AI’s Record 2024
January 11
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Here are some of the biggest stories from last week:
Dig deeper into these stories in this week’s review.
New data this week showed consumer prices in the US rose by 2.4% in September from a year ago, marking a small step down from August’s 2.5% pace. While this marks the sixth consecutive month of declining inflation, it came in slightly above economist forecasts of 2.3%. Adding slightly to the bad news, core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, ticked up to 3.3%. Economists had expected the rate to remain unchanged from August’s 3.2%. The higher-than-expected inflation, combined with last week’s strong US jobs report, will likely intensify the debate over whether the Fed should opt for a modest interest-rate cut or pause after September's larger reduction. For now, traders are betting on a quarter-point cut at the Fed’s November meeting.
Chinese shares surged after reopening on Tuesday following a weeklong holiday, continuing a strong rally sparked by last month's announcement of a broad stimulus package aimed at boosting the economy. The blue-chip CSI 300 index of Shanghai- and Shenzhen-listed stocks opened 10.8% higher on Tuesday but later pared gains, closing up 5.9%, with trading volumes hitting a record 2.6 trillion yuan ($368 billion). The loss of momentum throughout the day came as a government briefing expected to unveil more economic stimulus measures underwhelmed investors.
In contrast, the Hang Seng China Enterprises Index, which tracks Chinese stocks trading in Hong Kong, dropped 9.4% on Tuesday – wiping out all the gains from the previous five sessions. However, some convergence between the two markets was expected, as investors shifted away from Hong Kong stocks, which had rallied while Chinese onshore markets were closed for the Golden Week, and moved toward mainland-listed shares – the primary beneficiaries of last month’s stimulus package.
The CSI 300's surge on Tuesday marked its tenth consecutive session of gains, leaving some investors divided on where it goes from here. On one hand, some Wall Street heavyweights including Goldman Sach, HSBC, and BlackRock have turned optimistic on the once-beaten down index, and are predicting further gains ahead. Goldman Sachs, for example, said in a research note last week (i.e. before Tuesday’s big jump) that Chinese shares may rise another 15-20% if authorities deliver on their promises, citing factors such as below-average valuations, improving earnings, and low global investor positioning.
On the other hand, some investors are arguing that the rally has gone too far. Case in point: a day after Tuesday’s strong rally, the CSI 300 tumbled 7%, snapping its 10-day winning streak. Part of investors’ skepticism stems from the fact that authorities have yet to introduce aggressive measures to boost consumer demand, which is seen as a crucial missing element for the economy. After all, making money cheaper won’t stimulate growth if Chinese consumers remain hesitant to spend.
Still, authorities said this week that they’re confident in meeting their economic targets, pledging additional future support to drive growth. But not everyone shares their optimism. For example, the World Bank said just this week that it expects China’s economy to weaken further in 2025 – even when factoring in a temporary boost from the recent stimulus measures. More specifically, the institution expects the world’s second-biggest economy to expand by 4.3% next year, down from an estimated 4.8% in 2024. For reference, the Chinese government has set an official growth target of about 5% for this year.
This week marked the official start of the third-quarter earnings season in the US, with major companies like PepsiCo, Delta Air Lines, BlackRock, JPMorgan, and Wells Fargo releasing their latest updates. Investors are closely watching this reporting period to see if corporate earnings can sustain the S&P 500’s roughly 20% rally in 2024, which has added over $8 trillion to the index’s market capitalization. These gains have largely been driven by expectations of easing monetary policy and resilient profit outlooks, despite uncertainties around interest rates, geopolitical tensions, stock valuations, and the upcoming US presidential election.
However, analysts appear less optimistic and have been lowering their earnings estimates more than normal. On June 30, the estimated year-over-year S&P 500 earnings growth rate for the third quarter was 7.8%, but that’s fallen to 4.2% today. That means the third-quarter earnings-per-share (EPS) estimate for the S&P 500 has declined by 3.9% over the past three months – larger than the 5-year and 10-year averages of 3.3% (analysts typically lower their forecasts during a quarter). At the sector level, nine of the eleven sectors saw a decrease in their EPS estimates over the third quarter, led by the energy (19.2%) and materials (9.4%) sectors. On the other hand, the information technology sector is the only one that saw an increase in its EPS estimate during this period.
Still, it’s not all bad news. If the 4.2% growth rate holds, it will mark the fifth consecutive quarter of year-over-year earnings growth for the S&P 500. Analysts also still believe the index will report double-digit profit growth from the fourth quarter onwards. All in all, they see the index delivering year-over-year earnings growth of 9.8% in 2024 and 14.9% in 2025.
Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest contract chipmaker with a 60% market share, plays a critical role in the AI industry. While companies like Nvidia and AMD focus on designing high-end chips needed to train AI models, they outsource most of their manufacturing to TSMC. That explains why the firm’s stock price has more than doubled since the launch of ChatGPT. And this week, TSMC announced that its third-quarter revenue rose by a more-than-expected 39% from a year ago. (The firm typically provides a revenue update before officially releasing its earnings).
This strong performance supports some investors' belief that AI spending will remain elevated as businesses and governments compete for an edge in the emerging technology. However, not all investors are convinced, with some warning that Big Tech firms may struggle to sustain their current pace of infrastructure investment without a clear, monetizable AI use case. Time will tell who turns out to be correct…
General Disclaimer
This content is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell. Investments carry risks, including the potential loss of capital. Past performance is not indicative of future results. Before making investment decisions, consider your financial objectives or consult a qualified financial advisor.
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