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In this edition of Your Investment Themes analysts continue to debate about whether Big Tech can be a driving force for higher corporate earnings, and whether they might have further to run. There is some skepticism. Longview Economics, who still remain tactically UW, highlight an interesting indicator which historically has pointed to downside (Cyclical/defensive ratio). There’s also a piece of things investors should be looking out for this earnings season and a follow piece from Argus Research on retail sales.  

BCA Research: Can tech supercharge profits? Don’t bet on it (July 12)

With US tech now trading close to a 45 percent premium to the broader market, the market has priced supercharged growth in profits, says BCA Research. Yet, the firm says without any obvious ‘network effect’ moat, generative AI will struggle to deliver on these heady expectations. Structurally therefore, the stratospheric valuation of this year’s AI mania is likely to deflate, just as it did after the Web 1.0 mania of the late 90s, says BCA. This supports its structural (2+ years) position to overweight AI-lite Europe versus the US, says the firm. Tactically, BCA says it means overweighting European luxury goods stocks that have already corrected versus AI mania stocks that have not. It also means that this year’s stock market rally, largely driven by the AI mania, stands on shaky foundations, says the firm, which adds Carnival is a reversal candidate, and J&J is an outperformance candidate. Click here for the full report. Click here if you would like to speak to the analyst.

Applied Global Macro Research: US technology stocks – defying gravity even more (July 19)

Carsten Valgreen at Applied Global Macro Research argues that US corporate profits are likely to decline significantly over the next year making the current equity market rally unsustainable. One substantial driver of the equity market rally so far this year has been a renewed upturn in technology sector stocks (in part related to AI), he notes. As a macro economist, Valgreen says it’s possible he could be missing the forest for the trees, as these companies could be in a structural/secular bull market driving the broader market higher for non-macro related reasons. So in this report he focuses on the US technology sector.

First, Valgreen shows that technology sector sales are mostly driven by the US business capex and manufacturing cycles, and there is no evidence of any delinking of technology sector sales growth with the general cycle over the past year or during the COVID boom. Moreover, technology sales are likely to start to decline through H1 2024, he says. Second, Valgreen says when tech sales growth declines technology sector earnings are subject to the same negative operational leverage effects as overall non-financial corporate profits. This explains why technology sector EPS has declined about 15% over the past year, he says. Finally, the US technology sector is trading at 38 times trailing earnings, notes Valgreen. In a flat market using the above earning declines he projects P/E at 42 (no recession) and 55 (recession) by next Summer. This would be near 1990 tech bubble levels, says Valgreen, who adds if P/E is to return to historical averages or just 2019 levels, the US technology sector will decline 50-60%. Click here for the full report. Click here if you would like to speak to the analyst.

Longview Economics: Late cycle or Goldilocks? (July 20)

Clearly, given June’s strong performance, Chris Watling at Longview Economics says he moved tactically UW equities too early in this uptrend. The models are increasingly, though, generating a clear sell message, he says. Technically the market is overbought on various levels (and by various measures) according to Watling; risk appetite is high; scoring systems are on or close to sell; while market participants are vulnerable to negative newsflow (i.e. not hedged). Added to which, he says the cyclical (as well as the growth) part of the market is overextended to the upside, while the defensive area is the most attractive top level segment (on various measures) – which is typically a bearish sign for the stock market. A continued UW position, therefore, is logical, according to Watling. However, he says given there is still some headroom (for some of the models), and given the strong (late cycle) momentum in this equity market, he is temporarily reducing the size of the underweight position. Click here for the full report. Click here if you would like to speak to the analyst.

TS Lombard: The liquidity for a new bull market (July 20)

Stock markets have rallied despite central banks’ attempts to drain liquidity, says Dario Perkins at TS Lombard. But liquidity is not a “thing” – it is elastic, endogenous to risk appetite, and only loosely related to central bank policy actions, he says. Based on what happened during the Dotcom era, any AI-inspired bubble in tech stocks could have further to run – even with contractionary monetary policy and QT, says Perkins. Click here for the full report. Click here if you would like to speak to the analyst.

Pennock Idea Hub: What to watch for in a pivotal earnings season (July 17)

The upcoming Q2 earnings reporting season could be pivotal for investors, writes Cam Hui at Pennock Idea Hub. The direction of the economy and the earnings outlook could go either way. There are many questions but no answers. Hui offers some signposts to watch for clues to future market direction. Click here for the full report. Click here if you would like to speak to the analyst.

Argus Research: Soft retail sales (July 19)

US consumers are treading water at the start of the summer, despite a buoyant job market and gasoline prices that are 25% lower than last summer, according to this report from Argus Research. The firm says this supports the view that only one more rate hike might offer the best chance of cooling inflation without dunking the consumer. US retail sales in June were up 1.5% from a year earlier, growing at half the pace of the Consumer Price Index, which was up 3% in June, according to Argus. The firm notes sales at food and beverage stores rose just 1.3% last month, even as food-at-home prices were up 4.7% according to the CPI report. Shoppers are trading down to store brands and eating hot dogs rather than steak, says Argus, which adds an increasing number of shoppers who make more than $100,000 a year are switching to Walmart and other discount grocers. Weakness in discretionary categories, including furniture stores (-4.6%), building materials, garden equipment and supplies dealers (-3.2%), and department stores (-5.2%) show that consumers are reluctant to tap credit cards at record-high rates, says the firm. Business at restaurants and bars remained strong, jumping 8.4% as consumers allocate extra cash to services rather than goods, adds Argus. Click here for the full report. Click here if you would like to speak to the analyst.

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