The popular indices held up very well yesterday given the 13% drubbing of META and 4% decline in MSFT. As widely discussed, the Magnificent Seven has been the primary driver of index valuation at the expense of most other companies.
Government data states there is about $45.8 trillion in retirement assets. According to Vanguard, 45% of 401K plans assets are in index funds and total 401K assets are about $9.3 trillion. Vanguard further states there is another $18 trillion in IRAs which about 65% are in index funds. Government data states that there is about $9.3 trillion in defined benefit plans which over 60% of the funds are indexed.
Writing it differently, there is about $21.4 trillion in in retirement funds that is tied to one index or the other. The S & P 500 is worth about $58 trillion and is about 83% of the value of all publicly traded companies.
It is against this backdrop that one can easily conclude that 401k and IRA accounts have been a huge factor in the popularity of index funds and it could also be concluded that if the companies dominating in the indices (there are seven…aka the Magnificent Seven) decline so would most retirement accounts.
Last night both AMZN and AAPL released results. AMZN exceeded expectations sending shares up by almost 12% or $300 billion. AAPL also exceeded forecasts and issues a strong holiday outlook causing shares to rally about 2%.
Monies spent and projected expenditures for AI is huge. Will this spending generate the revenues and profits required to justify such expenditures.
And then there is the energy/electricity required for such growth. What is the energy source? Coal? Nuclear? Fossil fuels? Renewables are not reliable given the technology is not there yet.
The International Energy Agency (IEA) is estimating that global data center electricity consumption could double by 2030 and in its base case it is projected to rise by 150%.
Could it be written that the energy sector is the next AI sector/beneficiary?
Treasuries continued to sell off yesterday given that the odds until Wednesday were almost 100% that the Fed would lower rates again in December. At the time of this writing the odds have slipped to less than 35%. Wow! What a dramatic change in expectations.
And then there is inflation. The PJM (energy markets) is already projecting (and priced in) a considerable rise in electricity prices over the next four years, the result of AI. How will this increase affect the CPI and other inflationary indices? OER—or the largest component of the CPI– has not declined as projected. Fortunately to date, tariffs have not been inflationary but how long could this environment last?
Life is stranger than fiction. Not even the best Hollywood writers could have written the script of today.
Lastr night the foreign markets were down. London was down 0.31%, Paris down 0.15% and Frankfurt down 0.23%. China was down 0.81%, Japan up 21.2% and Hang Seng down 1.43%.
Dow and NASSDAQ futures are flat and up 1% on AAPL and AMZN earnings. The 10-year is off 2/32 to yield 4.11%.
