Disappointing Data

Markets stumbled through the early days of September. Although the S&P 500 is only 4.2% below its peak, momentum for some of the tech titans has quickly faded. Nvidia’s strong but ultimately disappointing earnings report sent semiconductors and other Artificial Intelligence (AI) leveraged shares sliding. Compounding matters, economic data is increasingly suggestive of an ongoing slowdown in the U.S. economy. However, getting too bent out of shape with an economy still adding jobs is tough. For the “average” stock, lower inflation expectations and anticipated rate cuts reduce the pressure of competition and the cost of capital. We feel there are still plenty of opportunities remaining for the stock picker.

AI remains the dominant theme in the markets. Eyes were glued to the screen as Nvidia reported their quarterly results. Though they beat earnings and sales expectations and raised guidance through the end of the year, the results were not as impressive as in recent quarters. This is notable, considering earnings grew by 152% from the previous year. Instead, markets focused on the expected slowdown, with next year’s growth projected at just 41%. While this is a slowdown, the underlying fundamentals are solid. The AI arms race is real, but the key question is how quickly it will advance.

Labor market data came up soft in recent reports. Payrolls for the last several months have come in below expectations. For August, the U.S. economy added 142K jobs vs. expectations for 161K. This comes after substantial downward revisions for previous months. While it’s not terrible news, this data presents a double-edged sword. On one hand, the weaker data ensures the Federal Reserve will begin to cut rates in September. On the other hand, there are growing concerns that the weaker data could lead to a recession. Given the strength of our current position, this seems unlikely. We are on watch, but for now, lower interest rates should support stock prices for the “average” company.

The election is on the doorstep. Typically, the market rises if the incumbent party wins and falls if it loses. It’s early, but the broader market’s softer start to September is interesting. We’ll pay close attention to how markets evolve over the next few weeks. We don’t believe either outcome would necessitate substantial change; however, we would prefer some minor adjustments. Stay tuned.


Thanks,
Preston May, CBE®
Research Analyst

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