Weekly Update 01/30/2024
All Eyes on The Fed!
Fed Expected to Cut Rates
Big Tech Earnings Today: MSFT, Alphabet, AMD
TESLA IN TROUBLE: -22%YTD
Office Real Estate Apocalypse: Wave of demolished/converted properties soon
Musk: Chinese EV’s could “demolish” American Rivals
Weekly Meetings:
INVESTMENT CLUB THURSDAYS 6 PM (BPC188)
INVESTMENT FUND THURSDAYS 7 PM (BPC188)
Upcoming Events:
“Navigating the Hedge Fund Landscape” with Sam Kosters – February 8th
—Market Madness—
The Fed Meets. Stocks Could Be in Trouble, and There’s Little Middle Ground
Markets expect the Federal Reserve to signal a series of interest-rate cuts when the agency announces its monetary policy decision Wednesday. The Fed could disappoint, however, and many stocks could falter.
Consider the drop in bond yields. The two-year Treasury yield is down to 4.3% from a multiyear peak of roughly 5.2% set in October. The bond market expects the Fed to cut short-term rates beginning in March in the face of subsiding inflation. Lower rates can continue to stoke economic growth.
That all has boosted stocks. The Invesco S&P 500 Equal Weight exchange-traded fund is up about 19% to $158 from a multi-month low point hit in October. The ETF weights each stock in the index equally, stripping out the outsize impact of Big Tech companies such as Apple, Amazon, and Meta Platforms, which happen to be reporting quarterly earnings this week.
The equal-weighted S&P 500 already reflects high expectations for changes in Fed policy. Like the conventional S&P 500, the component stocks of the ETF have surged, but could drop if the Fed doesn’t signal the number of rate cuts as markets hope for, especially since inflation remains a tick above the Fed’s 2% target.
“If the Fed really is serious about only two or three rate cuts in 2024, then the statement should forcefully push back on the idea of a rate cut in March,” wrote Sevens Report’s Tom Essaye. “Likely Market Reaction: A solid decline.”
That would come as no surprise, especially because many stocks are hitting “resistance”—prices at which investors sell, knocking shares lower. The ETF peaked at about $162 in late 2021, and since then has repeatedly failed to break above the high $150s. In order to break through that resistance, something must change for the better, such as the Fed aggressively lowering rates. Anything short of such validation, and stocks will struggle this week.
There’s little middle ground. Stocks have elevated valuations, and investors are too optimistic rates will drop. A combination like that carries downside risk in the event of even mild disappointment.
The ETF trades now at about 16.2 times analyst’s aggregate earnings estimates for the coming year, a discount to the standard S&P 500’s 20.2 times, but the equal-weighted index has traded to as low as about 13 times in the past few months. The multiple could drop this week if markets are forced to anticipate a less-rosy picture for rates and the economy.
Investors should brace for markets to hit an ‘air pocket’ after recent rally | Tom Lee
Tesla CEO Musk: Chinese EV firms will ‘demolish’ rivals without trade barriers
CEO Elon Musk said on Wednesday that Chinese automakers will “demolish” global rivals without trade barriers, underscoring the heat the U.S. electric vehicle market leader faces from the likes of BYD, who are racing to expand worldwide.
Musk’s comments come after Warren Buffett-backed BYD (002594.SZ), opens new tab – with its cheaper models and a more varied lineup -overtook Tesla as the world’s top-selling EV company last quarter, despite the U.S. automaker’s deep price cuts through 2023.
Chinese car companies were the “most competitive” and “will have significant success outside of China, depending on what kind of tariffs or trade barriers are established,” Musk said on a post-earnings call with analysts on Wednesday.
“If there are no trade barriers established, they will pretty much demolish most other car companies in the world,” he said. “They’re extremely good.”
Asked about Musk’s comments, the Chinese foreign ministry said at a regular briefing on Thursday that it was unaware of the reports but advocated “maintaining a fair, just and open business environment”.
Musk has reason to be concerned.
He sparked a price war last year to woo consumers hit with high borrowing costs, in turn squeezing Tesla’s margins and worrying investors. On Wednesday, Musk warned Tesla was reaching “the natural limit of cost down” with its existing lineup.
Tesla plans to start producing a cheaper, mass market compact crossover codenamed “Redwood” mid-2025 to compete with inexpensive rivals, Reuters reported on Tuesday. Musk on Wednesday confirmed that Tesla expects to start production of its next-generation EV at its Texas factory in the second half of 2025.
But Chinese EV makers, adept at keeping costs in check with a stable supply chain, are moving fast. With rising competition and excess capacity in China, many are now working on rapidly expanding their foreign footprint after years of state subsidies helped boost domestic sales.
“The completeness and resilience of China’s multi-decade state-directed battery materials processing infrastructure build out is biting hard,” said Ross Gregory, a partner at Melbourne-based consultant New Electric Partners.
China’s SAIC Motor (600104.SS), opens new tab, for instance, has been placing orders for more vehicle vessels in its fleet to counter shipping costs as it looks to boost sales overseas.
Still, brand awareness of Chinese car companies in the United States is extremely low and their reliability, durability and safety is middling, so they have a long way to go to win U.S. market share, said Spencer Imel, a partner at consumer insights firm Lansgton.
“They enjoy high demand in China with innovation such as in-car technology and battery swapping,” Imel said. “That, we believe, will be an important ingredient and a differentiator in their future growth overseas.”
Musk’s comments also come as the U.S. presidential election picks up pace. President Joe Biden has said China was determined to dominate the EV market and that he “won’t let that happen”.
