Rotation, earnings and US midterm elections

00:00:00: Investors are rotating away from technology as spiraling AI is expanding and falling free cash flow levels overshadow their strong earnings this earning season.

00:00:10: but rising energy costs, higher borrowing cost and rate hikes.

00:00:14: And risk of further rates hikes mean that the alternatives offer no easy shelter either.

00:00:20: while you estimate term elections this week at another political uncertainty into the mix.

00:00:25: so welcome to Swisscoats.

00:00:27: daily market talk is Monday second of November.

00:00:31: I'm Ipeko Skardishkreja.

00:00:33: as we are stepping in through another week full of data events should be watching for this week and opportunities that come along with these risks.

00:00:44: But before we do, as always please keep in mind that opinions are my own.

00:00:59: So October has been a month of rotation and frayed nerves.

00:01:03: Equities have been on a bumpy ride with technology, especially under pressure as strong earnings from big technology companies fail to silence concerns about massive AI spending Three percent on Friday's trading session and almost ten per cent since this October all-time high level.

00:01:24: In comparison, the S&P five hundred is down by around three percent only since it's October High as defensive and dividend stocks have attracted some buyers.

00:01:34: As such The S& P Five Hundred equal weighted version gained up to five percent at some point in the month of October while US Treasuries also rallied after a period of heavy sell off that we saw.

00:01:46: investors saw safety during the month of October.

00:01:50: Now, European bonds face a different challenge obviously with French fiscal and political tensions keeping pressure tighter here.

00:01:57: With tensions also visible and feelable elsewhere in the euro area countries.

00:02:02: so overall November begins carrying all these worries on his shoulders as earnings announcements continue at full speed this week!

00:02:09: On the menu of the week Apple and Palantir will be going to The Earnings Confession today.

00:02:15: then we'll have AMD, Broadcom, ARM & Cloudfare earnings to watch later in the week and investors will be looking at how these companies did last quarter.

00:02:31: What's interesting, however is that the Magnificent Seven companies printed a poorer than expected performance and lower than that thirty percent.

00:02:39: According to Foxhead earnings growth rate for the magnificent seven companies has declined to twenty two point six percent today from thirty three point six per cent estimated on September thirtieth.

00:02:51: Now, note that FaxHead takes earnings that have already been announced and they blend them with the estimations for ones not yet being announced.

00:02:59: So if you look at this metric on Faxhead The earnings growth rate of the other four hundred ninety three companies in S&P five hundred index has increased to thirty two point six percent from twenty seven point eight percent forecast on September thirties.

00:03:14: That means that the third quarter earnings growth rates for the Magnificent Seven company is now lower than earnings growth rate for the other four hundred ninety-three companies of S&P five hundred in the third quarter this year.

00:03:27: Well that's a thing!

00:03:28: Now note down, That is not because technology earnings are growing slowly.

00:03:31: On the contrary, we saw so far that cloud revenue still beats sky-high expectations.

00:03:37: but spending spirals quickly and return on AI spending such as search and advertisement is not enough while free cash flow levels are falling.

00:03:48: And when spending rises faster than earnings, the outcome is more money coming in!

00:03:54: less cash left over and more pressure to prove that today's spending will generate tomorrow's profits.

00:04:02: Look, S&P just downgraded Meta's created outlook to negative from stable.

00:04:07: they pointed at concerns regarding high KPEX and squeeze cash flow there.

00:04:11: now moving into this week big technologies.

00:04:13: next challenge we'll be Political, what the US midterm election is due on Tuesday.

00:04:18: Latest poll from Reuters showed that approval rating for president of United States stands at just thirty-two percent.

00:04:26: Forty-four percent of likely voters said that they would vote for or lean toward a Republican candidate compared with fifty three percent who said, That They Would Rather Go For A Democratic One Hence Leaving Republicans Fighting To Retain Control Over Congress.

00:04:42: And this is not a political show.

00:04:44: I have no political opinion whatsoever but we are going to talk about what could be the implication and here's an issue for the AR trade.

