremy Schwartz noted a significant underperformance of growth stocks compared to value stocks in the five days ending Wednesday, calling it the worst performance for growth in that period. He believes this shift is part of a healthy market correction, removing froth from tech and AI stocks.
The second quarter GDP report showed a disappointing 1.5% growth, but Jeremy Siegel pointed out that consumption was extremely strong. He attributed the GDP miss primarily to a jump in imports, driven by robust consumer spending.
Jeremy Siegel believes the market's direction hinges significantly on oil prices. He suggests that if oil prices fall back to $70, potentially due to a resolution in current conflicts, the market could rally significantly. Conversely, rising oil prices could dampen consumer sentiment and hinder market growth.
Michael highlights that the debate about the reality of AI demand and potential overspending by hyperscalers is largely settled following recent earnings reports, citing Microsoft's Azure guidance. The current market focus has shifted towards leverage and risk management, particularly concerning leveraged positions in memory chip stocks.
Michael discusses the significant market action involving AI trades, particularly mentioning Citadel's unwinding of leveraged positions. He explains that the volatility seen in July was driven by a mix of de-risking and deleveraging by hedge funds, impacting sectors like memory chip stocks.
Jeremy Schwartz notes that the Mag Seven stocks experienced their largest single-day drop in four years on Wednesday, following reports from Tesla and Google. Professor Jeremy Siegel correlates this with the concept of 'capital pigs' from their book, where high capital spenders underperform.
Jeremy Schwartz observes that "hyper-scalers" or Mag Seven companies have funding for their expansion efforts underwater, leading to increased CDS spreads. He finds it remarkable that a trillion-dollar company is facing such risk premiums.
Jeremy Schwartz reports a significant increase in oil prices, with WTI moving from the upper 60s to around 90. This rise in oil prices is also leading to an increase in gasoline prices.
Despite rising oil prices, Jeremy Schwartz notes that real economy indicators remain generally fine. He highlights that unemployment claims reached a 60-year low of 180,700 for the week.
Jeremy Schwartz discusses the rise in ten-year TIPS yields back to levels seen during the Fed's fight against inflation, noting that real yields are now over 2.5%. He contrasts this with historical data, suggesting current valuations are not near an inversion.
Samir Rains observes that Iran's rejection of a US-proposed ceasefire signals US efforts for a ceasefire, indicating movement on the diplomatic front. He suggests monitoring headlines on Sunday afternoon for developments.
Samir Rains notes that rising oil prices have "destroyed" crack spreads, leading to a narrowing of the spread between crude oil and gasoline prices. He anticipates this trend to continue, which may bring gasoline prices closer to a norm, though not necessarily for the better.
Jeremy Schwartz anticipates the upcoming Federal Reserve meeting, expecting no changes in interest rates but highlighting the importance of the Fed's dialogue on inflation. He notes that Chairman Wash's views on whether the current inflation is temporary will be crucial.
Consumer Price Index (CPI) and Producer Price Index (PPI) data came in lower than expected, according to Professor Jeremy Siegel. This development suggests that the Federal Reserve is unlikely to increase interest rates at its next meeting.
Renewed hostilities in the Middle East have pushed oil prices back up to $80 per barrel, according to Professor Jeremy Siegel. This rise, coupled with record crack spreads, is contributing to higher wholesale gasoline prices, which could reverse recent CPI declines.
Professor Jeremy Siegel noted a positive trend in housing costs, with owner-equivalent rents and outright rents finally moderating. This is seen as a crucial factor in keeping core inflation down.
Goldman Sachs has revised its second-quarter GDP expectations upward to approximately 2.5%, while the St. Louis Fed has lowered its forecast to 1.7%. Professor Jeremy Siegel suggests that a decrease in oil and gasoline prices could further boost third-quarter GDP.
Professor Jeremy Siegel observes a significant rotation out of tech stocks, particularly AI chip stories, which he describes as 'frothy.' He also raises questions about the cost of compute, noting that free AI tools are highly capable and that China offers an open structure.