This week we‘ll assess the implications of ASML’s stunning disappointment on the tech sector as a whole, the recent herding of Wall Street strategists into cyclicals, a 1983 classic movie and a look ahead to important economic data.
DADO RUVIC/Reuters
Trends
AI investment theme at risk of pause
The Netherlands-based semiconductor provider ASML reported new orders for delivery so dramatically below expectations that it may be a shot across the bow for investors in the broader technology sector. ASML reported €2.6-billion in orders, just over half of consensus expectations for €5-billion. Not only did its stock get bludgeoned on Tuesday, but it also sent the Philadelphia Stock Exchange Semiconductor Index down more than five per cent. Even AI darling Nvidia Corp. was down 4.7 per cent.
The news follows a summer of negative news flow for the semiconductor sector, according to Citi analyst Andrew Gardiner, including weak memory prices and Intel Corp.’s decision to delay investment in new capacity.
Wells Fargo analyst Amit Chanda believes that the AI investment theme that has driven tech stocks higher has entered a new stage, one with more headwinds. He believes inflated expectations for AI have peaked and sentiment has moved into a “trough of disillusionment” stage where companies are carefully considering the benefits of investment.
Mr. Chanda does expect that AI will eventually transform numerous industries including health care, education, manufacturing and transportation. He believes that the effects of AI will be so pervasive that the loss of white-collar jobs might threaten economic growth.
In the short term, however, the rally in AI-related stocks may have stalled. Previous technology investment cycles imply that the market may have priced in the widespread adoption of AI too early (think late 1990s, when investors rewarded stocks for internet adoption well before it happened).
The massive investment necessary to provide AI, the data centers in particular, limits the opportunity to the most mega of the megacap tech firms: Microsoft, Meta, Amazon, Apple, Alphabet and that’s pretty much it.
The electricity needs alone indicate the scale of upcoming spending. Power demand will be high enough that Microsoft has partnered with Constellation Energy to reopen a Three Mile Island nuclear reactor. Alphabet announced a deal to buy a series of small reactors from Kairos Power.
It will be a while before AI providers reap the financial benefits of their gigantic cash burn. In the meantime, profit margins will be squeezed.
Not all Wall Street firms are bearish. BofA Securities analyst Vivek Arya argues that recent trends underscore the attractiveness of AI-exposed semiconductor providers – Nvidia, Broadcom Ltd. and Marvell Technology Inc. are his top picks – and those like ASML that benefit less.
I’m not sure if the AI trade will fully stall but I do think successful investing will require more selectivity. In the short term, I would be cautious about the hyperscaler spenders and be more optimistic about the peripheral beneficiaries of the investment, including sellers of all equipment necessary for data centers.
Parrots in Argentina this yearAgustin Marcarian/Reuters
Herding
Strategists parroting each other
I was greeted with four strategists saying basically the same thing when I came into the office this week – always cause for concern. Citi strategist Nathaniel Rupert wrote Regime Cluster Change-Transition to Recovery, noting a move from secular growth to cyclical stocks. Morgan Stanley’s Thoughts on the Market podcast was titled Markets Spin Towards Cyclicals. BofA Securities equity and quant strategist Ohsung Kwon argued that the U.S. economy was strong enough that a “no landing” scenario was becoming more probable, an environment that favours economically sensitive stocks. Goldman Sachs economist Jan Hatzius joined the party by noting the declining odds of a U.S. recession.
“When all the experts and forecasts agree – something else is going to happen” is legendary Merrill Lynch strategist Bob Farrell’s ninth rule of investing. Hence my discomfort with the wholesale strategist rush to cyclicals. Commodity prices are also not signaling a growthy global economy. Recent data does, however, indicate a stronger-than-expected U.S. economy, so sectors like transportation and consumer discretionary bear watching.
Diversions
Nic Cage trivia for everyone
I downloaded Pluto and Tubi recently because free movie and TV content is a good thing. The irresistible pull of Nic Cage’s greatest dramatic role, as Randy in the 1983 classic Valley Girl (trailer here), had me watching the movie on Tubi this weekend.
I’m not advocating for the movie here. I’m praising the IMDB trivia section for the movie. It informed me that Julie’s dad in the movie was played by Frederic Forrest who also played Chef in Apocalypse Now. Cage slept in his car during the filming because he thought it would make his character more authentic. Michelle Pfeiffer was considered for the female lead in the movie.
There’s a trivia section for almost every movie and I find it no end of entertainment.
The essentials
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The Rundown
Despite coming with some major trade-offs, the popularity of covered call and enhanced yield ETFs have exploded in popularity. Ian Tam of Morningstar went hunting for the best of the lot.
The money management business is upping its game in a hunt for profits. Tim Shufelt on why investors should not give in to the temptation.
Couche-Tard’s share price has hit a soft patch over the past two months, ever since it confirmed it was in discussions to acquire the Japanese parent of 7-Eleven. Here is David Berman’s advice to investors as the saga continues to play out.
Can the U.S. stock market keep going up? Market watchers think so, reports The New York Times.
Why Donald Trump’s plans for the U.S. dollar could upend broader U.S. financial markets
What’s up next
The domestic economic calendar is reasonably light for the next ten days with the notable exception of the Bank of Canada meeting next Wednesday. Retail sales for August will be out on Friday the 25th, providing an indicator of household financial stress.
For the U.S., advance retail sales for September will be out on Thursday with a 0.3 per cent month over month increase expected. September industrial production data is released the same day and a decline of 0.1 per cent is forecasted. Durable goods for September will be reported on the 25th and a drop of 1.1 per cent month over month expected.
See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)