ASML Holding said it expects revenue next year to be similar to 2023 given uncertainty around demand recovery in the semiconductor industry but posted better-than-expected net income for the third quarter.
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Nearly a year ago, OpenAI released ChatGPT 3 into the world, and investors got visions of dollar signs in their heads as they imagined the ways that artificial intelligence could make big money for businesses.
Wall Street’s now coming to terms with the fact that those sorts of paydays are going to take time. As investors have already seen from the past two quarters of earnings, AI has only really delivered financial benefits for a select few hardware companies so far — while spurring new costs for many others.
“The AI boom has already bifurcated into the contenders and pretenders,” said Daniel Newman, chief executive and principal analyst of Futurum Research. And while Advanced Micro Devices Inc., Intel Corp. and Arm Holdings PLC
ARM,
have stirred up interest, Nvidia Corp.
NVDA,
has established itself as far and away the greatest “contender,” with AI driving strong demand for its chips tuned for AI training.
Nvidia last quarter reported record earnings, including a 141% jump in revenue for its graphics chips used in AI infrastructure building up data centers. Nvidia, which reports near the end of earnings season on Nov. 21, posted record revenue of $13.5 billion last quarter and is expected to easily top that with $16 billion in the most recent quarter, a surge of 170% versus a year ago. Those estimates include $12.3 billion of revenue coming from data-center sales.
Other chip companies could post gains from AI as well, but to far lesser extents. Candidates include Broadcom Corp.
AVGO,
and system maker Super Micro Computer Inc.
SMCI,
as well as Marvell Technology Inc.
MRVL,
which last quarter told analysts that it expects to end the year at a revenue run rate of about $800 million this year from cloud/data-center chips related to AI.
“This is well above what we had outlined last quarter. Put this in perspective: This would put us at the run rate we had previously communicated for all of next year,” Marvel Chief Executive Matthew Murphy told analysts.
Super Micro is also riding the AI wave with its customized data-center servers that are designed to consume less power. But revenue in the September quarter is forecast to rise just 15% from a year ago and drop on a sequential basis, as supply constraints from Nvidia likely hampered Super Micro’s ability to meet all its demand.
Much as Advanced Micro Devices Inc.
AMD,
and Intel Corp.
INTC,
want to be in the AI conversations with the graphics chips they hope will be used for AI data-center applications, they won’t see much of an impact yet from AI revenue. Plus, those companies are experiencing a slowdown in PC sales that may overshadow any small benefit from AI chips.
The AI boom in chips is clearly not providing enough of a boost to lift finances for the overall semiconductor sector, which is forecast to see earnings fall 3.3% in the third quarter and post a revenue decline of 0.6%, according to FactSet. The industry is being dragged down in part by Micron Technology Inc.
MU,
which reported a 40% drop in revenue and a whopping fiscal fourth-quarter loss in late September for the quarter ended Aug. 31, which is included in FactSet’s third-quarter data. Even so, the company called a bottom to the memory-chip downturn.
Read also: Micron’s AI focused chip won’t help financial results anytime soon.
“Most of the consumer-based tech is still struggling, [including] PCs, laptops and to a certain extent smartphones,” said Daniel Morgan, senior portfolio manager at Synovus Trust Co. Wall Street has tempered expectations related to the impact of Apple Inc.’s
AAPL,
iPhone 15 launch on the quarter, as estimates call for an overall 1% drop in September-quarter revenue. Last quarter, Apple executives forecast that both Mac and iPad sales would be down by double-digits and that revenue performance would be similar to its June quarter, when revenue fell 1.3%
In addition, when asked about AI, Apple CEO Tim Cook said the company views AI and machine learning “as core fundamental technologies that are integral to virtually every product that we build.” Those comments, though, can also apply to the bulk of tech companies, where AI is built into software as another layer to improve a product. Internet companies such as Meta Platforms Inc.
META,
and Alphabet Inc.
GOOG,
GOOGL,
incorporate AI into their software and algorithms but don’t treat it as a specific, revenue-generating product.
