Earnings, AI, and Elon

Onward and upward... Earnings season is a positive so far... More on the start of Trump, Part II... $500 billion for AI... Is Elon Musk trying to get fired?... The debt limit is important again...

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Just like that...

Over the past week and a half, the S&P 500 Index has left the bumpy road it had followed since early December... climbing smoothly back toward new all-time highs. The U.S. benchmark index traded at a new intraday record today and closed about 0.6% higher.

The tech-heavy Nasdaq Composite Index is within striking distance of a new high, too. The Dow Jones Industrial Average and Russell 2000 Index have more to go to reach new records but are moving in the same direction.

As of yesterday, 60% of S&P 500 stocks are back trading above their 200-day moving averages, a measure of a long-term technical trend and a sign of improving market "breadth" or health. It's the most stocks above this average that we've seen in more than a month.

And this past week sure looks like a significant turning point one way or another. For the sixth straight day, more than two-thirds of S&P 500 companies closed higher yesterday. According to technical analyst Frank Cappelleri, that hasn't happened in more than 30 years.

Onward and upward...

You can take this behavior at least two ways. One is that "animal spirits" have indeed returned to the market, as we discussed yesterday, amid Donald Trump returning to the White House. Another is that the "surprise" from the Federal Reserve last month, projecting fewer rate cuts and high(er) inflation in 2025, has worn off.

Perhaps it's a bit of both. And another factor appears to be playing a role as well.

Earnings season, continued...

I (Corey McLaughlin) wrote last week that the big banks kicked off earnings season with strong results. Now, flashier companies are getting started sharing their quarterly financials.

Streaming service Netflix (NFLX) posted well-received results yesterday. It added a record 18.9 million subscribers for the quarter, luring people in with live sports like NFL games on Christmas Day.

Sales grew by 16%, revenue topped consensus Wall Street analyst expectations, and the company said it's planning to raise prices. NFLX shares were up 10% today.

We said coming into this earnings season that stocks were "priced to perfection" at already-lofty valuations. It's a case when companies would likely get punished if they missed expectations even slightly.

But the opposite is also true... Companies that beat Wall Street's expectations and improve their outlooks can lift prices even higher as growth expectations rise.

On balance, this is what we're seeing so far this earnings season.

It's early yet – only 11% of S&P 500 companies have reported new quarterly numbers thus far – but 75% of these have reported positive surprises relative to Wall Street consensus, according to Fundstrat.

Continued performance like this surely won't be a headwind to the broad market, though of course individual stocks can suffer if they underperform expectations. And a heavily weighted S&P 500 or Nasdaq leader could move the headline index.

The 'Magnificent Seven' are on deck...

A lot of eyes will be on Big Tech soon.

Microsoft (MSFT), Meta Platforms (META), and Tesla (TSLA) are expected to report a week from today on January 29, followed by Apple (AAPL) on January 30, Alphabet (GOOGL) on February 4, Amazon (AMZN) on February 6, and Nvidia (NVDA) bringing up the rear on February 26.

And talk about lofty expectations. As a whole, the "Magnificent Seven" companies are expected to report year-over-year earnings growth of 21.7% for the fourth quarter, according to FactSet.

The other "S&P 493" are projected to grow earnings by a significantly less (but still good) 9.7% for the quarter. That would be the highest growth since the second quarter of 2022.

So, all in all, expectations are high all around. We'll keep an eye on whether they continue to be met, or even exceeded, as they have been for most S&P 500 companies that have reported so far.

Trump, Part II, continued...

We covered a lot of the Day 1 and Day 2 announcements from President Donald Trump in yesterday's edition.

Here's one more, which arrived right as we were going to press last night. It has to do with a subject our team has covered extensively: the intersection (and growing demand) of artificial intelligence, energy, and infrastructure.

Trump stood at the White House with the CEOs of Oracle, OpenAI, and SoftBank and announced that they, with Middle East-based AI firm MGX, were committing to spend up to $500 billion over the next four years on what's being called "Stargate."

