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Summary
- Large caps marked time last week, but the Russell 2000 (RTY) jumped 3.1% as the 10Y Treasury yield dropped 20bp to 4.20%.
- And three tech companies in the data business – Salesforce (CRM), SnowFlake SNOW), and Hewlett Packard Enterprises (HPE) – soared on strong earnings and reports that their clientele are implementing data strategies aimed at leveraging emerging AI technology.
- Discount retailer Dollar Tree (DLTR) reported that its lower-income customers are spending less – but also that most of its new customers have six-figure household incomes. Good for DLTR maybe, but perhaps less so for the macroeconomic outlook.
- Only 27 companies report in a week that will be dominated by the looming jobs report on Friday. Homebuilder Toll Br (TOLL), tech giant Broadcom (AVGO) and Lululemon Athletica (LULU) are likely to be the big draws.
Market Implications
- We add three companies well positioned to benefit from rising AI investment as intermediate holdings: Salesforce (CRM), SnowFlake (SNOW) and Hewlett Packard Enterprises (HPE).
- We remain enthusiastic about Russell 2000 (ETF – IWM) and interest-sensitive ETFs homebuilders (XHB), regional banks (KRE), and large cap REITS (XLRE).
What We Learned Last Week
Last week was a lacklustre one for large cap indices. The S&P 500 (SPX) was up a scant 0.8% and the NASDAQ 100 (NDX) little changed even as the 10Y Treasury yield dropped 25bp to 4.20%.
But plenty was happening beneath the surface. The Russell 2000 (RTY) jumped 3.1% and appears on track to recover to the July highs after the Silicon Valley Bank collapse in March (Chart 1).
On the earnings front, several tech companies that had been laggards for much of 2023 also jumped on better-than-expected earnings – and outlooks. HR software company Salesforce (CRM) was up 15.5%, cloud manger Snowflake gained 8.6%, and Hewlett Packard Enterprises (HPE) gained 6.7%.
The common link? All reported an influx of demand for data-related services from companies eager to position themselves to use their data to leverage AI technology. The buzzword across all three was ‘data strategy’ – as in their client companies are focusing anew on how to best organize and use their data.
Earlier this year, all three managed to report solid earnings beats, but also warnings that companies were keeping a lid on tech spending. It appears caution on AI-related spending is lifting – but remains in place for most other tech budgets, as network gear Cisco’s (CSCO) soft earnings and outlook suggests.
Nvidia (NVDA) was off 2.1% on the week, perhaps as some investors shifted funds to other companies that are starting to benefit from AI spending.
Higher-Income Shoppers Trading Down – On the retail front, discount outlet Dollar Tree (DLTR) leapt 8.6% despite top- and bottom-line misses and a decline in average transaction size among its lower-income clientele, a clear sign they are stressed. However, it also reported most of its new customers have household incomes above $125,000, spurring hopes that they will buy more higher-margins goods.
That is a positive for DLTR – but perhaps a negative for the macroeconomic outlook in coming months.
Stay Long Equities
We continue to expect equities will gain going into yearend, although any rally may await confirmation that the upcoming labour market and inflation reports do not upset expectations of a Fed easing in 2024.
Our Picks
We continue to like holding the Russell 2000 via the ETF IWM on expectations that small caps are finally putting the post-Covid supply chain and labour problems behind them.
We also favour interest-sensitive ETFs, including homebuilders (XHB), regional banks (KRE), large cap REITS (XLRE) and residential mortgages (MBB) on expectations that the longer end of the yield curve can rally further.
Finally, we like adding CRM, SNOW and HPE as intermediate term holdings. These companies are well positioned to benefit as AI related investment accelerates.
The Week Ahead
We expect equities will trade in a narrow range for most of this week as investors await Friday’s employment report.
About 27 companies in our Russell 1000 universe report earnings this week. We may see some individual stock moves, but they are unlikely to shift the broader indices much.
On Tuesday, we see if luxury homebuilder Toll Br (TOL) indicates that they are making money. Of particular interest will be any statements about how lower mortgage rates are expected to affect housing demand.
On Wednesday, we will see if diversified tech vendor Broadcom (AVGO) is hopping on the AI express. Campbell Soup Co (CPB) may discuss the prospect for food disinflation in 2024.
On Thursday, it will be interesting to see if Dollar General (DG) is finally putting its inventory problems behind it – and if it is seeing an influx of well-heeled customers looking for a bargain. And Vail Resorts (MTN) will indicate how popular its ski destinations will be this winter.
Among key earnings this week:
Tuesday
- Autozone (AZO)
- JM Smucker Co (SJM)
Wednesday
- Campbell Soup (CPB)
- Gamestop Co (GME)
- Thor Industries (THO)
Thursday
- Broadcom
- Dollar General Co (DG)
- Lululemon Athletica (LULU)
- Vail Resorts (MTN)
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)