Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Adobe’s outlook adds to AI rally
Peter Garnry
Chief Investment Strategist
Summary: Adobe earnings last night were seen as a test of the AI rally and with the software maker beating Q2 estimates while increasing the fiscal year outlook the market got what it was hoping for. An excuse to add to already overextended AI-related stocks position. Adobe's outlook while increased a bit is still at this point reflecting a muted impact on the growth rate from these new generative AI features. Google Trends data is also suggesting that the early excitement over AI is fading from its high in April.
Key points in this equity note:
- Adobe beats expectations in Q2 and revises out its fiscal year outlook driven by robust growth and gains from effective cost cutting. Shares are up 2% in extended trading.
- While Adobe management sounds very optimistic on the new generative AI features the outlook is at this time reflecting a muted impact from AI on the company’s growth.
- Google Trends data suggests that search interest in the keywords ‘AI’ and ‘ChatGPT’ is declining from their April highs.
Adobe raises outlook on generative AI features
Nvidia’s crazy revenue outlook back in late May accelerated the AI-hyped rally in US technology stocks and ever since the question has been whether we would signs of higher demand in applications incorporating AI technology. Adobe earnings last night was the first test of that.
The company reported revenue of $4.82bn and adjusted EPS of $3.91 beating estimates, but more importantly Adobe is raising its fiscal year earnings per share outlook to $15.65-15.75 from previously $15.30-15.60 reflecting expected gains from their cost reduction initiatives and slightly higher than previously expected revenue figures driven by an anticipation of higher demand for its products due to the newly introduced generative AI features. Investors were pleased with the results and outlook sending the shares 2% higher in extended trading.
While the response to Adobe earnings has been positive it worth noting that implementing AI features have not yet moved the needle on the outlook for Adobe. This upward revision is very small, so Adobe has yet to see the same bonanza in demand as Nvidia is seeing. The next earnings release will be a bigger test of whether the new AI features are increasing consumption of Adobe software and whether it is pulling new business because the content creation and modification become easier with prompting.
Is the interest in AI already fading?
While the AI-hyped rally continues in financial markets and especially US equities it worth noting that Google Trends data on searches for ‘AI’ and ‘ChatGPT’ in the US is suggesting that the immediate interest is subsiding from the highs in April.
Our overall working hypothesis is that expectations about AI are getting extrapolated in an unsustainable way and that there will be a hard reset in AI-related stock when investors find out that the monetary gains will take longer to get from AI than anticipated. We remain positive long-term on the benefits of these new AI systems, but in the short-term the hype cycle is pushing AI-hyped stocks to unsustainable levels.
Existing inventory of houses for sale has been around 1.12mn homes over the past 12 months which is a 37% reduction from the levels from before the pandemic. A decade of production deficits have pushed the US housing market into a chronic supply shortage which underpins demand for new homes and especially on those with affordable prices. Latest Market Insights
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