According to announcements about the project, the idea is building new infrastructure (data centers and electricity generation) for OpenAI in the U.S. The initial investors have agreed to put $100 billion to work immediately, starting in Texas, where they have plans for at least 10 new AI-focused data centers, including one in the city of Abilene already under construction.

According to OpenAI's announcement...

This project will not only support the re-industrialization of the United States but also provide a strategic capability to protect the national security of America and its allies.

As for the government's role, Trump said he wants to help make it easier to "get this stuff built... They have to produce a lot of electricity, and we'll make it possible for them to get this production done easily, at their own plants if they want." He also said the projects will happen at other to-be-determined locations "nationwide." Taxpayer dollars do not appear to be directly involved in the project.

Other detail was scant, but additional partners in the proposed project are said to be Microsoft and the chipmakers Nvidia and Arm.

To me, it sounds like the companies involved – and perhaps others interested in building data centers and AI-related infrastructure – could expect to move forward without much regulatory resistance.

But then things got weird...

Interestingly, Elon Musk, part of Trump's inner circle, was publicly critical of the legitimacy of this Stargate project.

Late last night, Musk wrote on his social platform X that SoftBank doesn't "actually have the money... SoftBank has well under $10B secured. I have that on good authority." Well, that seems odd.

Open AI CEO Sam Altman responded...

Wrong, as you surely know. want to come visit the first site already under way? this is great for the country. i realize what is great for the country isn't always what's optimal for your companies, but in your new role i hope you'll mostly put [America] first.

Are you confused? I'm confused. And so are people involved in the deal, evidently. Microsoft CEO Satya Nadella said on CNBC today, "All I know is I'm good for my $80 billion."

Now, Musk and Altman have beef with each other going back some time and are involved in an ongoing lawsuit against each other, but this public drama is strange.

I don't know if Musk is trying to lose his job heading up the Department of Government Efficiency ("DOGE") and his relationship with Trump, but I suspect we'll find out soon enough.

What's more clear: either way, you can see a growing push for AI infrastructure in this country.

For sure, here is one immediate hurdle for the new administration...

On Friday night, Treasury Secretary Janet Yellen said the Treasury would begin taking "extraordinary measures" in order to avoid reaching the government's debt ceiling of $31.4 trillion.

First off, we have to laugh at the timing of the announcement and the start of the extraordinary measures...

Yellen made the comments after Friday's market close, and with only a few days left in her tenure as Treasury secretary. And the measures started on Trump's first full day in office.

Practically, Yellen directed the Treasury to pick and choose which of its bills it deems most important to pay so the U.S. doesn't default on its obligations. That means things like reinvestments in federal employees' retirement plans get suspended.

We've been down this road before, so don't worry too much...

This is the third time in the past four years that the U.S. has reached its congressionally approved spending limit. Put simply, the "debt limit" is the maximum amount of money the U.S government can borrow to pay for previously approved spending bills and programs.

Raising the debt limit doesn't authorize new spending but allows the government to finance existing obligations that Congress and presidents have made in the past. And Congress has continually voted to increase this limit whenever it becomes an issue.

For this reason, as I have written in previous Digests on this topic, the headlines about the debt ceiling are worse than the actuality of it. For instance, here is what we wrote in the Digest on January 23, 2023...

Congress plays dangerously close to the deadline almost every time it comes around. Then it uses our debt for political gain, soundbites, maybe a few votes... Then Democrats or Republicans eventually, and quietly, agree on the same big thing.

In the end, the result is always the same...

Since 1960, Congress has raised the debt ceiling 78 times. That's an average of 1.2 times per year over that period. And it comes under both parties... 49 times under Republican presidents and 29 under Democratic ones.

Once the debt ceiling is inevitably raised, the government hits the debt markets to raise money. It sells Treasury securities that pay interest, thus creating more debt. And on it goes.

Federal spending has followed the debt ceiling higher...

Total government outlays were $77 billion in 1960. In 2024, they came in at $6.8 trillion. The Congressional Budget Office ("CBO") sees that surging to more than $10 trillion by 2035.

