US equities continue to scale new highs

U.S. and European markets closed higher Thursday, driven by optimism from China’s fiscal stimulus, solid U.S. economic data, and strong chip earnings, particularly from Micron, which bolstered the broader AI growth narrative. Tech and industrial shares led gains on Wall Street, with the S&P 500 rising 0.40% and on track for its sixth positive week in seven. European equities followed suit, benefiting from improved global sentiment, while energy shares lagged amid falling oil prices.

Summary for 27.09.2024

• Asian equities are set for their strongest weekly performance since 2008, driven by China’s substantial stimulus measures, which have lifted shares to 2.5-year highs. The MSCI Asia-Pacific index gained 1.1%, with Chinese blue chips surging 2.9% for a total weekly increase of 14%. Hong Kong’s Hang Seng index rose 2.7%, up 12% for the week, while Japan’s Nikkei index saw mixed trading ahead of its leadership contest.

• US equity futures were stable this morning ahead of the PCE price index report, the Federal Reserve’s key inflation measure. Investors are closely watching the potential impact of recent economic data and China’s stimulus measures. European markets are also expected to open cautiously, with focus on inflation and economic growth indicators, as traders assess the broader implications for global markets.

• Oil prices fell for a third consecutive day on Friday, driven by expectations of increased supply from Libya and OPEC+. Both benchmarks are set for notable weekly declines, with Libya potentially returning 500,000 barrels per day to the market. Speculation over OPEC+ output cuts and a possible battle for market share, particularly involving Saudi Arabia, has fuelled bearish sentiment, contributing to the price slide.

• The dollar weakened this morning, poised for its fourth consecutive week of declines as investors weighed U.S. data and anticipated interest rate cuts. While strong U.S. labour market data and corporate profits supported a positive economic outlook, traders priced in further easing by the Federal Reserve. The dollar index remained near a 14-month low, as China’s stimulus measures buoyed risk-sensitive currencies like the euro, Australian, and New Zealand dollars.

• Thursday’s key reports confirmed that the U.S. economy, while slowing from last year, remains stable. Final Q2 GDP revisions showed 3% growth, while strong durable goods orders and declining jobless claims eased concerns of a sharp economic slowdown. These indicators suggest the economy is transitioning to a slower pace, but still strong enough to support the ongoing stock-market rally.

• China’s industrial profits contracted sharply in August, plunging 17.8% year-on-year, following a brief rise in July, reflecting mounting economic pressures. Weak domestic demand, job security concerns, and a property market slump have prompted global brokerages to lower 2024 growth forecasts. In response, China’s central bank introduced aggressive stimulus measures, but analysts caution that further fiscal support is needed to restore confidence and drive recovery.

• Arm Holdings approached Intel to discuss acquiring its product division but was informed that the division is not for sale, according to Bloomberg. Arm is not interested in Intel’s manufacturing operations. Meanwhile, Intel has lost its manufacturing edge to TSMC and is focusing on AI processors and contract manufacturing. Intel is also pausing factory construction in Poland and Germany.

• Costco Wholesale’s fourth-quarter revenue rose nearly 1% to $79.70 billion, missing analysts’ expectations of $79.97 billion due to cautious consumer spending on higher-priced items and lower gasoline prices. While demand for groceries remained strong, sales of furniture and electronics were weaker. However, net income of $5.29 per share exceeded estimates, benefiting from a 40 basis point increase in gross margins.

• Accenture announced a $4 billion share buyback and exceeded quarterly earnings expectations, driven by strong demand for generative AI services, which generated $900 million in revenue this fiscal year. Despite robust growth in bookings, the company’s annual revenue growth forecast of 3% to 6% fell short of analysts’ estimates. Accenture plans to return at least $8.3 billion to shareholders and invest $3 billion in acquisitions next year amid a cautious economic outlook.

• Super Micro Computer is under investigation by the U.S. Department of Justice following concerns raised by Hindenburg Research regarding its accounting practices. The probe relates to a whistleblower lawsuit filed by former employee Bob Luong, who alleges improper revenue recognition. Super Micro’s shares have dropped about 12% since the news broke, and the company has delayed its annual report while forming a board committee to review internal controls.

• Airbus is facing challenges in meeting its revised delivery target of 770 aircraft for the year, having delivered only about 30 jets in September, totalling around 477 for 2024. Production delays, particularly with LEAP engines, have caused frustration among executives. Analysts express concerns that Airbus may not achieve its target, and the company has initiated a cost-saving plan to address rising unit costs and inventory issues.

• Wells Fargo has submitted a third-party review of its risk and control improvements to the Federal Reserve, aiming to lift the $1.95 trillion asset cap imposed by regulators. This cap restricts the bank’s growth until it resolves issues stemming from the 2016 fake accounts scandal. Currently, Wells Fargo is still addressing eight regulatory penalties known as consent orders.

• Bettina Orlopp, Commerzbank’s newly appointed CEO, announced yesterday that the bank will begin initial talks with UniCredit today, regarding a potential merger. This marks her first statement since her appointment during a pivotal moment in the bank’s 154-year history. UniCredit has acquired a 9% stake in Commerzbank and aims to assess possible synergies together.

• Evercore ISI has reaffirmed its positive outlook on Apple, citing strong demand for the iPhone 16 based on a recent survey of 3,500 individuals. The survey revealed that 63% plan to upgrade their iPhones this year, the highest rate in five years, driven largely by interest in new AI features. Evercore anticipates average selling prices to rise to $1,000 per iPhone, reflecting a shift towards higher-end models.

• Bernstein upgraded Starbucks to Outperform from Market Perform, raising its price target to $115 from $92, driven by optimism over new CEO Brian Niccol’s leadership. With experience in turnarounds, Niccol is expected to enhance operational stability and reduce costs. Bernstein anticipates Starbucks returning to pre-Covid operating margins of 18.5% and views the equity as an attractive long-term investment despite recent gains.

• Truist has initiated a Buy rating for First Solar, setting a $300 price target due to its strong competitive edge attributed to its “American-made moat.” The firm cites First Solar’s innovation in thin-film Cadmium Telluride solar modules and its unmatched U.S. manufacturing footprint. With plans to invest $4 billion in R&D and a backlog of 76GW in orders, analysts believe the company is positioned for significant growth despite rising competition in the solar market.

• UBS has downgraded GE Healthcare Technologies Inc. to a ‘sell’ rating, citing concerns over its valuation and exposure to competitive risks in the Chinese Medtech market. Despite a 20% share price increase this year, UBS believes current pricing overstates potential. The firm has lowered its price target from $84 to $74, reflecting adjusted revenue and earnings forecasts due to increased competition and margin challenges.

• HSBC analysts recommend investors seek opportunities in shares with less demanding valuations as the S&P 500 trades at a 15% premium above historical averages. They highlight that seven sectors exceed a 10% premium, driven by large companies showing above-average earnings growth. Identified buy-rated shares include Target, Biogen, Cisco, and Salesforce. Analysts advise against small-cap investments due to historical underperformance in easing cycles and significant valuation gaps with larger firms.

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