Tech Heavy: The chips are up as sentiment and semiconductors take control of Wall Street

The Week on Wall St

Upbeat and – yes – funky sentiment took a hold of Wall Street on Friday and lifted the S&P500 (1.2% for the week) to a shiny new record high as the Nasdaq Composite closed the week out some 2.3% ahead (and about 2% YTD).

Growth stocks rousingly outperformed value shares and big caps outperformed little caps. While – and strike me down with all your hatred – US tech stocks stonkingly outperformed everyone following the run on semiconductor names.

The Nasdaq 100 (NDX) ended at a new all-time high on Thursday, while the best year-to-date performance for any of the 11 S&P500 Sectors is Information Technology with an increase of 2.6%.

While many of the 7 magnificent suspects have taken home outsized gains, Tesla (TSLA) shares are down an equally wonderful 15% YTD – this, after Elon threatened to go make his AI products outside of TSLA somewhere, unless he gets double the amount of his current voting control.

Artificial intelligence (AI) chip sweetheart Nvidia (NVDA) was particularly strong, as was crosstown rival Advanced Micro Devices (AMD).

US markets were closed Monday last for Martin Luther King, Jr. holiday.

Also last week, US Q4 earnings moved out of the quasi-embryonic stage, as only the major banks and some 23 companies in the S&P500 reporting during the week.

US consumer inflation expectations fell after US consumer sentiment survey from the University of Michigan revealing American consumers are most comfortable since July. The strong improvement was also preceded by unexpectedly strong December retail sales.

Chip triggered

On Tuesday the highlight was watching Boeing fall sharply from the air after dropping earnings and then dropping a few analyst downgrades, warning of likely delivery delays as regulators go back inside Boeing’s breakable 737 MAX.

But the hero of the dish last week on Wall Street was Taiwan Semiconductor Manufacturing Company (TSMC) which dropped a lovely set of numbers to go with the island’s new President, triggering a bit of a chip renaissance early in the new year.

Q4 revenue was up 14% quarter-on-quarter. Operating Margins came in at 41.6%, slightly higher than guidance.

TSMC expects revenues to be low-to-mid 20s growth in 2024, ahead of consensus. The driver is AI, with management indicating demand has continued to rise. AI is now expected to be high teens (or higher) of revenue by 2027 instead of low teens. HPC growth will far outstrip group growth, with other platforms below group growth but all growing in 2024.

Wall Street analysts – like the share price – responded positively – suggesting TSMC stock is looking attractive, trading at a record 32% P/E valuation discount to the SOX (Semiconductor) index.

Analyst consensus recommendation is a Buy with the Price Target US$706.53.

Barclays analysts model 38% growth for HPC, 14% for smartphone, 10% for IoT (Internet of Things) and 8% for auto.

Concerns about Intel (INTL) competition are also likely to recede over the next 12 months as investors realise the strength of design wins for TSMC and Intel outsourcing to TSMC increases.

JPMorgan expect TSMC’s cash dividends to double in the next four years as Free Cash Flow (FCF) growth reaccelerates.

TSMC has passed the capex peak in this investment cycle and expect capex to stay in the $30bn range the next few years, implying that capital intensity will trend down.

According to JPM, with capex starting to peak, TSMC’s FCF should grow rapidly over 2023-27 – over 30% p.a.

The week ahead

The tech sector will again be the key focus Stateside this week after its cracking final few sessions absolutely driven by strength in chip stocks Nvidia, AMD, Broadcom (AVGO), Arm Holdings (ARM), and Micron Technology (MU).

Growth indicators unfolding for the pumpkins on Wall Street include US preliminary Q4 GDP and the global flash PMIs.

Central banks will also be busy, with monetary policy statements and interest rate decisions expected from the Bank of Japan, European Central Bank, and Bank of Canada.

In the US the Federal Reserve members will be in a blackout period of no public talks ahead of the next FOMC meeting on January 30-31.

The media blackout period ahead of the FOMC’s 30-31 January meeting has started, so here’s the final Fedspeak they got in. The no-cut scenario appears to be a done deal for the January meeting next week.

Thus far, no FOMC (Federal Open Market Committee) member has yet come out for a March rate cut.

