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BFM 89.9 Market Watch: 2024 Is Still The Year For Tech

In this BFM Market Watch episode, Tony Nash discusses the current state of the US equity markets, noting that valuations are stretched and earnings growth is expected to be below 5% on average year on year. He also highlights the potential for a cost-cutting cycle for companies and the impact of AI-related stocks in the tech sector.

This podcast is originally produced and published by BFM 89.9 and can be found at https://www.bfm.my/podcast/morning-run/market-watch/2024-tech-stock-nvidia-amd-ai-equity-us-fed.

With CI Markets Free, our goal is to democratize financial insights. We believe that everyone should have access to powerful forecasting tools, enabling them to make informed decisions that align with their financial goals.

The podcast covers the impact of UK inflation on Wall Street and Asian markets, as well as the expectations for US equity markets. CEO Tony Nash provides insights on the US equity market, expecting incremental growth with volatility, and discusses the potential impact of the Fed’s rate decisions on equity markets. Furthermore, the discussion touches on the performance of companies like Charles Schwab and Verizon, highlighting challenges and anticipated financial results.

The segment also provides an overview of recent market performances and insights into the factors influencing equity markets, including the impact of UK inflation on global markets, expectations for US equity markets, and the financial outlook for specific companies.

Transcript:

BFM


Good morning at on Thursday the 18 January 2024. I’m Shazana Mokhtar with Wong Shou Ning and Keith Kam. In about half an hour we’re going to be discussing the market outlook for anti obesity medication, which has really taken the world by storm over the past couple of years. But as always, we’re going to kick start the morning with how global markets closed overnight.

BFM


Yeah, Wall Street saw its first, its third straight losing session overnight and that was because Europe was also down as UK inflation unexpectedly picked up. The Dow Jones was 0.3% lower, the S&P 500 was down 0.6%. The Nasdaq closed 0.6% lower. Earlier in the day was also quite a red day for Asia. Japan’s Nikkei was down 0.4%, Hong Kong’s Hang Seng was down 3.7%. Shanghai’s composite was down 2.1%. Singapore’s STI was down 1.3% and the FBMKLCI closed 0.2% lower at 1491 points. Like we don’t even remember that Monday was above 1500 anymore.

BFM


Well, it was a red day all across the board. For some insights on where international markets could be heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us. Now, roughly thirty S&P. Five hundred companies have reported fourth quarter results thus far with 78% beating expectations. Yet the equity market in general hasn’t been reacting as bullishly to those results as one might expect. I think all of the three major indices are down on a year to date basis. Why is that the case?

Tony Nash


Yeah, a big part of it is that, first of all, those expectations are much lower than they were a couple years ago, even last year. So those expectations that they’ve beat are pretty low. But in general, us equity markets are really priced for perfection. So if a company doesn’t come in with the perfect results, valuations are so stretched that investors kind of beat them down. Today in the US, we had retail sales numbers come out and the sales for December were very good, which could potentially build the case for a Fed higher for longer scenario, which goes against the Fed expectations for easing kind of as soon as possible that a lot of investors are really hoping for. So the retail sales numbers are really what it’s kind of good news is bad news in the US right now, because if there is good news for the economy, it means the Fed will not ease or is unlikely to ease. So when we look at valuations in the US, they’re very stretched. When we look at earnings in the US, earnings are below 5% on average. Expect to be below 5% on average, year on year earnings growth, that is.

Tony Nash


But when we look at earnings over the past few years, it’s really mirrored the inflation picture. And we’ve talked about this several times before where when there isn’t underlying inflation, then there isn’t a justification for companies to expand their margins. So if your underlying product, let’s say it’s steel, if steel inflation is say 10%, you as a steel manufacturer or whatever are going to add another couple of percent on top of that. Right? So everybody takes their cut. If we see a static or even deflationary environment, the ability for companies to grow their earnings is really low and it’s just a much more difficult environment for them. So what we’re looking at now, and not many people are willing to talk about this right now, but we’re about to enter a cost cutting cycle for companies because the ability to grow those earnings is really disappearing. So they’re going to have to cut costs to grow earnings.

BFM


Okay. I guess we’re seeing that in terms of the number of jobs eliminated, tech sector, financial sector, but that’s right. Tony, my question is, okay, if we assume that the Fed is really not going to be so aggressive with cutting rates, I think initially people were saying five, six times. I think the number’s been brought down to three and four times for this year. What does this then mean for equity markets? Because it’s likely that the US dollar will continue to remain strong, and we are seeing that now. So doesn’t the money still stay in us equities versus an outflow into emerging markets? Perhaps.

Tony Nash


Yes. So our expectation of Complete Intelligence is for incremental equity valuation growth on the broad index scale, okay, we have individual stock forecasts, but on the broad indices it’s incremental growth with a lot of intramonth volatility. So when we talk about incremental growth, that’s kind of small, positive movements month on month on average. Okay. But intramonth, we’re going to see a lot of up and down. Now with the Fed in terms of their raising interest rates, our sense is that it’s probably not going to happen until May or June. There are some people who are hopefully saying March, but we can’t continue to get readings like we’ve been getting in the macroeconomic data and expect the Fed to cut just because equity markets are pulling back doesn’t mean the Fed will cut. They don’t do that for equity markets. They do that for things like recession. They do that for things like deflation and so on.

