Tech Earnings Rekindle AI Enthusiasm

For the week ending 23 February 2024

As of midday Friday, global equities traded in record territory amid renewed enthusiasm over rapid advancements in artificial intelligence. Yields were little changed on the week, with the US 10-year Treasury note unchanged at 4.31%. The price of a barrel of West Texas Intermediate crude oil fell $0.60 to $76.90 from a week ago while volatility, as measured by the Cboe Volatility Index (VIX), edged down to 14 from 14.4.

MACRO NEWS

AI boom gives markets fresh momentum

Shares of graphic-processing-unit-maker Nvidia soared after the company beat extremely upbeat earnings estimates by a wide margin on Wednesday afternoon. The devices are critical components in the data centers that power artificial intelligence applications. Markets rallied broadly after the news, helping carry Japan’s Nikkei 225 to a new record close for the first time in over 34 years. Several European bourses closed in record territory on Thursday, as did the S&P 500 and Nasdaq 100 indices, though breadth was narrow.

China cuts rates, aims to boost confidence

Chinese Premier Li Qiang on Sunday called for “pragmatic and forceful” action to boost confidence in China’s economy, though he did not outline any specific steps during a meeting of the State Council. On Monday, the People’s Bank of China lowered its five-year loan prime rate — a key mortgage reference rate — 0.25% to 3.95%. Early in the week, the China Securities Regulatory Commission said it will take heed of all suggestions, even criticism, from market participants and would address their concerns promptly in an effort to bolster market sentiment. The securities regulator also created a task force to monitor short selling and is said to be considering a ban on institutional stock sales during the first and last thirty minutes of each trading session.

German companies up US operations

According to the Financial Times German companies announced a record $15.7 billion of capital commitments in US projects last year, up from $8.2 billion a year earlier and dwarfing the $5.9 billion pledged in China. Executives said that the combination of pragmatic US government industrial policies, a strong long-term market outlook and an increased focus on supply chains was driving US investment. Others said Europe is increasingly suffering from overregulation, slow and bureaucratic approval procedures and high costs for most production factors. A recent report by the German Chamber of Industry and Commerce forecast that the US would supplant China as the Germany’s top trade partner by 2025.

US warns Russia over space nukes

The United State told allies this week that Russia intends to deploy space-based nuclear antisatellite weapons. According to the Wall Street Journal, US officials have reached out to China, India, the G7 nations and other close allies to pressure Russia into abandoning the weapon. Officials are alarmed as it is thought the weapon would leave both military and civilian satellites vulnerable, potentially disrupting communications infrastructure and the global economy. Russia denies the claim, saying it is categorically opposed to the deployment of nuclear weapons in space.

Market finally adopts Fed’s rate view

After pricing in aggressive rate cuts from the US Federal Reserve in late 2023 and early 2024, markets have moderated their outlook in the wake of a string of strong US economic data points and signs that inflation may fall more slowly than feared. In addition to the solid growth trajectory, the strong rally in equities in recent months has kept monetary conditions looser than the Fed would like, easing any urgency for rate cuts. As a result, markets have trimmed the number of cuts in 2024 from nearly seven in mid-January to just over three currently, in line with the Fed’s own forecasts. The first cut is now fully priced for July after earlier being priced as soon as March.

QUICK HITS

The US warned China that it will act if China tries to ease its industrial overcapacity problem by dumping goods on global markets.

Bank of England Governor Andrew Bailey said this week that the central bank can begin cutting rates before inflation hits its 2% target.

In an effort to support the country’s struggling property sector, China cut its five-year loan prime rate — a key mortgage reference rate — 0.25% to 3.95%.

Goldman Sachs raised its S&P 500 year-end 2024 index target to 5200 from 5100. It also raised its top-down S&P 500 EPS forecasts to $241 from $237 in 2024 and to $256 from $250 in 2025.

The Conference Board’s Leading Economic Index contracted 0.4% in January, its 23^rd consecutive decline. Though the downturn continues to signal headwinds for economic activity, the six-month annualized rate of decline has slowed sharply, prompting the organization to abandon its recession call.

According to data from the US Department of Agriculture, US consumers spent 11.2% of their disposable income on food in 2022, the highest percentage since 1991.

The minutes of the January meeting of the Federal Open Market Committee contained few surprises, though officials confirmed that they will begin in-depth discussions on balance sheet issues at the March meeting.

The European Union and the US announced that they will impose heavy sanctions on Russia in response to the death of Russian opposition leader Alexei Navalny.

The administration of US President Joe Biden plans to invest $20 billion to enhance port security, including replacing cranes made in China because of concerns that the China could gain access to information about the shipment of materiel in or out of the US to support US military operations. Chinese-made cranes account for nearly 80% of the cranes in use at US ports, officials said.

Japan’s government downgraded its economic outlook, citing sluggish consumer spending.

US January existing home sales rose 3.1% to a four million annual rate.

Germany forecasts a sluggish 0.2% pace of economic growth in 2024.

The flash February reading of the S&P Global US manufacturing PMI rose to 51.5, its highest level since September 2022. The services index dropped to 51.3 from 52.5 in January.

Israeli Prime Minister Benjamin Netanyahu outlined a plan for the administration of the Gaza Strip after the end of the war with Hamas. The blueprint calls for Gaza to be administered by local Palestinian officials without ties to militant groups and for Israel to maintain a heavy security presence indefinitely, with a buffer zone along Gaza’s perimeter. The plan has not been approved by Israel’s cabinet and is at odds with proposals put forward by the US and Arab governments. 

EARNINGS NEWS

With 90% of the constituents of the S&P 500 Index having reported for Q4 2023, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings rose 3.8% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 4.2% year over year.