Earnings are top-of-mind for investors, and AI is the talk of the town. Companies that have relied on AI narratives to push their stock price over the past year are now seeing investors asking “when do we get paid”? For companies that have delivered good results from their AI spend, we are seeing rewards in stock price. For companies still failing to deliver, however, the punishments have been heavy.
Overall, analysts expect earnings to grow about 11% over this time last year, which are strong.
A concerning development over the past weeks has been the increasing number of announced layoffs. Amazon plans to lay off 16,000 workers, UPS plans to lay off some 30,000 workers(!), and Dow plans to lay off around 4500 workers, to name just a few. It is important to put these figures into perspective, however. The post-Covid years have regularly seen announcements as high as 100,000 per month. And, yet, no recession behind those announcements. A development to watch, but not one to worry about just yet.
Besides, the employment has been deteriorating for some time now, yet that has not been affecting consumer spending much, if at all. Until those unemployed workers stop spending, I expect corporate earnings will continue higher.
Overall, I maintain my view that the economic backdrop is very weak. That said, earnings continue to improve. Risks are to the downside, but if the S&P 500 breaks above 7000 there are probably higher prices after that. In short: investors should be cautious, but we cannot afford to sit on the sidelines forever.
Chart of the Week
Gold and silver have been in the news with a huge upward surge in price, followed by Friday’s swift downward crash. The big question — is this the end of the run, or just the beginning?
I am a collector of arcane financial theories, and there is an one that I somewhat subscribe to known as the log-periodic power law. I’ll spare you all the gory details, but it says, in short, that “normal” price growth should be approximately exponential. However, when growth becomes more than exponential, it is dangerous. This is the fancy version of “pigs get fed, hogs get slaughtered.”
We don’t even need a fancy model to see this. On a chart, exponential growth looks like a smooth upward curve. Or, if we look at the logarithm of prices, that curve becomes a tilted upward line. Hyper-exponential growth, however, still looks like a sharp curve even when we take the logarithm of the price. We can clearly see this behavior in silver over the past year.
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