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WEEK AHEAD
August 19-23, 2024
August 5th’s global stock market quake is now just a blip on the radar. The markets have moved on, as they always do, with the resilience of a cat that somehow always lands on its feet. Last week’s sharp rebound raised our momentum indicators, strengthening the support of a fully invested position.
As you would when entering an intersection, look left, look right, and ahead to check for road hazards; the market has emerged cautiously after the sudden three-day market downturn in early August. The market tremors triggered by Japan's Black Monday are all but a long-distance memory, with the S&P 500 gaining +3.99%, wiping out August's initial losses and then some. After sobering up from a bad hangover, investors stoked by recession fears were unwarranted as CPI @ 2.9%, Core PPI @ 2.4%, and Retail Sales held up by +1% were all moving in a favorable direction, pivoting to the expectation the Fed will soon cut rates. Without hesitation, bond yields tightened, resulting in the Bloomberg US Agg adding 53 bps to its YTD return of 2.91%.
The market rebound was helped by, yes, Technology stocks @ +6.94% but also breadth from Retail @ +4.81% and Financial stocks @ +3.3%. Stocks including Home Depot, Cisco, Walmart, Applied Materials, and Deere all represent cornerstone industries that all jumped on earnings beats.
With the Fed keeping interest rates currently unchanged, it should not surprise investors that the intent is to slow the economy enough to rein in inflation, consumer demand, and jobs as you would when taking your foot off the gas pedal to slow down. As the Fed seeks to balance its mandates, reducing the policy rate too soon or too late could unduly reverse inflation or weaken the economy. The latest Industrial Production print for July at -0.18%, a key indicator we follow, measures the output produced by manufacturers and points to a lack of horsepower in the economy, albeit a modest one-month result.
With second-quarter earnings coming to a stop, the week ahead will initially be dominated by political and policy headlines kicked off with the Democratic National Convention. Closer attention will shift toward Chair Powell's interest rate views as he headlines the Jackson Hole Symposium.
"The key to the information revolution is not that it increases labor output per unit, but rather that it reduces the labor input per unit – with all the efficiencies and cost savings that entails. The amount of physical labor required to do any task gets reduced. That means, if you have a culture and society that allows you to easily and freely displace workers with new technologies then you will reap the benefits they offer in terms of improved productivity, improved profits, greater general prosperity and ultimately more job creation. It all adds up to a more competitive country. America today has a society and culture in which Schumpeterian creative destruction is allowed to work."
– Thomas L. Friedman, The Lexus and the Olive Tree, April 2000.
There is more to AI than NVIDIA – What about IBM?
International Business Machines Corporation (Ticker: IBM) recently announced its financial results for the second quarter of the year, highlighting a solid performance that continues to attract positive attention from both investors and industry analysts. The company reported revenue of $15.8 billion, representing a 1.9% increase compared to the same period last year, while net profit surged to $1.83 billion, a significant 15.8% year-over-year rise. This robust growth outperformed market expectations and directly led to a 4.3% increase in IBM's stock price the day following the announcement.
Earlier in the year, following the release of its first-quarter results, IBM's stock price experienced a temporary dip, dropping to around $165, largely attributed to concerns surrounding the acquisition of HashiCorp. However, the company's stock has shown a steady and impressive rebound since then. With the recent boost following the second-quarter earnings release, IBM's stock has appreciated by approximately 40% over the past year, vastly outpacing the industry average and its primary competitors. This strong market performance is a testament to IBM's operational resilience and reflects investor confidence in the company's strategic direction and future growth potential.
IBM's growth story in 2024 is driven by both the strength of its traditional business lines and its ambitious push into the burgeoning AI sector. While IBM continues to maintain stable growth in its established divisions—such as cloud computing, IT infrastructure, and consulting—the company is making significant strides in the AI space. AI has rapidly evolved into a critical segment for IBM, with AI-driven solutions becoming an increasingly substantial part of its consulting revenue. This pivot towards AI is viewed as a key driver of IBM's future expansion. During the earnings conference, IBM's Chief Financial Officer, James J. Kavanaugh, expressed confidence in the company's AI strategy, emphasizing that IBM is uniquely positioned to capture the growing demand for AI solutions. This optimism, combined with the company's clear focus on innovation, has further enhanced investor confidence, making IBM an attractive investment prospect as it navigates the evolving technology landscape.
Looking ahead, IBM's management team remains optimistic about the company's growth prospects. They have outlined plans to expand their AI and cloud offerings while optimizing their existing business lines for improved efficiency and profitability. This dual approach of nurturing innovation while maintaining steady performance in established markets has positioned IBM to withstand competitive pressures and thrive in a rapidly changing technological environment.
The second-quarter results of IBM presented a picture that is both forward-looking and grounded in its core strengths. The successful integration of AI into its business model, combined with strong execution in its traditional areas of expertise, has elevated IBM's growth trajectory. As a result, analysts are increasingly bullish on IBM's future, with expectations of continued revenue expansion driven by AI and cloud adoption, bringing potential opportunities for investors.
Chart Source: https://www.visualcapitalist.com/ranked-top-companies-by-generative-ai-patents/
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.