Former President Donald Trump, who is the frontrunner for the Republican nomination for president this year, has signaled that he would double down on stronger tariffs if elected, calling for a universal 10% tariff on all imports into the U.S. and revoking China’s most-favored-nation trading status.
Musk on Wednesday said there was “no obvious opportunity” to partner with Chinese rivals but Tesla was open to giving them access to its charging network and licensing other technologies such as self-driving.
Europe has also taken a protectionist stance towards Chinese EV makers. Last year, the European Commission launched an investigation into whether to impose punitive tariffs to protect EU producers against cheaper Chinese EV imports it says are benefiting from state subsidies.
AMD earnings are coming. Can they help justify the stock’s huge increase?
Advanced Micro Devices Inc. shares have rocketed some 80% since the company last posted earnings. That means the pressure is on heading into Tuesday afternoon’s report.
Despite the stock’s big rally, AMD’s AMD, -3.16% story at the moment is mixed, as the traditional personal-computer and data-center markets are under pressure. But AMD also has the potential to see more momentum with its data-center AI offerings, and that’s been driving the stock’s recent momentum.
Even so, some analysts are skeptical that the upcoming report will be a positive catalyst. HSBC’s Frank Lee wrote earlier this week that there could be some “disappointment” as relates to the company’s forecast for its current quarter, given weakness in several key traditional business areas.
Read: Intel’s stock sees worst plunge in more than three years upon ‘yet another major reset’
Meanwhile, “the recent AMD share price rally has raised expectations significantly, especially for its AI MI300 GPU revenue potential,” he continued. He sees “significant AI upside” as already priced into the stock.
UBS’s Timothy Arcuri, meanwhile, sounded more upbeat.
“The tactical setup around earnings is complicated somewhat by the recent rally, but we are nonetheless more confident on AMD’s data center GPU revenue opportunity,” he wrote, noting that he was “significantly” upping his full-year expectations for 2024 and 2025.
Analysts are looking for $2.3 billion in data-center revenue, up 39%, along with $1.5 billion in client revenue, up 70%. But gaming revenue is expected to drop 25% to $1.2 billion and embedded revenue is projected to fall 24% to $1.1 billion.
Stock movement: Shares of AMD have fallen after three of the company’s past five earnings reports, though they gained 9.7% after the most recent one.
Of the 46 analysts tracked by FactSet who cover AMD shares, 33 have buy ratings and 13 have hold ratings, with an average price target of $164.58.
What analysts are saying
Of key interest to analysts will be AMD’s commentary on its MI300 AI accelerator, after the company said three months back that it expected upwards of $2 billion in revenue from data-center graphics processing units during 2024. The thinking on Wall Street is that that target is now stale.
See more: AMD earnings are around the corner, and this number could be the ‘swing factor’
“While we see our new estimate for the ‘plus’ as certainly debatable (with our model now assuming $3.1 billion in datacenter GPU revenue, vs. the ~$2 billion we had previously been modeling), we also would suggest that given AMD’s apparent customer base, that it’s very believable that AMD will be able to take a mid- to high-single-digit share of the overall AI market by the end of the year,” Wedbush’s Matt Bryson wrote recently.
Stifel’s Ruben Roy wrote that while AMD’s MI300 family seems to be gaining momentum, demand isn’t the only factor.
BlackRock upgrades U.S. stocks to overweight, says AI-driven rally could broaden in next 6 to 12 months
BlackRock on Monday upgraded its overall outlook for U.S. stocks to overweight from neutral, as the world’s largest asset manager sees the S&P 500’s upward momentum continuing for the next six to 12 months amid cooling inflation and potential interest-rate cuts by the Federal Reserve.
The stock market’s tech-driven rally, fueled by investor excitement over artificial intelligence, should “broaden out as inflation falls further, the Fed starts to cut rates, and the market sticks to its rosy macro outlook,” said a team of strategists led by Jean Boivin, head of the BlackRock Investment Institute, in their weekly commentary research note on Monday.
“Markets are pricing a soft economic landing where inflation falls to 2% without a recession,” the strategists noted. “With markets tending to focus on one theme at a time, this narrative can support the rally over our tactical horizon and allow it to expand beyond tech.”
See: Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week
U.S. stocks entered the new year with the wind of a stellar 2023 at their back, helped by encouraging economic data such as strong GDP growth in the fourth quarter and falling inflation metrics, with the latter possibly giving the Fed a green light to begin cutting interest rates as early as the first half of 2024.
The benchmark S&P 500 index SPX on Thursday closed at a record high for the fifth straight trading day, the longest streak of its kind since November 2021. In the month of January so far, the S&P 500 has advanced 3.3%, while the Dow Jones Industrial Average DJIA is up 1.7% and the Nasdaq Composite COMP has surged 4.1%, according to FactSet data.
However, Boivin and his team still “stay nimble” and are “ready to pivot,” as current market conditions could create a wide range of uncertainties, they said. For example, the strategists think the consensus view of a soft landing for the U.S. economy could be challenged later this year, and that inflation is still bound for a resurgence in the long term.
“We agree with markets that inflation will fall near 2% this year, helping the upward momentum extend into the year. Yet inflation is unlikely to stay there in the long run,” Boivin and his team said, citing “too-hot” U.S. wage growth that could make it difficult to keep the core inflation near the Fed’s targeted 2% level.
“That means inflation will likely roller-coaster up toward 3% in 2025,” they wrote.