The Trouble With Great Expectations
More on Big Tech earnings... A market drag... The latest inflation data... The BRICS nations are big on bitcoin... A U.S. bitcoin reserve? Eric Wade has thoughts... Counting down to the election (and more)...
As promised yesterday, we've got more Magnificent Seven earnings to cover...
After yesterday's close, both Microsoft (MSFT) and Meta Platforms (META) reported their quarterly results, and the market reaction today was telling.
Both companies' top and bottom lines came in above Wall Street's estimates. But investors didn't like Microsoft's forward guidance or Meta's pace of user growth, so shares of the tech giants dropped today – and took the broader indexes down with them.
Microsoft projected revenue for the current quarter to be slightly below prior expectations (though the number is still close to $69 billion), and both Microsoft and Meta talked up more spending on artificial intelligence ("AI").
Meta boosted its capital-expenditures ("capex") forecast for 2024 to $38 billion to $40 billion, while adding that it expects "significant acceleration" in this area next year. Microsoft's capex came in at $20 billion in the quarter – almost double the same quarter last year.
That's a lot of money flowing into AI...
It's not for misguided reasons...
Both companies talked up demand for their AI offerings, with more than 1 million advertisers using Meta's AI software and demand outpacing supply for capacity in Microsoft's data centers. Like all new trends, the AI story isn't without its growing pains.
Microsoft said that its suppliers are late in delivering data-center infrastructure that it needs to power its AI offerings. And its revenue forecast fell short of expectations as a result.
It will take time for these companies to see these investments pay off. But with hundreds of billions of dollars being invested, Microsoft, Meta, and Alphabet (GOOGL) still believe they can gain a leg up in the long-term AI trend, so they're keeping up spending...
What this means for the broader market...
Microsoft and Meta are the third- and fifth-largest weightings in the S&P 500 Index, respectively. Together, they make up about 9% of the index. So they can have an outsized impact on where the broader market goes, even if the rest of the stocks are having relatively good days.
With both stocks lower after their quarterly reports, they dragged down the overall market today – and the tech-heavy Nasdaq Composite Index (where these companies make up 15% of the overall index) suffered the most.
Today, the benchmark S&P 500 finished nearly 2% lower and the Nasdaq was off 2.5%, while the Russell 2000 Index and Dow Jones Industrial Average lost 1.2% and 0.6%, respectively.
So, remember, while the buzz around AI stocks may have been good for the market on the way up... these stocks can lead on the way down if their big AI investments don't pay off sooner rather than later, or meet sky-high expectations.
Beneath the surface, things didn't look as bad, but they're still shaky.
The equal-weight S&P 500 was down 1% and just dipped below its 50-day moving average (50-DMA), a technical measure of a short-term trend, as did the Dow and Russell 2000. But the other three major indexes are still trading above their 50-DMAs, so positive momentum for U.S. stocks remains in place for now.
Also notable: Inflation has already accelerated again...
Another day, another round of "official" inflation data. This morning, Uncle Sam published its personal consumption expenditures ("PCE") price index report for September.
The "core" PCE number – which the Federal Reserve says is its preferred measure – checked in at 2.7% for the third straight month. And the month-over-month gain was 0.3%, the highest since April.
I saw headlines today reporting inflation is getting closer to the Fed's goal (and thus that rate cuts can or should continue). Those stories didn't tell the whole – or correct – story. This is a little in the weeds, but important: They referred to headline PCE, which measured 2.1%.
Now, that might be a good enough piece of data for a good story... or for the Fed to conveniently use to claim that high inflation has been conquered.
But in the past, and right or wrong, the Fed has said it prefers "core" PCE – which strips out volatile food and energy prices – to gauge underlying inflation. And given the month-over-month growth rate of core PCE in September (0.3%), the pace was closer to a 4% annual clip than the Fed's 2% goal.
These numbers do not reflect a trend of disinflation – or prices rising by a slower rate. It's a signal that the pace of inflation has accelerated again. Already.
But I doubt the Fed will acknowledge this at its next meeting next week... It'll probably say it needs to wait for more data for confirmation.
That sets the stage for the Fed to possibly continue making its "mistake" that the bond market has been pointing out... and federal-funds traders are still expecting. That is, it will cut rates again when it meets next week – even as the unemployment rate has improved... GDP growth is close to 3%... and inflation isn't yet under control.
Such is the life we live in our fiat-currency world.
Beyond the U.S...
So the world's reserve currency, the dollar, is subject to our constant manipulations... No wonder governments beyond the U.S. borders have different ideas on how to do business... but I don't think a lot of people know the details quite yet.
Last week, Russia hosted a three-day meeting of "BRICS" nations, a group that has expanded beyond the team of Brazil, Russia, India, China, and South Africa that made up the acronym for the group when they were its only members back in 2010.
Iran, Egypt, Ethiopia, and the United Arab Emirates are now a part. Others have applied to become members. The summit in Russia – dubbed "BRICS Plus" – was attended by representatives of 36 countries.
