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@theMarket: Stocks Eke Out Gain for the Week
Once again, markets managed to stay above the waterline thanks to a handful of tech names. With corporate earnings right around the corner, investors are betting on stronger results to keep the markets afloat. That could prove difficult.
Depending on who you talk to, third-quarter corporate earnings are expected to come in a range of up 25 percent-30 percent. That follows a second-quarter result of about the same magnitude. Investors are asking not only whether the AI crowd will deliver, but whether it beats expectations.
Given the record highs on the Nasdaq and the S&P 500 this week, most of the expected results have already been discounted. That means company managements (read AI) must beat expectations and by a sizable amount to justify the lofty heights of their company stock prices. They must also give future guidance that fulfills the loftiest expectations. That is a tall order. Failure would mean significant downside for their stocks and the market in general.
Given the president's belief that his fortunes are tied to the stock market's performance, not the polls — where AI goes, so does he. Both company management and the president have pulled out the stops. They all have a stake in keeping this circus going.
No matter how much of the earnings the AI crowd claims as real, it's simply an accounting ploy, according to recent analysis by several Wall Street firms like the Carlyle Group. The industry is about a trillion dollars over its head in spending, which is well known. The need to borrow more to compete is becoming a worry as well, since it is crowding out other borrowers in global bond markets.
And yet without them and their borrowing to fuel additional capital investment, the economy wouldn't really be growing as fast as the numbers indicate. That becomes a midterm election problem for Trump and the Republican-held Congress. Which is why the president, at every opportunity, has tried to assure Americans that not only should AI data centers be in practically everyone's back yard, but those who don't get aboard will miss out.
The handful of AI companies that attended the president's love fest last week at the White House were part of the administration's strategy to keep the effort going at warp speed. To justify the frantic race for first place in AI, both parties have trotted out the China card. "Whoever wins AI wins," said the Dear Leader, in explaining why it would be dangerous to fall behind in this race.
As for the fear that AI could run amok, well, a new federal task force, the "Super Intelligence Force," run by Trump's boy, Jay Clayton, the director of national intelligence, has been created with great fanfare.
The administration even established a solemn "accord" where Anthropic, Google, Meta, Nvidia, OpenAI, and SpaceX committed to internal risk reviews, third-party audits, and board oversight of frontier AI models. Of course, these will be considered voluntary industry guardrails, conducted by the same guys who just happened to have received the National Medal of Science (the CEOs of SpaceX, Nvidia, Google, and Advanced Micro Devices) and the National Medal of Technology and Innovation (Dell and Microsoft) on Thursday, Oct. 8, in Washington by the president.
I am sure the public will now rest easy, assured that whatever happens, the threat of Skynet will remain where it belongs — in "The Terminator" movies. It should allow us all to breathe a tremendous sigh of relief, shouldn't it, especially when we consider the source of this "morally binding agreement." After all, it was engineered behind the curtain by the same man who assured us that COVID-19 was just a simple flu that would pass quickly, and that an Iranian conflict victory would take just a few weeks at most.
The president also signed an executive order this week insisting all executive branch departments and agencies use the term "super intelligence" instead of artificial intelligence. Good luck with that. Rebranding is a difficult task at the best of times, as we know. Consider the president's lack of success at renaming the Gulf of Mexico or Lake Ontario.
Successful rebranding requires a clear strategic "why." "Trump Always Chickens Out" (TACO), for example, is a success and has become a satirical and meme-driven nickname for Donald Trump. It first gained traction online through the visual resemblance to Trump's signature hairstyle, which was likened to a folded soft-shell taco. The newly coined term TACO reflected his constant backpedaling on threats. It has signaled a shift in public perception, blending visual jokes, political irony, and market sentiment.
Marketwise, higher bond yields, a stronger dollar, climbing oil prices, and larger deficits and debt have created a barrier that has been difficult for both stocks and bonds to surmount. FYI: the U.S. budget deficit climbed to nearly $2 trillion in the fiscal year that ended September 30th. The U.S. spent $7.4 trillion last year (up 6 percent) while collecting $5.4 trillion in revenue.
This coming week we will see how badly higher oil and diesel prices have impacted the Consumer Price and Producer Price Indexes for September. Readers already know that I think the numbers will be on the "hot" side. Neither bonds or stocks will like that.
The administration is doing all it can to keep the markets up (or at least not down) over the next few weeks. I expect more machinations from the White House to prop up the markets, whether that means the data proves different from my expectations or, takes the form of more jawboning like Trump's promise not to act militarily against Iran before Nov. 3.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