Other software companies are building AI into their products as separate features or add-ons, but they are still in the early stages of seeing whether or not customers will pay more for them. Take Microsoft Corp.,
MSFT,
which has showed off Copilot, an extra AI feature for customers of Microsoft 365.
“[Microsoft] can distinguish itself by providing more details around its AI revenue
ramp since we don’t expect much information from Google, who really doesn’t seem
to have the monetization plan for Bard and AI-assisted search (SGE) ready to
articulate yet,” Melius Research analyst Ben Reitzes said in a note to clients this week. He also noted that the cost of offering AI products to consumers is steep, and requires lots of investment.
“There are sophisticated issues to contend with for Microsoft, including balancing the potential for higher revenue from Copilots with the high costs per query and much-needed investment,” Reitzes said. “The balance of AI adoption vs. cost was implied when Microsoft guided to flat operating margins year over year for fiscal 2024.”
Earlier this year, the Information reported that OpenAI, the creator of ChatGPT and recipient of a hefty investment from Microsoft, has costs of up to $700,000 a day, because the massive amounts of computing power needed to run queries. In February, OpenAI launched ChatGPT Plus, for $20 a month, a service that will give subscribers access to its AI during peak times and faster response times.
Another example is Adobe Inc.
ADBE,
which has a few AI offerings, including a subscription service called Generative Credits, tokens that let customers turn text-based prompts into images. Another is Firefly, a generative AI service for images, and an AI option in Photoshop, currently called Photoshop Beta AI, to help users fill in images and other collaborative tools. Adobe did not provide any forecasts on potential revenue generation during its analyst day earlier this month.
Toni Sacconaghi, a Bernstein Research analyst, said AI could drive a massive increase in enterprise productivity, and companies could dramatically increase IT spending on servers in order to invest in productivity-enhancing AI. “However, we note that enterprise adoption appears to be in early stages,” he said in a recent note to clients, adding that it was feasible that spending on AI infrastructure could take money away from other IT projects in process. “We do worry that projected AI infrastructure build out may be occurring too quickly, necessitating a digestion period, which could result in a commensurate stock pullback in AI-related names.”
Overall, the information-technology sector itself is expected to see anemic revenue growth this quarter. The consensus on FactSet forecasts a meager 1.35% revenue uptick in the third quarter, with earnings growth of 4.65%. FactSet’s estimates for IT companies exclude internet companies like Meta and Alphabet, which are under the category of communications/interactive media services. That sector is expected to see sales growth of 12%, and earnings growth of 51%, thanks to a 116% boost in Meta’s net income, after it hit a low point in the year-ago quarter.
Amazon.com Inc.
AMZN,
in the category of consumer discretionary/broadline retail, is forecast to see earnings growth of 109%, and revenue growth of 11%. Amazon’s cloud services business, AWS, is expected to also see a potential uplift from customers spending money on AI projects, according to a TD Cowen & Co. survey, in which 41% of respondents said they were “highly considering” allocating a budget for generative AI.
“This trend could bode well for Amazon’s AWS,” TD Cowen analyst John Blackledge said in a recent report, adding that he expects AWS revenue growth to reaccelerate in the second half of this year and in 2024, boosted by the move of additional workloads to the cloud, possibly including generative AI.
As companies build up their infrastructure, or their spending on cloud computing to add or improve AI capabilities, they are seeing higher costs, which is affecting margins — especially if revenue has slowed down, as it has in some sectors. Across both the broader S&P 500
SPX,
and the IT sector, earnings are lower than a year ago.
As Newman of Futurum pointed out, “AI stole the budget this year.” And that is a mixed bag for tech.
U.S. stocks are poised to rise on Monday ahead of a week of earnings and economic data releases, including quarterly reports from Tesla, Netflix, and .
When Eyal Waldman thinks of his youngest daughter and her boyfriend, he sees them dancing.
“Danielle and Noam loved dancing, and I hope they continue dancing somewhere up there,” Eyal Waldman told MarketWatch.
Danielle Waldman and Noam Shay were killed at a music festival in southern Israel last week, part of a campaign by the Hamas terrorist group that has led to further bloodshed.