Chicago Fed president Goolsbee:

“If we continue to make surprising progress faster than was forecast on inflation, then we have to take that into account in determining the level of restrictiveness.”

Atlanta Fed president Bostic repeated his view that cuts could start in Q3, adding:

“I’d be open to changing that outlook and my view about when we need to start cutting rates, but we need to make sure that we are well on our way to 2% before we move off of our restrictive stance.”

San Francisco Fed president Daly said:

“While I think it’s appropriate for us to look forward and ask when would policy adjustments be necessary so we don’t put a stranglehold on the economy, it’s really premature to think that that’s around the corner. Do I get consistent evidence that inflation is coming down, or do I get any early signs with the labour market starting to falter? Neither one of those right now is pushing me to think that an adjustment is necessary.”

However, UBS’ forecast of rapid core PCE (Personal Consumption Expenditure) disinflation in the next few months means a further no-cut call in March would push up the real rate far above the Fed’s assumption of 2.2% to 3.0% in its SEP (Statement of Economic Projections).

UBS expect the incoming dataflow to reveal an as-yet “underappreciated progress on inflation”, in time for the Fed to pass the first 25bp rate cut of this cycle in March.

The US Economic Calendar

Monday January 22 – Friday January 26

MONDAY
United States CB Leading Index (Dec)

TUESDAY
Japan BoJ Interest Rate Decision
Taiwan Industrial Production (Dec)
Eurozone Consumer Confidence (Jan, flash)

WEDNESDAY
Eurozone HCOB Flash PMI, Manufacturing & Services*
US S&P Global Flash PMI, Manufacturing & Services*
Japan Trade (Dec)
Canada BoC Interest Rate Decision

THURSDAY
Eurozone ECB Interest Rate Decision
United States Durable Goods Orders (Dec)
United States GDP (Q4, adv)
United States Wholesale Inventories (Dec)
United States New Home Sales (Dec)

FRIDAY
Australia, India Market Holidays
Japan BoJ Meeting Minutes (Dec)
United States Core PCE Price Index (Dec)
United States Personal Income and Spending (Dec)
United States Pending Home Sales (Dec)

US Reporting Season

The earnings calendar is getting a lot busier with Elon’s Tesla, Netflix and Texas Instruments just a few of the notable companies due to report.

According to UBS, 10.4% of the S&P 500’s market cap has reported so far – Earnings are beating estimates by +5.6% in aggregate, with 76% of companies topping projections.

Fourth quarter expectations are for revenues to grow +2.5% and EPS by +4.6%.

US Earnings: Highlights

Monday January 22 – Friday January 26

Monday

– Brown & Brown (BRO) and United Airlines Holdings (UAL)

Tuesday

– Johnson & Johnson (JNJ), Procter & Gamble (PG), Netflix (NFLX), Verizon Communications (VZ), Texas Instruments (TXN), General Electric (GE), and Lockheed Martin (LMT).

Preview: Netflix Q4 Earnings (23 January)

It’s been a rollercoaster few years for Netflix; struggling to maintain growth after its pandemic surge, losing its place amongst the world’s top stocks, FAANG’s replacement by the magnificent seven – and finally sparking a comeback in the last year with shares up more than 50%.

Josh Gilbert at eToro says this resurgence is partly thanks to its new advertising plan and crackdown on password sharing.

“Netflix has also stepped up its games service, adding the world-renowned Grand Theft Auto, which should provide a boost in the quarter. The consensus is another big quarter from Netflix, with net subscriber additions at nine million and revenue projected to see the fastest growth in three years at $8.7 billion.

“The focus for the quarter is likely to be on the outlook for the full year 2024, with consumer spending set to slow, and investors wanting to see strong profit growth with subscribers now at record levels,” Josh says.

Wednesday

– Tesla (TSLA), IBM (IBM), AT&T (T), General Dynamics (GD) and Las Vegas Sands (LVS)

Thursday

– Visa (V), Intel (INTC), Comcast (CMCSA), American Airlines Group (AAL), Southwest Airlines (LUV) and Levi Strauss (LEVI)

Friday

– American Express (AXP), Colgate-Palmolive (CL) and Autoliv (ALV).

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