Earnings Spook The Market But Support Several Models

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Equity futures point to a weak start when the stock market opens later this morning, following a string of weaker-than-expected guidance that in some cases includes higher spending relative to market forecasts. The standout example was Meta (META), which saw its shares sink double-digits in after-market trading last night. From our perspective, Meta indicated it would increase its spending levels for the year by up to $10 billion to support infrastructure investments to support its AI investments. This confirms the thought we are in the midst of an AI-arms race and our AI and Digital Infrastructure & Connectivity models are well positioned. Other companies that came up short relative to market expectations included ServiceNow (NOW) and IBM (IBM).

It wasn’t all bad news last night. During its earnings conference call, Lam Research (LRCX) discussed several tailwinds for our CHIPs Act model - “To conclude, the proliferation of AI, the global push for localized chip manufacturing capacity and the ubiquity of semiconductors in new consumer and commercial products represent powerful, secular drivers for Lam and the rest of the semiconductor equipment industry in the years ahead.”

Before the stocks begin trading this morning, we’ll get the initial look at 1Q 2024 GDP, which the market sees coming in at 2.5%, down from 3.5% in the prior quarter. We expect more than a fair amount of brain power will break down the line items that culminate in the headline in the headline figure. Two that could get more attention than others are the 1Q 2024 PCE and core PCE indices. 

We say this for two reasons. First, the PCE and core PCE data are favored inflation metrics for the Fed. Second, the March figures for those two data sets won’t be released until this Friday, which means savvy investors will be parsing the 1Q 2024 for implications on the March data. What they’ll be looking for is how it stacks up against the market forecasts for the core PCE Price index to fall to +2.6YoY in March from +2.8% the month before, while the headline PCE rises to 2.6% from 2.5% in February. 

Should that data come in ahead of those forecasts, it would be the latest in a growing string of inflation data supporting what is shaping up to be just one or maybe two rate cuts later this year. Even if the March PCE and core PCE data surprises to the downside, our thinking is the Fed will not hang its hat on any one metric but look to see a variety of inflation metrics all moving toward its intended target level. And as Fed watchers know, Friday’s March PCE and core PCE price indices will be the last formal inflation data points before the Fed concludes its next policy meeting on the afternoon of May 1. That means we are still in the Fed’s quiet period as we close out this week, and begin next week. 

Inside quarterly results this morning from heavy equipment company Caterpillar (CAT), we’ll be mining its earnings conference call for comments on North American construction activity and the impact of large projects tied to infrastructure spending that is helping fuel our Rebuilding America model. With an eye toward our AI, CHIPs Act, Cloud Computing, and Digital Infrastructure & Connectivity models, after today’s market close we’ll be following quarterly results, guidance, and other comments from Alphabet (GOOGL), Microsoft (MSFT), Intel (INTC), and KLA Corp. (KLAC).


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Disclosure: None.

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