Danielle’s father — an Israeli tech executive who co-founded Mellanox, which became the largest acquisition in Nvidia Corp.’s
NVDA,
history — spoke with MarketWatch as Friday turned to Saturday in Israel, in hopes of increasing attention on the hostages who are still held in Gaza as well as to memorialize his daughter, who was 24, and Shay, who was 26.
Courtesy of Eyal Waldman
Danielle Waldman — who was born in Palo Alto, California, but moved back to Israel with her family at age 4 — and Israeli native Shay were students who met six years ago in the army, and her father said they had been inseparable since. They attended the Supernova music festival in early October with friends, and were killed while attempting to escape Hamas terrorists in a car that Eyal Waldman found bullet-riddled near the festival’s location.
“Danielle and Noam have done nothing bad to anyone, and they were murdered only because they were Israelis,” he said.
Eyal Waldman, a onetime Israeli combat fighter, founded Mellanox in 1999, and sold it 20 years later to Nvidia for $6.9 billion. He is known internationally for attempting to foster peace between Israelis and Palestinians through his work in technology — Mellanox hired Palestinian tech workers in Gaza, Nablus and the West Bank town of Rawabi, which led to a “60 Minutes” appearance.
“We wanted to make peace, to work together, to bring prosperity to the Palestinian people, the same as we have in Israel,” he said. “I brought even Apple
AAPL,
to open a design center in Rawabi and I brought other companies to open design centers in Rawabi.”
The death of his daughter and Shay and the scope of the attacks and counter-attacks dominating headlines in recent days have not changed Waldman’s hope for peace in the future, he said, but not the near future. He believes this time, the violence “took us back several years, if not decades.”
“We need time to build the trust, if at all, between the two nations and start working together to be able to talk about peace,” he said. “Until then, we will continue protecting ourselves in a very direct manner in Gaza and everywhere else around Israel.”
Waldman also said he would continue to try to hire Palestinians and work with them to be a part of the Israeli tech ecosystem, as long as they state “that they are working for peace, and they are not supporting — not financially and not in any other way — any terror actions, or any actions that are not civilian economics between the two nations.”
“Our hands are always reaching out for peace. But at the same time, before we do this, we need people to understand that Israel is strong, Israel is united, and we will never let anyone harm the citizens of the state of Israel again.”
Read: Israel-Gaza war scenarios: Here’s what might lift oil prices to $95, $100 and $115 a barrel
Waldman was thankful for U.S. aid and was forceful in discussing the need to find hostages that were still missing. One of Nvidia’s current employees was kidnapped, according to an email that Chief Executive Jensen Huang sent to employees that was obtained by Insider, which reported that the employee was also at the Supernova music festival.
Nvidia has more than 3,000 employees in Israel mostly working for Mellanox, which makes networking gear that connects Nvidia’s high-performance data-center products. In an emailed statement, an Nvidia spokesman said “our focus now is working with our Israel leadership to ensure our employees and their families are safe and well cared for. We will then turn our focus to shoring up [the company’s] execution if necessary to ensure continued operations of our business.”
Waldman said the return of hostages is top of mind.
“What’s important now is to focus on bringing back the hostages, and that is the No. 1 priority for the State of Israel and for the international community,” he said.
Continuing to worry about others while suffering his own tragedy is a trait that Eyal Waldman seems to have passed down to his youngest daughter. He said that he had received a note from another festival attendee who was wounded in the eye in the initial attack. That victim told him that Danielle Waldman had stopped to attend to her and make sure she was safe before attempting to escape in a car that was later believed to have been attacked by Hamas terrorists with rifles.
“They loved to celebrate life,” Waldman said of his daughter and her boyfriend.
“And they went down on Friday night to celebrate life, love and freedom, and they were massacred.”
The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.
The current environment, in which you can get a yield of more than 5% yield on your cash at a bank or lock in a yield of 4.57% on a10-year U.S. Treasury note
BX:TMUBMUSD10Y
or close to 5% on a 20-year Treasury bond
BX:TMUBMUSD20Y
seems to have made some investors forget two things: A stock’s dividend payout can rise over the long term, and so can it is price.
