Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi quantitative strategist Alex Saunders maintains faith in AI-related stocks,
“We study large caps with big run-ups into earnings season. We find that, contrary to consensus, those equities do not pull back after earnings, but tend to drift higher. Dispersion is quite wide, though. Furthermore, if performance is up more than 10 per cent on earnings day, those large caps with strong performance into earnings, continue to perform very well for the next three months. The AI bubble is not in trouble, and, if anything, earnings performance suggests that it is less of a bubble to begin with. We therefore continue to favor the tech heavy markets of the U.S., Taiwan, and Korea. We are also overweight the tech sector.
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Scotiabank strategist Jean-Michel Gauthier notes that TSX earnings are not off to a great start,
“As we near the halfway mark on the TSX Q4/23 earnings season, bottom-line is set to disappoint by 1.1 per cent relative to the January 17 consensus, coming in at $355. This would mark a small step down from Q3/23 (down 1.9 per cent quarter-over-quarter, down 2.2 per cent year-over-year) which puts a dent in the attempted profit recovery from earlier lows. Cyclicals (Industrials and Discretionary) along with Base Metal miners have suffered from the largest misses, while Technology has handily beaten forecasts … From a top-line perspective, results are also mostly below expectations, especially in Industrials and Discretionary again. Sell-side consensus is still banking on an almost uninterrupted quarterly march upwards in profits for 2024 and 2025. Still, they have started to meaningfully shave some of their numbers: the FY 2024 EPS forecast is down 1.7 per cent to $1,484, with cuts across all sectors (focussed on resources). Revisions to Q1/24 projections are especially negative at this stage. FY 2024 revenue forecasts are also down 1.5 per cent since January 17 … Despite all the negative news, stocks have reacted mostly positively to earnings announcements so far. In our view, investors may still be banking on robust YoY growth in EPS for 2024 and had anticipated the normal downward drift in estimates over time”
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Jefferies analyst Christopher Wood produces the widely-read GREED & fear report and the most recent edition contains some interesting observations about artificial intelligence and Japanese equities,
“The arms race to invest in AI ‘training’ capacity has been confirmed with Nvidia’s earnings announcement yesterday. The company seems to have surpassed expectations which is impressive given the media hype preceding the event. This all confirms what GREED & fear has been telling investors in recent months. This is that the most important event in world stock markets last year was nothing macro but the Microsoft investment in ChatGPT maker OpenAI. This was the catalyst for the AI thematic to start driving market psychology and, crucially, gave the most important sector in the world’s largest stock market a new story which is secular not cyclical. GREED & fear will keep the 25 per cent of the global long-only equity portfolio in AI-related stocks. Meanwhile if the picks and shovels approach remain the risk-adjusted way to play the AI theme, fortunes will be made for those who come up with the winning applications … Meanwhile, the Nikkei 225 Index took out its 1989 high today which is an important moment for veteran Japan watchers like GREED & fear. Hopefully, it will make it more likely that the Bank of Japan ends negative rates at its next meeting on 19 March”
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Diversion: “Florida’s experiment with measles” – The Atlantic
Scott Barlow