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WEEK AHEAD
December 30 - January 3, 2024
Equity markets notched a small Christmas gift with a modest gain to reverse the negative momentum. Our tactical models remain balanced and fully invested.
The U.S. financial markets closed the shortened holiday week ending December 27, 2024, with a mixed bag of performances, reflecting the interplay of resilient equity markets, faltering manufacturing data, and evolving Federal Reserve policy signals.
The S&P 500 Index notched a weekly gain of 0.70%, a modest yet noteworthy rise considering the four-day trading stretch due to the Christmas holiday. Investors navigated a landscape of cautious optimism, balancing lingering concerns about the broader economy with the relative strength of corporate earnings and consumer activity. Equities found support as market participants shrugged off weaker economic indicators, emphasizing the strength of consumer spending over consumer sentiment.
Conversely, the Bloomberg U.S. Aggregate Bond Index declined by 0.33%, with fixed-income markets responding to a steepening yield curve and rising Treasury yields. The 10-year Treasury yield climbed 10 basis points to 4.62%, as the Federal Reserve hinted at a more measured pace of interest rate cuts in light of its economic outlook. The steepening yield curve underscores expectations of longer-term inflationary pressures and a recalibration of monetary policy trajectory, signaling potential headwinds for bonds.
Housing markets provided an intriguing counterpoint to broader economic unease. Freddie Mac reported an uptick in 30-year mortgage rates to 6.85%, yet existing home sales continued to climb, defying the headwinds of higher borrowing costs – Existing Home Sales MoM increased by 4.8% in November. This paradox highlights the ongoing demand for housing despite affordability challenges, likely fueled by pent-up demand and demographic tailwinds.
In sum, the week's market dynamics captured a tale of strength. Equity markets displayed resilience in the face of softer economic data, and bonds rose while manufacturing exhibited signs of strain. The evolving narrative of Federal Reserve policy and its implications for growth and inflation will remain critical as markets step into the new year. For now, investors appear content to navigate the mixed signals, with a cautious eye on what lies ahead in 2025.
With only two trading days left in the year, Wall Street is gearing up to bid farewell to a year of economic plot twists and monetary cliffhangers. As we round the corner into 2025, the markets will continue to dance to the tune of the Federal Reserve's monetary symphony—equal parts intrigue and caution—with an added layer of suspense courtesy of President-elect Trump's ambitious geopolitical overtures on trade and tariffs. If history has taught us anything, it's that markets hate uncertainty almost as much as toddlers hate bedtime. But one thing is crystal clear: media outlets are sharpening their keyboards and bracing for a deluge of breaking news.
"When Susie died, her estate was roughly $3 billion, with about 96% of this sum going to our foundation. Additionally, she left $10 million to each of our three children, the first large gift we had given to any of them. These bequests reflected our belief that hugely wealthy parents should leave their children enough so they can do anything but not enough that they can do nothing." – Warren Buffett, CEO of Berkshire Hathaway, Shareholder Newsletter, November 24, 2024
CPU, GPU, and now XPU
Broadcom Inc (AVGO) has recently sparked much excitement in the fast-paced semiconductors world, gaining +49% MTD. With its stock price soaring on December 16, surpassing the $1 trillion market cap milestone, investors are buzzing about the tech giant's rapid ascent. The latest surge recalls the explosive rise of Nvidia earlier this year, with both companies more than doubling in value as demand for artificial intelligence infrastructure has reached a fever pitch. Broadcom's stellar performance, driven by robust financials, a string of strategic acquisitions, and its growing role in the AI and 5G space, is transforming it into a key player on the global stage.
At the heart of Broadcom's stock rally is its impressive quarter-end fiscal results. The company's semiconductor revenue surged, with AI-related business driving much of the growth. As the world rushes to embrace AI, Broadcom's products have become indispensable for hyperscalers — large tech companies running some of the world's most powerful data centers. Its custom AI accelerators, or XPUs, alongside networking solutions, have been vital to AI deployment. For Broadcom, this shift toward AI has been nothing short of transformative. In just one quarter, AI networking revenue exploded by 158%, while shipments of XPUs doubled, helping to push the company's overall AI revenue to an eye-popping $12.2 billion for the year.
Broadcom's recent success isn't just a lucky break—it's the culmination of a long-term strategy. The company has been strategic in its acquisitions, including the highly publicized purchase of VMware, which added considerable weight to its cloud computing and enterprise software portfolio. By integrating VMware's cloud and virtualization expertise with its own semiconductor dominance, Broadcom has effectively positioned itself as a comprehensive technology provider, catering to the needs of some of the biggest names in the industry. And it's not just VMware—Broadcom has secured key partnerships with Google and Meta, propelling its AI business forward.
The real catalyst behind Broadcom's remarkable stock surge lies in its rapidly expanding role in the AI space. The company's strategic focus on hyperscale inferencing, a vital element of AI's machine learning infrastructure, has positioned it as a leader in this high-demand sector. Unlike competitors such as Nvidia, which offer more generalized solutions, Broadcom has carved out a niche with its specialized products tailored to the needs of hyperscalers—large tech companies at the forefront of AI and 5G deployment. This targeted approach ensures Broadcom's chips perfectly align with the growing demand for cutting-edge AI and networking solutions. The company's technological prowess has made it a highly sought-after partner for leading global tech giants. With $12.2 billion in AI revenue for fiscal year 2024, Broadcom has already captured a significant share of this expanding market. Their addressable market in AI-related products is also substantial, with estimates putting its serviceable market at $15–$20 billion in 2024. More impressively, projections suggest this figure could skyrocket to anywhere between $60 billion and $90 billion by 2027. The numbers offered investors confidence in the company's future growth and its critical role in powering the next generation of AI and 5G technologies.
Broadcom is well-positioned for sustained growth, supported by its strong innovation pipeline, strategic acquisitions, and pivotal role in the AI revolution. While keeping a close watch on the opportunities, analysts point out that the company's reliance on a limited number of hyperscale customers for a large portion of its AI revenue could expose it to potential volatility. Broadcom also faces intense competition from other semiconductor giants, all targeting the rapidly expanding AI market. While the company's supply chain is currently robust, future disruptions—whether driven by geopolitical factors or market shifts—could present risks. As AI technologies continue to evolve rapidly, Broadcom will need to keep innovating to maintain its competitive edge and solidify its leadership.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.