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In terms of the oil and gas industry, the geopolitical crisis in the Middle East is not expected to have a significant impact on the industry. Despite the volatility in oil prices, there have been consolidation deals within the industry, as companies look to prepare for the future and navigate the shift towards green energy.
In the US markets, there is a sense of nervousness regarding the future of AI and tech valuations. The recent earnings reports have shown that 77% of S&P 500 companies have beaten street expectations, but this could be attributed to a game of meeting or beating numbers rather than a true reflection of corporate America’s performance. Business activity in the US has picked up in October, driven by a rebound in factory demand and an easing in service sector inflation. This trend is expected to continue into 2024. The Yen has weakened against the dollar, but the BOJ is not expected to intervene unless it reaches a level of discomfort.
Meta, formerly known as Facebook, reported better-than-expected third-quarter profits and revenues, driven by a recovery in digital advertising. The company’s operating margin doubled to 40%, its best in two years, largely due to cost-cutting measures. However, its augmented reality division, the metaverse, has incurred significant operating losses. Despite this, Meta’s CEO, Mark Zuckerberg, remains committed to the metaverse. The company expects revenue to be between $36.5 billion and $40 billion for the fourth quarter. Meta is also facing a legal challenge over its addictive qualities and impact on the mental health of younger users.
Transcript:
BFM
BFM 89.9, it’s 7:06 AM on Thursday, the 26th of October. You’re listening to The Morning Run. I’m Shazana Mokhtar with Wong Shou Ning. We’re going to kickstart this rather lovely-looking Thursday morning with a recap on how global markets closed overnight.
BFM
Okay, it’s a nice day, but it wasn’t such a nice night for US markets. They all ended in the red. The Dow is down 0.3 %. And I want to highlight on a year to date basis, it is now in negative territory. It is down on a year to date basis also by 0.3 %. And Nasdaq had its worst day so far this year, down almost 2.5 %. So it’s only up 22 % on a year to date basis. Meanwhile, we look at the S&P 500, it was also down 1.4 %, only up nine % on a year to date basis. So all these earlier gains that we saw throughout the year seem to be slowly disappearing. Meanwhile, if we look at the Asian markets, the Nikkei225, however, was up 0.7 %. Hang Seng was up 0.6 %. Shanghai Composite up 0.4 %. The Singapore Straits Times were however down by 0.2 %, while our very own FBMKLCI was actually up by 0.5 %.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. I would like to start with oil and gas. So Shell Oil has given the US some measure of energy independence, but the number of operating oil rigs, a barometer for activity has dropped 16 % to 502, compared with the same time last year. How do you see the geopolitical crisis in the Middle East affecting the fortunes of this industry?
Tony Nash
Yeah, it’s a great question. At this point, I don’t see too much impact at this point. There is a lot of pressure to continue to reduce crude prices. And we’ll see actions in markets, we’ll see intervention by, say, central banks to try to reduce crude prices. But I think we’ll also see, even with the geopolitical risk in the Middle East, we’ll see the supply from Iran continue to hit global markets. We saw with the geopolitical issues in Russia and Ukraine that Russian oil continued to hit markets. I think the go-to place for crude traders is, Oh, gosh, geopolitical risk in the Middle East, that must mean crude prices are going to rise. Not necessarily the case. If they don’t rise, you probably won’t see those rigs come back online.
BFM
Meanwhile, Tony, we have seen a lot of consolidation or quite some pretty big consolidation deals within the oil and gas industry. I think despite the volatility in oil prices. How do you see this trend moving forward?
Tony Nash
Well, yeah, I think these companies are seeing that if the 2030, 2035 goals are kept by a lot of the companies that have… Sorry, national legislatures and regulatory bodies that are trying to push green energy and force, say, electric cars by 2035, which I believe California is doing other things, then really the for these guys are capped, so it’s time to start consolidating. But if that doesn’t happen, which we’re starting to see some pushback on that, then it’s also a great time to consolidate because we’re in a sweet spot where crude prices are, it’s not too high, it’s not too low. And so we’ll likely see more of these deals, not a lot more, but a couple more of these deals on the horizon.
BFM
And let’s talk about U. S. Markets. Well, Nasdaq had a pretty rough day down 2.5 %, pretty much the worst for the year. We did see Meta and IBM come out with their numbers, both actually beating street expectations. What’s driving this nervousness?
Tony Nash
I think a lot of people are feeling that, at least for now, AI has played out. You even had Bill Gates today come out and say that large language models are not what people think they are in terms of the level of innovation, that thing. I think large language models and AI are really cool, and I think there’s a lot more room to run. But I do think valuations are very stretched right now. With interest rates rising, it’s very hard to stretch tech valuations much further. A lot of these companies for the past, say, four quarters, you can count the number of times they say AI in their quarterly earnings calls, and it’s just increased. As they’ve said AI more and more, it’s just helped their share price. But I think that’s a little bit played out. I think until people start to see real gains from AI outside of the chip makers, like CONVIDIA, real gains within corporate sectors, real gains within the user sectors, then I think we may see valuations as stretched as they can be, at least for now.
BFM
Okay, so far, about a quarter of the S&P 500 companies have reported earnings, and apparently, 77 % of them have actually beat street expectations. I’m not sure whether it’s just the street being conservative or really corporate America is doing better than I expected. So is there some contradiction? Because everyone’s been talking about that recession that’s coming, but just never seems to happen yet.
