Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
On Semiconductors, Neoclouds & Threats To Undersea Cables
Investors rewarded semiconductor maker AMD’s impressive Q3 earnings report, which reflected robust compute demand and expanding market share. Yet the S&P 500 Semiconductor industry at large has been out of investor favor for a number of possible reasons. … Also: Neoclouds may have a tougher time pursuing their data center aspirations, Jackie reports, given tighter credit conditions and now the midterm elections’ Blue Wave. Democratic leaders are much more likely to impose hurdles to slow the data center buildout. … And: Geopolitical strife has three nations threatening or preparing to cut the undersea Internet cables on which modern life as we know it depends.
On BOE Decision, Q3 Earnings & Bubble Meter
The Bank of England is walking a tightrope, William explains. The central bank needs to raise its key interest rate this week to rein in inflation and preserve credibility but also needs to temper investors’ aggressive expectations of rate-hiking to come. Pushing rates much higher could reignite gilt market stress and complicate the new PM’s efforts to establish fiscal credibility. The rate move would telegraph three messages about central bank decision-making in the global economic environment. … Also, Joe shares insights from the earnings results of the S&P 500’s September-quarter reporters to date. … And Melissa introduces the new and improved Bubble Meter that she and Claude have built.
On China’s Bear Market & North Korea’s Heist
The global AI rout last week hit China’s stocks hard. If China’s AI trade was a bubble that now has burst, William says, President Xi’s push dream of a “Wall Street East” could pop as well. An AI bust would only reinforce households’ perception of Shanghai as a casino, with odds set by the Politburo, thwarting Xi’s push to steer household savings into stocks, particularly tech stocks. … Also: The North Korean government is under investigation for stealing $6 billion in cryptocurrency, the largest crytpo theft to date. The breach exposes crypto’s vulnerabilities and puts China, North Korea’s chief benefactor, in a sticky spot.
Some AI Lessons In A Booming Economy
Today, Elias and Ed examine lessons that emerged from last week’s financial market turbulence. While stock investors soured on AI-related stocks, pulling the S&P 500 down despite good performance from most sectors, the week yielded several insights that are encouraging for the AI trade. … Less encouragingly, last week showed how little tolerance investors now have for under-delivering AI companies. Analysts with unattainably high estimates are to blame for that. But at least such investor skepticism inhibits bubble formation. … Also: The US economy is firing on all cylinders, as the release of Q3 real GDP growth shows, and underlying demand was even stronger than the headline number suggests.
On Anthropic’s IPO, P/Es & Quantum Computing
After digesting Anthropic’s recent IPO filing, Jackie highlights the company’s plan to reduce its dependency on cloud providers and produce more compute itself, leasing the data center capacity and semiconductor chips needed. The contracts signed will mean huge upfront capex and lease payments with little to show for it in the immediate future. …Also: With the S&P 500’s price index up less dramatically than its fast-growing earnings outlook, its forward P/E multiple has taken a nosedive. Multiples have contracted the most for the S&P 500 Consumer Discretionary and Information Technology sectors and expanded for Health Care. … And in our Disruptive Technologies segment: An update on strides made improving quantum computing.
On Housing’s Recession, Brazil’s Election & Rising Profit Margins
The US housing market has entered a downturn. Sales activity is low, depressed by low demand given high mortgage rates and affordability constraints. Homebuilders have been hit hard, but the downturn hasn’t yet depressed prices for existing homes, Melissa reports. They’ve been supported by low inventories, as would-be home sellers with low mortgages have been opting to stay put. … Also: William discusses what may be ahead for Brazil’s economy and markets now that left-leaning President Lula has been reelected. … And: Is AI adoption improving corporate profit margins yet? Joe’s data suggest so.
On BOJ & ECB Decisions Ahead, European Stocks & Britain’s New Prime Minister
The central banks of Japan and Europe will make decisions on interest-rate policy this week. … William says this is no time for the BOJ to pause its tightening as expected. The stakes are too high. … The ECB likewise is expected to pause. Its ability to focus solely on inflation is compromised by the debt problems of some countries, which are driving up bond yields and doing some of the ECB’s tightening work for it. … Toby observes that European stocks may have been overly discounted amid the debt problems, as the earnings outlook remains good. … Britain’s debt markets seem confident that PM Andy Burnham is no Liz Truss. Now he has to prove it.
Possible Bad News & Good Buying Opportunities Ahead
When we lowered S&P 500 year-end target a month ago, it had nothing to do with the market’s fundamental underpinnings. Our concerns remain valuation related in light of rising uncertainties in the investment backdrop. But don’t be tricked by scary surprises that send stocks southward; they could be attractive buying opportunities, say Ed and Elias, given the robust economic growth and corporate earnings we continue to expect. Today, they explain why prospective frights from four directions—geopolitical, US political, the Fed, and AI—could turn out to be opportunities in disguise.