00:04:51: The Trump administration has been so supportive So very much supportive indeed of AI and its infrastructure build out.

00:04:59: There were the past two years that investors didn't really care about growing this content, about jobs and job losses That comes with AI energy consumption that's spiraling out of control And a broader impact on environment.

00:05:13: The primary motto for current administration was bring manufacturing and jobs back to America when they are raised over China.

00:05:23: So the risk is that if republicans lose their majority in either chamber, it would become harder to push through Donald Trump's legislative agenda and support for the AI boom could face greatest grunity.

00:05:36: Of course a divided congress wouldn't automatically reverse those executive measures or cancel privately financed projects but it could complicate new funding and legislation raising your risk that some projects are delayed.

00:05:50: And that's a potential political headman for trade.

00:05:53: That is already struggling with snowballing spending, rising borrowing costs falling cash flow levels and uncomfortable questions among investors about when these returns will arrive to justify this huge massive expanding.

00:06:07: That said, if we leave the AI in stress aside for a minute and if history is any guidance this MP's five hundredth average annual return has been strongest under a Republican president.

00:06:20: And it divided Congress since nineteen fifties.

00:06:23: according to Bloomberg that means that investors are just fine with political gridlocked just to scroll.

00:06:28: And in any case, the President of the United States will retain his veto power.

00:06:33: and he said if things went wrong He would become Mr.

00:06:37: Veto!

00:06:38: Even if Democrats gain control of Congress they are unlikely to secure a two-thirds majority In both chambers needed to override it.

00:06:46: So that means this will limit today's ability to legislate A major reversal Of current AI strategy although They could still obstruct new funding and legislation.

00:06:56: That should offer Some comfort to investors who are worried that a weaker Republican position by the end of this week could derail aggressive AI trade without however offering any guarantee whatsoever, that mounting AI worries especially regarding mounting spending and worsening macroeconomic backdrop would improve mood among technology investors.

00:07:23: The Bank of Canada raises interest rates by twenty-five basis points, while the Federal Reserve, DCB, the Bank of Japan and the Reserve Bank of New Zealand maintain their raise unchanged leaving however door open for further monetary policy tightening to fight inflation into year end.

00:07:41: So this week the Reserve bank of Australia and the B.O.E are expected to announce a twenty five basis point hike each.

00:07:47: I was saying at beginning remember that month October was marked rotation out of technology, but it was also marked by some rotation into the European stocks because despite the bond stress to stock six hundred and a footsie hundred benefited from that rotation mind you.

00:08:06: And as we were discussing with NFG partners Glenn Coxon at the beginning off this quarter remember if you haven't watched our quarterly outlook please go ahead and watch it all.

00:08:16: The european stocks cheaper valuations have certainly been encouraging for the converging values But the earnings that are being announced today, also supporting further convergence moving forward.

00:08:28: Because MSCI Europe's EPS growth is closed on the heels of S&P five hundred so far this quarter with European energy companies and banks delivering another quarter of strong growth here in the US.

00:08:41: meanwhile Strong technology earnings no longer seem enough to satisfy investors as big technologies growth engine keeps asking them to throw more cash into more cash out.

00:08:52: the story that is beginning to sputter.

00:08:55: So looking broadly, sector composition and stronger longer-term growth prospects have traditionally justified a U.S.

00:09:02: valuation premium but that premium for the US companies becomes harder to defend when spending keeps accelerating while confidence among investors in future returns weakens.

00:09:14: This means that unless the u.s.. And other technology heavy markets too like Cosby, Tyix & Topics for example can revive investor's appetite that we saw during the month of October towards cheaper and non-technology markets could continue.

00:09:32: I'm Ipek Oskar Deshkaya.

00:09:34: And thank you for joining me and Thank You For All Your Beautiful And Supportive Comments!

00:09:39: I hope this episode of Market Talk has been helpful, and it's been insightful to you so please do not hesitate to leave your comments, reactions and questions below.

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00:10:08: So I will meet again tomorrow, until then good day trading!