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On Semi Prices, Utilities & Better Knee Repair
It’s well known that demand for semiconductors is booming, supply is tight, and prices are soaring. The managements of two neoclouds, CoreWeave and IREN, confirmed that on recent earnings calls. But might the tide reverse? Jackie explores three headwinds gathering force that could cause semi demand and prices to sink. It’s a contrarian view, but one that IREN’s CEO finds feasible. … Also: Constellation Energy’s Q3 results suggest a bright market environment for electric utilities providers. … And in our Disruptive Technologies segment, a look at the less invasive alternatives to knee surgery under development in corporate and university labs.
Time To Sound The All Clear Signal?
I. From Caution to Buying Opportunities On September 15, we advised our readers to "Proceed With Caution." In that note, we pushed our year-end S&P 500 target of 8,400 to mid-2027 and lowered our 2026 target to 7,900. Our concern wasn't earnings. We maintained our 2027 S&P 500 EPS forecast of $425 but lowered our year-end forward P/E forecast from 19.8 to 18.6. Why? Our worry list was getting longer: geopolitical conflicts, rising bond yields, domestic political uncertainty, and concerns about the AI trade. We reckoned that these risks were increasing and would depress valuations (FOMO) despite the ongoing strength of the economy and fabulous earnings momentum (FEMO). We reiterated our caution on October 14. On October 24, we observed that buying opportunities were starting to emerge, but better ones were likely after the midterms. On November 2, we warned that a Democratic sweep could deliver a cold shower for Wall Street. The Nasdaq plunged on November 5. That evening's QT was titled, "We Promised You Buying Opportunities After The Midterms." We concluded that Thursday's selloff was the buying opportunity we had anticipated. Our post-election cold shower warning proved timely. After initially rallying on Wednesday following Tuesday's midterm elections on November 3, the S&P 500 sold off sharply on Thursday. It found support at its 200-day moving average and has rebounded since then (chart). It is only 2.6% below its October 5 record high. The S&P 500 equal weight index is back at its record high. The Nasdaq rose to a record high on October 6 (chart). It then plunged 11.9% into correction territory through November 5. It is up 4.7% since then. FEMO has offset FOMO. Soaring S&P 500 forward earnings has offset the drop in the forward P/E (charts). We think that the latter probably bottomed on November 5, while the former should continue rising, albeit at a slower pace. Our worry list is getting shorter: (1) Geopolitics. The feared post-midterm re-escalation of the Middle East war did not materialize. Instead, President Donald Trump adopted a more conciliatory tone after Republican election losses, which some Republicans partly blamed on the unpopular war. Correspondingly, oil prices have retreated recently (chart). The White House now seems determined to maintain the status quo by continuing to blockade Iran, while seeking a diplomatic solution. (2) Bond yield. The 10-year Treasury yield is back in our old normal range of 4.00%-5.00% (charts). We view this range as consistent with solid economic growth. It rebounded to the top of the range yesterday after October's hotter-than-expected CPI, which increased the odds of a 25bps Fed rate hike early next month. We've expected a 50bps hike ever since the last FOMC meeting, which voted against another hike. (3) Domestic policies. The midterms are done, removing one key source of uncertainty. The market's recent rebound suggests investors are adjusting to the new political landscape, though fiscal standoffs over the federal budget and debt ceiling remain a risk. In our opinion, the Blue Wave in Congress and state governorships might slow data center construction, but it won't stop the AI buildout (chart). (4) AI investment boom. Investors seem to be coming around to our view that financial, political, and physical constraints should be speed bumps, not roadblocks, to the AI buildout. That's principally because demand for computing power remains exceptionally strong. CoreWeave's earnings report yesterday provides further evidence, with Q3 revenue surging 168% y/y to $3.7 billion and backlog reaching $132.5 billion. Such robust demand not only justifies continued investment in computing capacity but also helps ease financing concerns. Indeed, the company expects roughly $9 billion in customer prepayments and deposits, reducing its reliance on expensive borrowing. But is this exceptionally strong demand for computing power sustainable? The latest results from OpenAI and Anthropic suggest that it is. OpenAI's Q3 revenue surged 160% y/y to $10 billion, while Anthropic's soared 1,127% to almost $17 billion. This exponential revenue growth provides compelling evidence of rapidly expanding demand for AI services, which will continue to fuel compute demand. Meanwhile, reports that Anthropic's IPO is already multiple times oversubscribed suggest that investors remain eager to finance the boom. II. Bearish Sentiment Is Bullish We are pleased to see that the Investors Intelligence Bull/Bear Ratio plunged to 1.54 last week (chart). We expected that to happen in response to last Thursday's panic attack. From a contrarian perspective, this is a strong buy signal. For the remainder of the year, we expect analysts to moderate their earnings forecasts as they account for the speed bumps ahead, while investors become more comfortable paying a higher multiple as earnings estimates become more credible and sentiment improves.
On AI Global Mess, AI Tokenomics & Better Breadth
Many emerging market economies aspire to become regional AI hubs, importing the technologies needed for their infrastructure from the US or China. The US had seemed the better option given concerns about Chinese data privacy and misinformation. Now uncertainty over whether the US will slow AI deployment changes that calculus. William says that could give China “a far deeper hold on the digital plumbing of the 21st century.” … Also: Melissa explains why falling AI token prices aren’t the negative for AI providers one might assume and why we’re bullish on “tokenomics.” … And: Joe explains how the midterm elections broadened the S&P 500’s breadth.
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