BFM


Then again, Tony, we are looking at share prices of stocks linked to AI, like Nvidia and AMD. They are still soaring. Is tech, especially those related to AI, still going to be outperformers this year, no matter what happens politically or economically? And I was wondering how this ties into what you said just now about most companies going through a cost cutting cycle eventually.

Tony Nash


Yeah, I think we have those two opposing forces, right? So one is the corporate drive to improve profit. So that would tell you, hey, they’re probably cutting back on capital spending. The other one is kind of the seemingly endless hype about AI. And so obviously the hype about AI means underlying strength in chips. Okay? If companies are cost cutting, that likely means that individual companies are unlikely to build their own AI and ML machine learning platforms. They’re likely to outsource it to people like Microsoft or Amazon or something like that. So that would mean that those guys like Microsoft and Amazon would be buying more chips to power the AI that companies are going to use. So here in the US, I run an artificial intelligence company, and a lot of companies over the past couple years have tried to build their own artificial intelligence platforms. And that is just crazy because it’s like every company trying to build their own word processing software, right, when you just end up buying Microsoft Word or whatever. So we’re likely to see CTOs and CIOs come back to their senses and say, hey, we can’t build this stuff in house. We need to have someone outside do this.

Tony Nash


Now, when you look at Nvidia and AMD specifically, Nvidia is trading at, I think, 73 times earnings right now. So that means they have to make the current earnings for 73 years to justify their price. AMD is trading at 1423 times earnings, which is just crazy. So that tells me either AMD is going to have an incredible quarter next quarter or next year to recalibrate that valuation, or their share price is really in danger. I don’t actually know. I mean, we have our own forecasts on this stuff, but personally, I don’t know. But it seems to me that the AI hype cycle is maturing. We’re not having the rate of growth and hype that we had last year. That hype cycle is maturing. So are we going to see the rate of rise of individual share prices like we did last year? It’s going to be really hard to do that. So does that mean that we’re going to see a crash in these? It doesn’t necessarily have to be the case. They could just taper off or slow their growth rate.

BFM


Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. A lot to look out for, I think, as earnings season continues to unfold. And let’s take a look at that, some of the earnings that have come out overnight, we’re beginning with Charles Schwab. They have reported fourth quarter profit that fell 47% to $1 billion on the back of bigger interest payments on its client deposits and debt, offsetting gains from increased asset management fees.

BFM


Net interest revenue fell 30% to about $2 billion. Charles Schwab, like major banks, are affected by the US Fed’s aggressive rate hikes. The brokerage paid an average of 1.4% on deposits, compared to 0.5% a year earlier. They also borrowed from the federal Home loan bank in the first half of 2023 to supplement its funding sources. And it paid an interest of $423,000,000 on those loans. That was four times higher than the year earlier. So it really, really adds up.

BFM


Okay, so this is the granddaddy of online trading. It emerged way back in the 2000s. But their CEO is basically saying they’ve never seen such difficult times. I think for them, it’s a confluence of factors. They, of course, were hit by the higher interest rates, so they had to pay much more for their deposits. Brokerage also came down as a result. New assets fell as much as 48%. So, basically, I think, tough times ahead for this company. And if you look at just the analysts, what are their recommendations for this stock? The current, they’re just, well, still. Okay, 19 buys five holes, two sells. Consensus target price for this stock, $74 at $0.65 during regular market hours. At one time, it was down 7%, but it did close just down eighty six cents to sixty three us dollars and forty five cents. But after this very negative earnings call, I won’t be surprised if many analysts go out and cut their numbers.

BFM


Well, speaking of negative earnings call, we’re not expecting Verizon’s fourth quarter results until next week, January 23. But perhaps they’re starting to manage expectations by issuing this statement that it will take a 6 billion US dollar write down in the fourth quarter as it reduces the value of its declining wireline business, which includes legacy voice and data services.

BFM


And this segment has been under particular pressure from strong competition, an uncertain economy and a broader shift to wireless services. The company cut its financial projections for its business unit, which caters to businesses and government clients after a five year review, and those account for more than a fifth of the company’s revenue.

BFM


Not very hot on Wall Street, 14 buys, 15 holes, four sells. Consensus target price for this job? $41.65. Current share price, $38.87. But, guys, this is fourth quarter, so I can imagine a lot of corporates doing as much kitchen sinking as possible and releasing as bad results as possible. It’s all about managing expectations. And then they can say, look, 2023 bad. Okay, never mind. We move on. Everyone just look to 2024.

BFM


All right? We’ll see what comes out of their earnings results next week. 718 in the morning, we’re going to head into some messages, but we’ll come back to cover more of the top stories in the newspapers and portals today. Stay tuned. BFM 89.9.