Third quarter earnings season commences next week with Wall Stret lenders including Goldman Sachs and Citicorp releasing results.
TSLA is the first of the Magnificent Seven to report on October 22 followed by GOOG, MSFT and META on October 29.
Given how lopsided the expectations have become and how lofty valuations are, and the lack of data releases, the markets are perhaps more sharply focused than ever on results. A pivotal question is if or when earnings can catch up with valuations, specifically in the AI associated companies.
Is this massive spending increasing revenues and earnings? As noted many times, four companies have announced capital expenditures totaling $7 trillion over the next four years. Will this spending generate an acceptable return on investment?
Currently tech spending is 4.5% of GDP. The only time it reached this level was in 1999.
All this spending can be primarily traced back to two companies…NVDA and OpenAI. The narrative is starting to rise about circular deals that may have created a bubble, whether or not this not this proposed spending will take a similar path as past circular financing has during past boom periods.
JP Morgan writes the amount of debt tied to AI has ballooned to $1.2 trillion, making it the single largest component of the investment grade market. This amount is more than the entire market cap for the S & P Material sector.
Bloomberg states the Magnificent Seven mega caps have surged about 260% since the start of the AI frenzy in early 2023. Wow!
Commenting on yesterday’s markets, equities were quietly lower ahead of next week’s commencement of third quarter earnings season, nervousness rising over the impact of the shutdown.
Long dated Treasuries were higher in yield following the auction of $22 billion of the 30-year, an auction that was met with “the lowest dealer participation in the history of the Bloomberg data set.” The yield curve steepened moderately even as the Treasury Department stated it will tweak upcoming auctions, increasing the amount of the deficit funded with extremely short dated debt versus coupon (longer-dated) obligations.
What will happen today?
Last night the foreign markets were down. London was down 0.01%, Paris up 0.01% and Frankfurt down 0.11%. China was down 0.94%, Japan down 1.01% and Hang Seng down 1.73%.
Futures are flat with no hopes of ending the shutdown in the immediate future. The 10-year is up 10/32 to yield 4.11%.