Europe’s Future
Five Central and Eastern European countries are enjoying an economic renaissance—expanding exports, growing GDP at rapid clips, and attracting foreign investment. William argues that investors seeking the next great European growth story need look no further than the de facto bloc of Poland, Romania, the Czech Republic, Hungary, and Slovakia. … Europe has been gaining relevance in the global economy by investing in strategically indispensable sectors: defense and aerospace, energy infrastructure, semiconductors, critical minerals, batteries, AI innovation, and digital infrastructure. But retooling Europe is expensive. Can Europe pay for its new relevance without reviving its old fiscal crises? France is the first test.
On South Korea’s Chip Bet & Claude’s AI Bubble Meter
No economy has bet more chips (literally) on AI than South Korea. William explains why its stock market represents the purest AI trade and what’s at stake for the BOK’s upcoming monetary policy decision. … Also: Introducing YRI’s AI Bubble Meter. Melissa discusses the tool that Claude built to gauge whether investors’ heady expectations for AI are inflating a stock market bubble. The meter reads high on the bubble preconditions dial but low on the triggers dial. The takeaway: The meter says there’s a bubble, but it’s not about to burst.
On IMF’s Seal Of Approval And France On The Brink
The International Monetary Fund’s latest assessment of the global economy was a nuanced one, William reports. Officials were impressed by the resilience of world economies in the face of multiple formidable challenges, and they forecast healthy rates of global GDP growth this year and next. But there’s a “but”: Their forecasts rest on assumptions that could unravel, so continued resilience is far from guaranteed. … Also: Toby points out a possible contrarian opportunity in French equities given their recent valuation declines. The stocks of the France MSCI have taken hits at a time of rising earnings, thanks to revenues derived from stronger economies abroad.
Question For The Fed: Where Is Waldo?
The risks to the Fed’s dual mandate are constantly changing. Its attempt to hit its inflation target is complicated by price pressures beyond the control of interest rates, and its attempt to hit on a federal funds rate that neither over-stimulates nor over-restricts economic growth is complicated by the elusive nature of this neutral rate. Today, Elias and Ed examine the forces with bearing on the Fed’s rate decisions since 2022. They also explain why they believe that the neutral federal funds rate has risen over recent years and the implications for monetary policy looking ahead.
On Bank Earnings & Defending Data Centers
Investors have been worried about the major banks, particularly given fears that leveraged AI data center operators will cause a deterioration of corporate credit quality. But if a reckoning is coming, it’s a future concern. Life for the big banks is currently sweet. That’s Jackie’s takeaway from the stellar Q3 earnings reports of JP Morgan and Bank of America, which enjoyed expanding loan portfolios and net interest income last quarter. … Also: Amid all the spending hyperscalers are doing to build AI infrastructure, they may have ignored an important detail: How to protect data centers if they are attacked.
On Bubblish AI, Fiscally Feckless France & Weaker Earnings Estimate Revisions
If AI is a bubble, how vulnerable are investors? Can it even be considered a bubble, detached from fundamentals, with demand for compute growing like gangbusters? Demand so strong doesn’t mean highly leveraged players can’t be at risk, and their investors exposed, if returns take longer than expected to materialize or fall short of infrastructure build-out costs. Melissa doesn’t think valuations have detached from fundamentals, but she does see them becoming increasingly “bubblish.” … Also: William discusses how France’s ailing government bond market has weakened the euro—the last thing the ECB wanted. … And: Joe shares takeaways from his NERI index tracking the direction of analysts’ estimate changes for S&P 500 companies.
On China’s Banking Crisis & New Trade Flexibility
In consolidating its banking system, William reports, China risks repeating the mistakes Japan made in the 1990s when bad loans simply migrated to new balance sheets instead of being recapitalized. That paved the way to years of deflation and near-zero interest rates. … Also: Uncharacteristically, China has agreed to EU demands to halve its hybrid vehicle shipments to Europe, deescalating tensions between the two and perhaps opening the door to similar deals for other industries. What does China’s new conciliatory tack imply for its trade negotiations with other economies? Does the deal represent a new model for global trade?
When American Consumers Are Depressed, They Go Shopping!
Consumer spending may seem to be defying economic gravity—remaining robust in the face of depressed consumer confidence, affordability concerns, and elevated interest rates. Indeed, the saving rate is dropping toward zero and could even turn negative by the end of the decade. Today, Ed and Elias explain why that’s no worry; why consumer spending has been so resilient, like the economy itself this decade; and why they expect the resilience of both to continue. … Also: Inflationary expectations are on the rise. That raises the risk that so are secondary inflationary effects from this year’s inflationary shocks. And that raises the probability that the Fed’s September rate hike won’t be the last this year. … And: Dr Ed reviews “Lioness” (+).
