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WEEK AHEAD
September 30 - October 4, 2024
Continued bullish momentum from broader sector participation bolsters our indicators to maintain a fully invested position.
The markets continue to ride high on the Fed's recalibration, with the S&P 500 and Nasdaq Composite notching gains of +0.64% and +0.96%, respectively. Year-to-date, they stand tall with returns of 21.55% and 21.37%. It's a rally fueled, in part, by political relief—Congress managed to avert a government shutdown with a stop-gap spending bill, buying time until after the election.
China's central bank added its own fireworks midweek, unveiling a sweeping stimulus package that slashed borrowing costs and loosened bank reserves. The result? A stunning +12% surge across the Shanghai and Hong Kong stock exchanges. Clearly, Beijing isn't messing around as it aims to pump life back into its sputtering economy.
Meanwhile, the bond market remains stubbornly resistant to the Fed's 50 basis-point rate cut. The 10-year Treasury yield nudged up by 2 bps, settling at 3.75%. A steepening yield curve—coupled with last Thursday's robust 3% GDP report—suggests the broader economy is holding firm, if not thriving.
One sector showing no signs of slowing down is utilities. Utilities, riding a +1.09% weekly rise, are now up a remarkable 30.73% YTD. Constellation Energy (CEG) is a star of the sector, whose stock has exploded by 119% YTD, thanks to a new 20-year contract with Microsoft. The tech giant is tapping Constellation to provide nuclear power for its AI and cloud data centers. In a world where AI is the new oil, it seems utility stocks have gone nuclear—literally and figuratively.
The upcoming week may be light on major economic data. Still, all eyes will be on the Federal Reserve's next moves, particularly Fed Chair Jerome Powell's address at the National Association for Business Economics (NABE) on Monday. Powell's remarks could offer crucial insights into the Fed's evolving stance on interest rates as market participants look for clarity. Regarding equities, the S&P 500 Equal-Weighted Index has quietly outperformed the broader S&P 500 over the last three months, signaling a deeper market breadth driven by stronger participation from value and mid-cap stocks. This outperformance and the continued tailwind from the Fed's recalibrated monetary policy suggest the rally may have broader legs moving forward. As investors assess the balance between economic strength and potential monetary tightening, expect a renewed focus on sectors that have lagged but stand to benefit from this expanding market participation.
“If you thought the drug cartels were rich, wait till you see how much money the dopamine cartel is making. For a start, check out the market cap at Apple, Meta, etc. They are literally too big to stop.” – Ted Gioia, The Honest Broker - The State of Culture, 2024, Feb 18, 2024
Nuclear is the New AI
Energy has long been viewed as a key component of future technology growth, and it continues to generate significant interest in the market. On Sept 20, Microsoft (MSFT) signed a 20-year fixed-price power purchase agreement with Constellation Energy (CEG). As part of the deal, Constellation will restore Unit 1 of the Three Mile Island nuclear power plant in Londonderry Township, Pennsylvania, with Microsoft committing to buy all the electricity generated once the restoration is complete. This announcement boosted investor confidence in Constellation, driving its stock up by over 20%. This agreement has once again brought the issue of high electricity demand into the spotlight, with many seeing growing opportunities in related industries.
Electricity demand in the United States is experiencing a significant surge, driven by a multitude of factors that are reshaping the nation's energy landscape, including the rapid growth of high-tech industries like AI and electric vehicles. ICF has posted their project results, saying that "after decades of relatively flat electricity demand across the country, demand could increase by an average of 9% by 2028 while peak demand for electricity could increase by an average of 5% over the same period."
One of the primary drivers of increased electricity demand is the rapid proliferation of data centers nationwide. As artificial intelligence and other data-intensive technologies advance, data centers have emerged as significant power consumers. The power consumption of AI servers is astonishing. One Nvidia server uses as much electricity as several American households combined. An early version of ChatGPT's search required 10 times more power than Google's search, and this figure continues to grow. Completing AI tasks typically demands more robust hardware support compared to traditional computing tasks. According to estimates by the Electric Power Research Institute, by 2030, data center electricity usage is projected to account for 9% of the total U.S. electricity generation, up from just 1.5% today. This escalating demand, particularly in the context of technological advancements and societal shifts, underscores the importance of diverse and sustainable energy sources.
Nuclear power stands as a viable and reliable option to meet this escalating demand. As a clean and efficient baseload power source, nuclear energy is well-suited to complement intermittent renewable sources like wind and solar. The United States boasts a robust nuclear fleet, with over 95,000 megawatts (MWe) of installed capacity, the largest in the world. These reactors generate a significant portion of the country's electricity, maintaining stability in the grid and contributing to overall energy security.
As a company with 67% of its 33,100 megawatts of owned generating capacity derived from nuclear power, Constellation Energy stands at a pivotal crossroads with great opportunities together with challenges. The Three Mile Island nuclear plant was once known for the 1979 accident at its Unit 2 reactor. This incident left a lasting impact on public perception of nuclear energy, contributing to a broader anti-nuclear sentiment that persists to this day. Nevertheless, the current energy landscape—with surging electricity demand—has shifted the conversation. The negative voices opposing nuclear energy seem quieter in light of the pressing need for more power. Beyond public sentiment, Constellation also faces financial challenges. Building and maintaining nuclear power plants require large, long-term investments, as these assets are capital-intensive and highly illiquid. The company must secure substantial funding over extended periods. The cost of capital is presently higher than historical averages, which could limit Constellation's ability to finance new projects or refurbish existing ones at favorable rates. However, this could be alleviated if the Federal Reserve continues to lower interest rates. Again, with a promising outlook for future demand and growth, the public appears increasingly optimistic about future cash flows and their capacity to secure financing.
As the world steps deeper into the era of technological revolution, the energy landscape, especially clean energy, is evolving rapidly to keep pace with once unimaginable demands. The deal between Microsoft and Constellation symbolizes this transformation, where companies are not just making business agreements but laying the groundwork for the future of power. In a time when every watt of power is essential to drive the engines of innovation, investors started to put more sights on possible opportunities beyond AI itself. The energy needed to power AI, the hardware and equipment that support it, and even education for training AI programmers and users are all experiencing rising demand and potential for growth. Constellation's surge is unlikely to be an isolated case of a company benefiting from the rise of AI. As AI continues to expand, many more opportunities are emerging across various industries, creating new avenues for growth.
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.