Tony Nash
Yeah. The recession calls are a big game, too. It’s a little bit of conservatism on behalf of analysts and a meeting of the minds between, say, the CFO to the publicly traded companies and analysts, and everyone wants to beat their earnings, right? So it’s a game. Everything, it’s a game. We saw MetaBeat and we saw Microsoft Beat and all this stuff. That’s great, but it’s a game number. Nobody’s going to put a number out there that they knowingly that they’re going to either meet or not meet. They all want to beat everything by a certain amount. It’s a bit of a game. I think we’ve seen in sectors like real estate where things haven’t gone so well. We’ve seen in energy where things haven’t gone so well. Again, those energy valuations are down a bit and that’s created some room for some of those deals that we just talked about. Sectors like materials and health care, they’re down a bit as well compared to a year ago. So even though some of these current firms beat, they are a bit sensitive to market conditions of debt and other things. And so it’s not all good all around.
BFM
Can we talk about US business activity, which picked up in October after back to back months of stagnation, helped by a rebound in factory demand and an easing in service sector inflation? So do you see this trend continuing into 2024?
Tony Nash
Yes. What we’ve seen with business activity is we have seen some prices come off a little bit. With service sector activity, really service sector inflation comes down to the wages of service sector workers for the most part. As the rate of inflation for those service sector wages have started to slow, you’ve seen on a relative basis, more activity. A lot of this is really inflation-slowing and the impact of interest rate rises hitting markets. In some ways, like we said, real estate and some other sectors, it’s not a good thing. But in services, as we start to see some pressure on those prices, it can be a better thing for consumption because we do have wages rising in a lot of the economy, but costs have just continued to rise, especially in services. So as people are seeing some of their service costs slow down a little bit and in some cases even decline, people are more willing to spend.
BFM
Okay, I’ve got a quick question on the Yen. It’s slumpab past $150 per dollar, weakest level this year. BOJ, are they going to intervene?
Tony Nash
I think at 150, it’s okay. I think at 155, it becomes a little bit uncomfortable. I think it’s a delicate balance, and they’ll try to keep it at 150 as long as they can. But it really all depends on what happens with the dollar. With geopolitical risk, the dollar becomes more appealing generally, not in all cases, but it becomes more appealing generally as a safe haven. The Yen is a secondary safe haven currency, but it really depends on their monetary policy. If they continue with YCC and some of these other policies, they really need to tighten slightly. Not a lot, but slightly. I’m sure you guys remember 2012. Maybe you were in school. I don’t know, but maybe I’m sure you remember 2012 when Abenomics first came into discussion. The Yen was trading at ’76, I think, right? And then within a month or two, it was in the ’80s or ’90s, and it ripped really quickly.
BFM
Yeah, Tony, I’m the only one in the room that remembers that. You and I.
BFM
I read history books.
Tony Nash
That’s right. The Yen can really fluctuate. It hits these extremes. Once they change policy, it can really boomerang back fairly quickly. If they made some policy tweaks, we could see a Yen at 1:30 or 1:35 or something like that. It sounds like it’s a long way from here, but it’s actually not.
BFM
Tony, thanks as always for the chat. 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 watch there, especially as we’re in the thick of earning season. Speaking of that, let’s talk about some of the earnings that have crossed our table this morning. A Meta, third quarter profit and revenue beat analyst expectations thanks to a recovery in digital advertising ahead of the holiday season. We saw this exact same trend with Alphabit yesterday. They also saw digital advertising recover. So Meta is also seeing the same thing. Revenue rose by 23 %. It’s the fastest rate of growth since 2021. They achieved $34.2 billion better than the expected $33.6 billion.
BFM
Okay, so at the same time, their operating margin in the third quarter doubled to 40 %. It’s best in two years. Now, a lot of it is actually driven by their cost cutting measures, right? They’re keeping an eye on this because they’re a bit uncertain in terms of the outlook. So the best thing to do is just really just not spend very much money. Remember their augmented virtual reality thing that they.
BFM
Are so The metaverse. It was all the rage a while back. It’s largely forgotten right now.
BFM
Well, it’s cost them $3.74 billion in operating losses. So you might have forgotten, but they’re paying the price of your forgetfulness. Clearly, it’s not going to turn around so quickly. Since the start of 2022, this division has lost close to $25 billion. But Mark Zuckerberg is plowing ahead. He’s not giving it up. So the outlook, they expect revenue to come in between 36 and a half to 40 billion for the fourth quarter. Analyst will however expect sales for that quarter of 38.5, like the analysts being a bit chicken and really coming in the middle. Now, does the street like this name? The answer is still yes. 60 buys, seven holds, two sells. Consensus target price, 373 US dollars and 87 cents. During regular market hours, the stock was actually down $13. $2.99 to $299.53. The stock’s still up 148 % on a year to date basis.
BFM
Well, Meta has found itself in a bit of a legal pickle over in the US. We’ve got several states that are actually filing a lawsuit against Meta for its addictive qualities impacting the mental health of the younger generation. We are going to get more into that social media impact a little later in the show. 7:19 in the morning, we’re going to head into some messages, but we’ll come back to cover the top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.