AI bonanza drives new highs and dangerous index concentration

The energy sector is still the most attractive sector

CrowdStrike earnings showed why cyber security is still interesting

On Wednesday, CrowdStrike reported better than expected earnings results on both revenue and EPS, but more importantly the cyber security company raised its fiscal year guidance on revenue. The company’s single-platform strategy continues to be a competitive advantage for the company taking market share and capitalizing on an industry that is seeking alternatives to what Microsoft offers on cyber security and especially given a recent government report criticizing Microsoft’s cyber security culture. CrowdStrike shares rose 12% on the back of its earnings results.

Is ECB playing with fire?

The ECB delivered yesterday the most well-telegraphed interest rate cut in recent history, but it was not the beginning of the interest rate cut party that many had expected. We have argued multiple times that the ECB should have waited as the Eurozone economy was already rebounding. What was interesting was the rate cut seemed like something that the ECB had to do because of their forward guidance, but because of the recent data points it would probably have not done it. This is also why the ECB did not hint at any rate hike and instead referred to being data dependent. The market is still pricing that the ECB will cut again in October. As we have been saying for a while it seems odd that the ECB is so confident in its econometric forecasts on inflation when the Fed has been completely wrong on inflation. Our thinking is that the ECB is playing with fire. If they keep cutting the interest rate they might ease financial conditions for some parts of the economy but they risk increasing longer term inflation expectations.

Next week: Fed rate decision, US May CPI, Broadcom earnings

• Fed rate decision: The market is pricing a low 21% probability for a rate cut at the FOMC rate decision on Wednesday. Data points since the last meeting are suggesting a resilient US economy and supercore inflation that has accelerated in recent month. The Fed is clearly confused after being wrong again on inflation. What the Fed and ECB are getting wrong might be that this economic cycle is income-driven and less credit-driven like in the past resembling more of what we saw in the 1950s and 1960s. If you want to familiarize yourself with this concept listen to this podcast featuring Bob Elliott from Unlimited Funds.
  
  
• US May CPI: The most important macro figure in the coming week is the US May CPI report on Wednesday with economists expecting core CPI MoM of 0.3% vs. 0.3% in April. The worry in the April figures was that it was the sixth straight month of increase in the 6-month average of the MoM figures in the US core services CPI (excluding energy) suggesting that there are some inflation dynamics that are not well understood by the Fed. The US core services CPI was 6% annualised in April based on the previous 6-month data points which is clearly too high and inflation only looks moderate because of deflation in the goods economy which by and large is driven by China’s unsustainable and aggressive export policy.
  
  
• Earnings: Key earnings to watch next week are Autodesk (Mon), Oracle (Tue), Broadcom (Wed), and Adobe (Thu). From an index weight perspective the most important earnings release is the one from Broadcom as the company is a global supplier semiconductors and infrastructure software used in data centres, networking, broadband, and wireless communications with Apple being one of its most important customers. Analysts expect Broadcom to report FY24 Q2 (ending 30 April) revenue growth of 38% YoY and EPS of $10.82 up 30% YoY.

Previous weekly equity market updates

Chinese setback, AI woes, and ECB decision (31 May 2024)
Nvidia earnings, electrification boom, and bubbles (24 May 2024)
New all-time high on speculative stocks comeback (17 May 2024)