On Global Borrowing Binge & Nuclear Fusion
Globally, countries have been spending way beyond their means, absolutely and as a percentage of GDP. And the problem has been worsening, Jackie reports. Rarely has global debt issuance as a percent of GDP approached the 23% expected this year. With higher interest rates escalating governments’ interest expenses and wars necessitating higher defense spending, the end of this tunnel is dark. … Also: A look at the junk bond funding of two data center construction projects. … And: The promise of nuclear fusion is attracting big bucks from Big Tech investors. Five fusion-focused startups are cases in point.
On The AI Economy, Brazil’s Election & Gangbuster Q3 Earnings
The economic impacts of the AI boom extend far beyond the leading providers and their executives. Today, Melissa assesses how AI is altering the general US economy—currently and how it’s expected to in the future. Also: William warns that Brazilian markets, keen to see President Lula ousted, may be celebrating prematurely. … And: Joe’s data on analysts’ aggregate consensus estimates suggest Q3 will be one for the record books, with all 11 S&P 500 sectors growing both earnings and revenues year over year.
On China’s Disappointing Stock Market & France’s Looming Debt Crisis
China’s stock market hasn’t been buoyed by AI exuberance; today, William examines the reasons it’s been left behind. … Also: Why China’s capital markets aren’t ready for prime time as President Xi claims. … And: French government bonds are under mounting pressure as investors lose hope that leaders will rein in chronic budget deficits. … France’s higher borrowing costs could weaken the broader Eurozone economy, putting the European Central Bank in a tough spot. It’s been tightening in response to oil price shocks.
Bond Yields On The Spectrum: From Good To Ugly
Is the bond selloff the Revenge of the Bond Vigilantes, i.e., a looming debt crisis? Not yet. Despite the recent surge, the 10-year Treasury yield remains below the growth rate of nominal GDP. That points toward an upward repricing of the neutral interest rate. Ed and Elias examine the spectrum of forces behind higher yields, from rising R* to a potential debt-crisis scenario. The real warning sign would be if the yield rises above nominal GDP growth. In addition, they consider two other spectrum scenarios: the war in the Middle East and the yen-carry trade. … Also: The latest labor market data suggest resilient but noninflationary strength. … And: Dr Ed reviews “Tony” (+).
On Stock Market Churn, Corporate Debt & AI Agents
The S&P 500 Equal Weight index is up less ytd than the S&P 500, so the average company’s stock isn’t faring as well as the overall index’s performance would suggest. That’s a reversal from mid-August, Joe points out. Today, Jackie looks under the S&P 500’s hood, identifying industries that have toppled the most from their summer peaks. … Also: Corporate bonds have had a tough year, with rising Treasury yields and lots of new supply. But their declines don’t reflect credit-quality concerns. … And: The AI agents Big Tech has been launching are likely to squeeze entrepreneurs’ niche offerings out of the market.
On AI’s Rollercoaster Ride & Canada’s Moneyball
Frontier AI models are debuting fast and furiously, with no sign of “pacing” yet. Today, Melissa takes stock of the AI boom, breaking down a host of recent developments into bullish, mixed, and bearish categories. Net, net, we’re bullish on the AI boom, fueled by exploding demand and enormous infrastructure investment. But we acknowledge caveats including uncertain returns on investments and risk from credit exposure. … Also: Canada is taking a strategic “Moneyball” approach to filling the hole that lost trade with the US is leaving in its economy, William reports. Trade agreements with numerous smaller economies are in the works.
On Australia & The Global Mountain Of Debt
The Reserve Bank of Australia is tightening monetary policy to corral stubbornly high inflation and limit imported second-round inflationary effects from the Middle East war. Australia serves as a bellwether for the global economy, argues William, so its challenges presage the same for other economies. … Aggravating Australian inflation stickiness are hot services inflation rates and years of productivity declines. … Also: Mountainous government debt globally hasn’t alarmed global financial markets much, yet. Will it when money is no longer cheap? William looks at the risks of such high debt, particularly for emerging market economies, and the potential responses of governments.
On Inflation, Capital Spending & Economic Resilience
Today, Ed and Elias take a deep dive into core inflation, i.e., minus volatile food and energy prices. The Fed’s preferred measure, the core PCED, justifies tightening monetary policy—both the recent September rate hike and presumably future ones provided that underlying inflation remains elevated. … The alternative measure, the core CPI, is structured differently, causing it to diverge from the core PCED in response to price changes in AI-related spending, financial services, and shelter. … The US economy should remain resilient during this tightening cycle, as GDP growth has become increasingly desensitized to interest rates. That’s one reason the recession widely expected in 2022 and 2023 never happened.
On RVs, Drought & Crypto Regs
Economic conditions have dealt RV makers a tough hand, with high oil prices and interest rates discouraging RV sales and high input prices squeezing profit margins at the same time. Today, Jackie looks at the business decisions Thor Industries management has made in response to these challenges. … Also: The drought in western US states has gotten so bad that it threatens electricity production at the hydroelectric plants in the dams that created Lakes Mead and Powell, and the government has imposed a water conservation plan. … And: A look at the Trump administration’s crypto-promoting regulations.