Overall and core (excludes volatile food and energy prices) inflation on both the consumer and producer price indexes retreated more than expected last month, helping to reduce the number of interest rate hikes expected by the Fed Funds futures market over the next 12 months to 1.57, down from 1.73 at the end of the preceding week.
The latest reads on Small Business Optimism, the Empire Manufacturing and Philly Fed Manufacturing PMIs, Housing Starts and Building Permits, and the Univ. of Michigan Consumer Sentiment all exceeded expectations, boosting the Atlanta Fed’s projection for Q2 U.S. GDP Growth.
Second quarter earnings reporting season kicked off with a bang, with a whopping 96% of the 47 S&P 500 members that have turned in results thus far topping bottom-line expectations and 76.6% beating top-line projections
All that sounds rosy, and the mood of investors on Main Street brightened considerably last week,…
…just in time for the S&P 500 to pull back 1.5% for the full five trading days and the Russell 3000 Growth Index to skid 3.6%, pushing the latter into the red on a total return basis (includes dividends and dividends reinvested) since last Halloween and widening the gap with its Value counterpart to 2,360 basis points.
No doubt, a significant escalation of hostilities in the Middle East that sent the price of WTI Crude Oil up more than 15% soured the trading mood, even as consistent U.S. military involvement in that part of the world has been ongoing for 36 years since the first Gulf War, with the Dow Jones Industrial Average advancing from the 3000 level back in 1990 to more than 52000 today.
And the correction, or dare we say Bear Market, in formerly white-hot Tech stocks, with uber-popular SpaceX breaking below and then closing some $11 below its $135 IPO price, didn’t help matters,…
…even as we would argue that there are plenty of reasons to think that the Artificial Intelligence Buildout that has benefitted many of our holdings is still in the early stages.
While we like SPCX at $124 a lot better than at $224, it isn’t a stock that our Value-oriented approach could consider today, but we will never say never. After all, many of the AI Buildout stocks in the chart above became momentum-investor darlings after we made our initial purchases at what we believed were inexpensive price tags. True, many soared in price, with some losing their Value-index residency, but the fact that we have taken money off the table via our partial sale strategy on multiple occasions allows us the comfort to continue to hold our remaining stakes in these companies, especially as we like the 21.8 average Year-2 P/E ratio for the group.
Yes, we respect that tech hardware has long been a cyclical space, and some are arguing that Chinese AI startup Moonshot’s launch of its new Kimi K3 model could lead to another DeepSeek moment, but we would be very happy living with short-term pain, such as occurred 18 months ago, for long-term gain.
To be sure, there is no guarantee that history will repeat and we know that fickle folks can quickly shift attention from revenue and growth to ROI and earnings, but we like how the stocks we own stack up on the latter two concepts, while we aren’t convinced that the world is ready to embrace Chinese AI models.
And we would argue that there were plenty of positive developments last week that might have sent AI-stock prices higher, such as stellar quarterly results from giant chipmaker Taiwan Semiconductor and Dutch chipmaking equipment provider ASML Holding.
C.C. Wei, CEO of Taiwan Semi, said on the Earnings Call, “AI-related demand continues to be extremely robust. The AI mega trend continue to drive the need for more and more computation, which supports the robust demand for leading-edge silicon. Our customers and customers' customers, who are mainly in the cloud service provider continue to provide us with their very strong signal and positive outlook. Thus, our conviction in the multi-year AI megatrend remains very high.”
Christophe Fouquet, CEO of ASML added on his company’s Call, “I will now provide some additional details on the dynamics that prompted us to raise our guidance for the full year. The combination of continued strong momentum in customer demand and our ability to respond to that by driving higher output through strengths in our supply chain, our manufacturing and our installed teams in the field are the primary drivers of our improved guidance. Strong end market demand this year has motivated our customers to aggressively add capacity on their leading-edge nodes."
He continued, "A number of our customers have revised their capital expenditure plans upward for the year and our ability to increase output has allowed us to meet their request for additional lithography system. The dynamics are very similar in both advanced logic and DRAM and the plans to build up capacity are equally aggressive. Our customers in both segments are entering into long-term agreements with their customers, providing them with longer-term visibility and the confidence to add significant capacity to support demand."
Intel (INTC) announced a €5 billion ($5.7 billion) capital investment at its Leixlip campus in Ireland, marking the next phase in the site’s capacity expansion. The U.S. semiconductor giant explained, “Global demand for AI and high-performance computing is driving the need for advanced silicon to power AI Factories, and Intel is scaling capacity in Ireland to deliver Intel Xeon 6 and next gen Intel Xeon built on its Intel 3 node. This strategic investment expands current production output, advances research and development activities and utilises capacity across existing cleanroom space, strengthening Europe’s semiconductor supply chain and serving industry need.”
Hyperscaler Meta Platforms (META) said it is expanding its Louisiana AI data center to 5 gigawatts of computing power, with the total cost to exceed $50 billion, up from an initial $27 billion estimate.
Clearly, we must be braced for continued volatility as the herd often cares little about valuations when a stampede for the exits gets underway. However, we always keep our attention on the long-term prospects of what we believe are undervalued stocks that we hold. In addition, we always emphasize broad diversification, with our portfolios also holding many traditional Value names outside the AI arena, which helps us sleep better at night, given the reasonable valuation metrics for the Value indexes.
It looks like the new trading week will see more selling pressure, given the deaths of U.S. soldiers in Jordan likely leading to further escalation of the Iran Conflict, but we offer the reminder that trips south have occurred with surprising frequency through the years,…
…yet stocks in the fullness of time have provided handsome rewards,…
…as the gains from the periods in the green have dwarfed the losses from the times in the red.