On the final day of the conference, Russian President Vladimir Putin spoke out against Western sanctions against his country in response to the war in Ukraine and talked about how the West's "perverse methods and approaches – to put it bluntly – lead to the emergence of new conflicts and the aggravation of old disagreements."
The BRICS nations are pro-crypto...
If anybody was listening, the message was clear in some of the specifics beyond the macro points. According to an Associated Press report last week...
Russia has specifically pushed for the creation of a new payment system that would offer an alternative to the global bank messaging network SWIFT, which would enable Moscow to dodge Western sanctions and trade with its partners – some of which are also heavily sanctioned by the U.S. and its allies – more easily.
In a joint declaration Wednesday, participants voiced concern about "the disruptive effect of unlawful unilateral coercive measures, including illegal sanctions," and reiterated their commitment to enhancing financial cooperation within BRICS. They noted the benefits of "faster, low-cost, more efficient, transparent, safe and inclusive cross-border payment instruments built upon the principle of minimizing trade barriers and non-discriminatory access."
I (Corey McLaughlin) don't know about you... but the description of a non-dollar currency that's "faster," "transparent," "cross border," and "built upon the principle of minimizing trade barriers..." among the BRICS nations sounds a lot like the concept of cryptocurrency to me.
I ran this idea past Crypto Capital editor Eric Wade today. He told me: "Exactly."
This a huge deal – and would be a massive driver for demand for cryptos, bitcoin specifically. Several recently added BRICS governments (including the UAE and Ethiopia) are already involved in mining the world's most popular crypto.
Many folks are unaware of this story, but...
It's part of the reason bitcoin has gotten more political in the U.S. lately, too...
The topic has come up during the campaigns of both Donald Trump and Kamala Harris.
Trump has been publicly pro-bitcoin and has offered more specifics on the subject.
Just today, he tweeted, a "Happy 16th Anniversary of Satoshi’s White Paper," referring to the creation and explanation of bitcoin by the pseudonymous Satoshi Nakamoto amid the financial crisis in 2008.
He has also floated the idea of creating a national bitcoin reserve... (which would also certainly be a driver of demand for the crypto).
Now, will it happen? Well, Eric has a few ideas about the idea... and he put together a free presentation about it. Some could interpret the proposal of a U.S. bitcoin reserve as a political ploy, Eric says, but he is confident it's inevitable no matter who wins the White House next week.
He points out there is growing bipartisan support for cryptocurrencies. For better or worse, much like every other industry, crypto execs have been funding political campaigns at record levels. That includes almost $120 million this year in contributions... all to ensure a positive future for cryptocurrencies with government support.
I could see politicians in the U.S. getting on board with pro-bitcoin or pro-crypto policies more emphatically in part if they think the BRICS nations are trying to use the technology to thwart the U.S.-led conventional banking system of the world today.
But you should hear what Eric has to say about this story.
Be sure to check out his free presentation for more about what this development could mean for bitcoin and the smaller, lesser-known cryptos that Eric is one of the world's foremost experts on... and how you can profit from owning the right ones.
And, oh yeah, there's five days left...
Until Election Day in the U.S., that is.
The waiting game, last-minute campaigning, and early voting continue.
In the 25 states that report early-voting data with party registration, Democrats have submitted nearly 900,000 more ballots than Republicans (about 12 million versus 11.1 million), according to the University of Florida's "Election Lab" data. About 7.7 million independents or third-party-registered voters have already voted in those states, too.
In the six states with gender data (Colorado, Georgia, Idaho, Michigan, North Carolina, and Virginia, a list that includes three critical "swing" states), women have outnumbered men who've submitted votes by a margin of 7.7 million to 6.2 million.
This is early, partial data. We won't use it to make a "call" on next week's election today. However, this much I know: Next week will probably be a volatile one, one way or another, for the markets.
In addition to the election outcome (or any delay), the Fed will announce its latest policy. Plus, as we've told you, the Chinese government is reportedly weighing additional economic stimulus plans that could come next week. And earnings season will continue as well.
New 52-week highs (as of 10/30/24): AbbVie (ABBV), Automatic Data Processing (ADP), Alpha Architect 1-3 Month Box Fund (BOXX), SPDR Gold Shares (GLD), Omega Healthcare Investors (OHI), Sprott Physical Gold Trust (PHYS), Spotify Technology (SPOT), Summit Materials (SUM), Texas Pacific Land (TPL), The Trade Desk (TTD), Tyler Technologies (TYL), and ProShares Ultra Gold (UGL).
In today's mailbag, feedback on our annual Stansberry Research conference and Alliance meeting in Las Vegas... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"A big thanks for the great Alliance conference in Vegas. I've lost count of how many I've been to, but I have to say I really thought this year was one of the most interesting. Billy Beane was fantastic as well as those that followed. Some interesting investment ideas as well. I hope to see you next year." – Stansberry Alliance member Bob G.
Corey McLaughlin comment: Thanks for the feedback, Bob. We certainly enjoyed the conference as well, and glad to hear the same from you and others. Hope to see you next year, too.
All the best,
Corey McLaughlin with Nick Koziol
Baltimore, Maryland
October 31, 2024