Farewell to an extra long February, which, as of Wednesday was poised for its best monthly return since 1998. But the setup is looking shaky for Thursday ahead of the Fed’s preferred inflation indicator, which could upset rate cut expectations.
Our call of the day is all about surprises, as UBS’s global equities strategist Andrew Garthwaite and his colleagues offer up a batch of unexpected possibilities investors might not be thinking about.
No. 1 stands out: “Generative AI does actually increase productivity growth to 2.5%, fueling a 20% return for equities in 2024.” That would take the S&P 500 to 5,723.87. (Note, the bank’s base case sees the S&P 500 ending the year at 5,400.)
They note the new technology already seems to be impacting work output and quality, and given the prior information and communication technologies revolution lifted productivity by 1.5%-2%, investors may be expecting the same from Generative AI.
But blink and you might miss it. UBS notes that while former Fed Chair Alan Greenspan flagged rising productivity in 1996, the 5-year average of productivity didn’t crest above 2.5% until February 2000, by which time the Nasdaq tripled.
So if that average is actually 2.5%, versus the 1.5% assumed by UBS economists and the Fed, inflation is undershooting and rate cuts could come faster than expected, they say.
Also, the economy would be considered mid-, rather than late-cycle because an inflation undershoot would mean full employment is under a 4.1% Fed estimate — and more like 2.5% to 3% unemployment, they said.
And, a margin squeeze would diminish.
But they warn a perceived change in business models like Gen AI brings a risk of extreme valuations, such as was seen with railways, the technology, media, and telecom (TMT) wave, etc.
During bubble periods, price/earnings ratios can reach 45 -72 times and whole-market equity risk premiums — the excess return investors should expect from owning stocks vs. bonds — drop to 1.7%. During TMT, the market’s forward P/E ratio peaked at 25 times, even with the 10-year index-linked bond at 4%, they said.
Garthwaite sees five of eight preconditions for an early-bubble cycle happening now: perceived change in productivity spurred by technical change; minimum gap of 25 years from a prior episode; the end of a secular bull market when aggregate profits are coming under pressure; and an loss of breadth due to pressure on profits.
Two more preconditions can’t be ruled out: central banks printing money and heavy retail buying of stocks, if a money-market to equities switch happens. Their chart shows corporates have been the bigger stock buyers:
Garthwaite and the team advise clients to “be long of equities and especially those areas that benefit from Gen AI (software, semis)” while being mindful of bubbles.
The markets
Stock futures
ES00,
NQ00,
are dropping and Treasury yields
BX:TMUBMUSD02Y
BX:TMUBMUSD10Y
rising. A BOJ member urged an overhaul of loose monetary policy, and the yen
USDJPY,
is surging. Bitcoin
BTCUSD,
is hovering under $63,000.
| Key asset performance | Last | 5d | 1m | YTD | 1y |
| S&P 500 | 5,069.76 | 1.77% | 4.63% | 6.29% | 28.30% |
| Nasdaq Composite | 15,947.74 | 2.35% | 5.17% | 6.24% | 40.14% |
| 10 year Treasury | 4.277 | -4.86 | 39.86 | 39.61 | 21.54 |
| Gold | 2,043.80 | 0.47% | -1.38% | -1.35% | 10.95% |
| Oil | 78.51 | 0.22% | 6.21% | 10.07% | 0.81% |
| Data: MarketWatch. Treasury yields change expressed in basis points | |||||
The buzz
PCE data is at 8:30 a.m. — the core index is expected to rise 0.4%, the biggest gain in nearly a year, with weekly jobless claims also coming, then pending home sales at 10 a.m. And lots of Fed speakers — Fed Gov. Christopher Waller at 10:15 a.m., Atlanta Pres. Raphael Bostic at 10:50 a.m., Chicago Pres. Austan Goolsbee at 11 a.m. and Cleveland Pres. Loretta Mester at 1:15 p.m. and 3:30 p.m.
Snowflake
SNOW,
shares have dropped 20% after the cloud data group reported disappointing results and a surprise exit of its CEO. HP
HPQ,
is slipping after the computing group’s results just met estimates.
WW International
WW,
is off 23% on news Oprah Winfrey will leave the board and donate her company stake after using a weight-loss drug.
The SEC is reportedly probing whether OpenAI misled investors.
Best of the web
I lost $240,000 after a ‘friend’ I met on Instagram encouraged me to invest in crypto.
The fight to save Italy’s beloved dish from extinction.
U.S. Labor Department sows confusion with email on consumer prices.
The chart
While Nvidia
NVDA,
is the new retail sentiment bellwether, and money is shifting toward it, the interest still pales to the previous frenzy surrounding Tesla
TSLA,
says Vanda Research.
“The ‘scary’ part is that despite the recent hype around anything AI and semiconductors, current retail flows into NVDA shares have merely matched the lowest point seen in TSLA stocks during 2023,” say a Vanda team led by Marco Iachini. Here’s their chart:
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
| Ticker | Security name |
|
NVDA, |
Nvidia |
|
TSLA, |
Tesla |
|
AMC, |
AMC Entertainment |
|
AI, |
C3.ai |
|
SOUN, |
SoundHound |
|
SNOW, |
Snowflake |
|
AAPL, |
Apple |
|
VLCN, |
Volcon |
|
NIO, |
Nio |
|
COIN, |
Coinbase |
Random reads
Broke TV star pays down mortgage in minutes.
Willy Wonka fail. Summon the police.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Check out On Watch by MarketWatch, a weekly podcast about the financial news we’re all watching — and how that’s affecting the economy and your wallet.
