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Growth Team Weekly Investment Insights

08 February 2024   |  

1. Hot jobs report and Fed Speak takes March cut off the table

Last week the Fed held rates steady at the 5.25% - 5.5% level but pushed back a bit on expectations for near term cuts due to a desire for “greater confidence” that inflation will return to the 2% goal or if the labor market weakened.

This graphic from the Financial Times does a good job of recapping the recent recent personal consumption expenditures (“PCE”) metrics. While longer term YoY measures show core PCE inflation at 2.9%, annualized 1-, 3- and 6-month measures are at the Fed’s target. Read more here. 

 

 

 

 

 

 

 

 

 

 

 

 

 

However, this positive inflation data was offset by Friday’s jobs report, which indicated that the US economy added 353,000 jobs in January versus 175,000 consensus and average hourly wages grew 0.6% versus 0.3% expectations. This data has slashed investor expectations for an interest rate cut in March.

 

 

 

2. US Mega Cap Tech Earnings

The “Magnificent Seven” don’t just dominate in terms of performance, they have the fundamentals to back it up. All but NVIDIA have reported Q4 earnings results and have largely delivered. Meta reported strong earnings results, including 25% revenue growth, and agreed to its first ever dividend payout. Amazon also reported strong results, citing a strong holiday season and a 13% increase in its sales for its cloud computing segment. Microsoft’s cloud revenues also rose 30%, while Alphabet’s Google Cloud services business reported a 26%.

Yes, these companies make up large weightings in the index, but they also dominate the earnings growth contribution. As of 2/5/2024, the Q4 EPS growth results (actual reported results combined with conscensus estimates for those that havent reported yet) for the S&P 500 Index was 1.6%. The magnificent seven stocks are contributing +8.6% to that total EPS growth metric while the rest of the stocks in the index are detracting -7%.

Q4 2023 EPS Growth (actual reported results combined with conscensus estimates)

 

 

 

 

 

 

 

 

 

 

 

 

3. AI Data Center Spending + AMD AI estimates

One common theme from multiple of these mega cap technology companies is continued spending into artificial intelligence. Microsoft reported strong cloud computing sales from customers eager to use its suite of software services that have been integrated with technology from ChatGPT-maker OpenAI. Alphabet is looking to integrate its Gemini generative AI into its advertising, search and cloud businesses.

Both groups warned that capital expenditure would be higher in 2024 as they make more significant investments in the technological infrastructure underpinning generative AI. Microsoft chief financial officer Amy Hood said the company expected capital spending, driven by investments in cloud and AI infrastructure, to “increase materially”.

The winner on the other side of this should be the chip companies providing the leading edge chip needed for these data center builds. Advanced Micro Devices raised its AI chip sales estimates by $1.5bn for 2024 in an earnings report, saying that customers including Microsoft had moved faster than expected in their deployment of its new MI300 chips, which compete with Nvidia. Read more here. 

 

4. Analyst Coverage by Size

One of the reasons why we have historically been attracted to smaller sized companies is the relative inneficiency down market given these stocks are less followed by analysts. One way to show this is how many stocks within the MSCI AC World Index have 5 or fewer analyst estimates in FactSet.

Only 14 stocks that are >$25B in market cap have 5 or fewer estimates versus 424 companies <$25B in market cap. 

 

 

 

 

 

 

 

5. Negative Earners in Russell 2000 Index

And last, we took a look at how the % of companies within the Russell 2000 Growth Index that are negative earners has been trending over time. Over the last 15 years, the percentage has been moving up from ~25% to as high as ~40% in recent years. We believe this is a potential source of alpha generation for managers in that space that are able to differentiate winners from losers, especially as refinancing headwinds strengthen.

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 12/31/2023

 

Artisan Growth Team manages portfolios which held securities issued by Microsoft, Amazon, Alphabet and Advanced Micro Devices as of 12/31/23.  Portfolio securities are subject to change.

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