The better news is revenue is expected to grow, too, but still not at the same pace. The CBO projects revenues of $8 trillion in 2035, from $4.9 trillion in 2024. Spending rising faster than revenue means higher deficits. And that could spell trouble...

The problem with higher deficits...

In September, credit-ratings agency Moody's called on the incoming administration to deal with the U.S. government's budget deficits.

Moody's warned that if the U.S. continues on this path, the government's credit rating is at risk. From Moody's analysts...

The administration's tax and spending policies will affect the size of future budget deficits and the expected decline in US fiscal strength, which could have a significant effect on the US sovereign credit profile. These debt dynamics would be increasingly unsustainable and inconsistent with a Aaa rating if no policy actions are taken to course correct.

The deficit is on track to only get worse.

In an update last week, the CBO gave its budget projections for the next 10 years. In the 2025 fiscal year, the CBO estimates a deficit of about $1.9 trillion. That's set to balloon to $2.7 trillion in 2035 – a 42% jump.

And it'll make up more than 6% of GDP, well above the historical average of 3.8%.

What would a downgrade mean for the U.S.?

For one, it would mean that the credit-ratings agencies believe the U.S. government is less creditworthy than companies like Johnson & Johnson (JNJ) and Microsoft, which both boast AAA ratings.

And that could mean investors would demand higher interest rates to buy U.S. debt. This would force higher Treasury yields, increasing the burden interest is already putting on government spending and likely leading to volatility in the stock market, too.

In 2024, interest payments were the second-largest government outlay, behind only Social Security and ahead of Medicare and national defense.

Where we go from here...

For now, the debt-ceiling headline seems scarier than it actually is.

The better news is that the Treasury has enough cash and financial maneuvers at its disposal to pay Uncle Sam's bills through possibly the middle of the year, according to estimates from the Bipartisan Policy Center.

And we don't believe Congress will let the government default on its debts. You're likely to hear hot rhetoric around the debt ceiling again at some point this year, but it's only a matter of time before we're right back where we are today.

But even if we see the same song and dance, a bigger issue is at play here.

Spending will continue to rise, meaning the debt ceiling will need to be raised again and again. And the government will add even more debt – taking the debt-to-GDP ratio past 120%, which is already higher than it was right after World War II – and provide a tailwind for inflation.

The conclusion is the same as I wrote two years ago. From that same January 2023 Digest...

Prepare for an economy where the debt keeps going up and up.

Maybe the DOGE can cut into spending somewhat and shrink the deficit, presuming Musk doesn't wear out his welcome with the White House.

On the other hand, Trump last month called for suspending the debt ceiling altogether during negotiations with Congress on a government funding bill (talks that Musk also played a role in). That would let the government borrow as much money as it wants to fund its obligations.

That's essentially what we have today in practice. The debt ceiling has proved to be a formality, though at least there are intermittent delays and some debate about hitting it before it's ultimately raised again.

No matter what happens, I'm willing to bet the deficit gets worse before it gets better, and it's something any administration will be dealing with for years to come.

New 52-week highs (as of 1/21/25): American Express (AXP), Alpha Architect 1-3 Month Box Fund (BOXX), Constellation Energy (CEG), Cisco Systems (CSCO), CyberArk Software (CYBR), Comfort Systems USA (FIX), Alphabet (GOOGL), HealthEquity (HQY), Intuitive Surgical (ISRG), JPMorgan Chase (JPM), Kinder Morgan (KMI), LandBridge (LB), Lumentum (LITE), Markel (MKL), Plains All American Pipeline (PAA), Planet Fitness (PLNT), Stryker (SYK), Visa (V), Vertiv (VRT), Vistra (VST), Westlake Chemical Partners (WLKP), and Zebra Technologies (ZBRA).

In today's mailbag, feedback on yesterday's edition about the start of Donald Trump's second term in the White House... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thanks for the summary of some of the Executive Orders (EOs). I watched all day his inauguration and executive actions to cutting the cake, and dancing with the sword. Yeah! We have a President again." – Subscriber Nancy P.

All the best,

Corey McLaughlin with Nick Koziol
Baltimore, Maryland
January 22, 2025