It is never fun to see your portfolio underperform during a broad market swing. And people have a tendency to prefer jumping on a trend hoping to keep riding it, rather than taking advantage of opportunities brought about by price declines. We may be at such a moment for quality dividend stocks, based on their yields relative to that of the benchmark S&P 500
SPX.
Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF
DIVL,
use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.
Before diving in, we can illustrate the market’s current loathing of dividend stocks by comparing the performance of the Schwab U.S. Equity ETF
SCHD,
which tracks the Dow Jones U.S. Dividend 100 Index, with that of the SPDR S&P 500 ETF Trust
SPY.
Let’s look at a total return chart (with dividends reinvested) starting at the end of 2021, since the Federal Reserve started its cycle of interest rate increases in March 2022:
The Dow Jones U.S. Dividend 100 Index is made up of “high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios,” according to S&P Dow Jones Indices.
The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year. Let’s break down the performance since the end of 2021, this time bringing in the Madison Dividend Income Fund’s Class Y and Class I shares:
| Fund | 2023 return | 2022 return | Return since the end of 2021 |
| SPDR S&P 500 ETF Trust | 14.9% | -18.2% | -6.0% |
| Schwab U.S. Dividend Equity ETF | -3.8% | -3.2% | -6.9% |
| Madison Dividend Income Fund – Class Y | -4.7% | -5.4% | -9.9% |
| Madison Dividend Income Fund – Class I | -4.7% | -5.3% | -9.7% |
| Source: FactSet | |||
Dividend stocks held up well during 2022, as the S&P 500 fell more than 18%. But they have been left behind during this year’s rally.
The Madison Dividend Income Fund was established in 1986. The Class Y shares have annual expenses of 0.91% of assets under management and are rated three stars (out of five) within Morningstar’s “Large Value” fund category. The Class I shares have only been available since 2020. They have a lower expense ratio of 0.81% and are distributed through investment advisers or through platforms such as Schwab, which charges a $50 fee to buy Class I shares.
The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index
RUT,
which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.
The Madison team calculates a stock’s relative dividend yield by dividing its yield by that of the S&P 500. Let’s do that for the Schwab U.S. Equity ETF
SCHD
(because it tracks the Dow Jones U.S. Dividend 100 Index) to illustrate the opportunity that Justman highlighted:
| Index or ETF | Dividend yield | 5-year Avg. yield | 10-year Avg. yield | 15-year Avg. yield | Relative yield | 5-year Avg. relative yield | 10-year Avg. relative yield | 15-year Avg. relative yield |
| Schwab U.S. Dividend Equity ETF | 3.99% | 3.41% | 3.20% | 3.16% | 2.6 | 2.1 | 1.8 | 1.6 |
| S&P 500 | 1.55% | 1.62% | 1.79% | 1.92% | ||||
| Source: FactSet | ||||||||
The Schwab U.S. Equity ETF’s relative yield is 2.6 — that is, its dividend yield is 2.6 times that of the S&P 500, which is much higher than the long-term averages going back 15 years. If we went back 20 years, the average relative yield would be 1.7.
After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.
When asked about oil companies and others that pay fixed quarterly dividends plus variable dividends, he said, “We try to reach out to the company and get an estimate of special dividends and try to factor that in.” Two examples of companies held by the fund that pay variable dividends are ConocoPhillips
COP,
and EOG Resources Inc.
EOG,
Since the balance-sheet requirement is subjective “almost all fund holdings are investment-grade rated,” Justman said. That refers to credit ratings by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings. He went further, saying about 80% of the fund’s holdings were rated “A-minus or better.” BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.
Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:
| Company | Ticker | Dividend yield | Relative yield | 2023 return | 2022 return | Return since the end of 2021 |
| CME Group Inc. Class A |
CME, |
2.04% | 1.3 | 31% | -23% | 1% |
| Home Depot, Inc. |
HD, |
2.79% | 1.8 | -3% | -22% | -25% |
| Lowe’s Cos., Inc. |
LOW, |
2.17% | 1.4 | 3% | -21% | -19% |
| Morgan Stanley |
MS, |
4.24% | 2.7 | -3% | -10% | -13% |
| U.S. Bancorp |
USB, |
5.89% | 3.8 | -22% | -19% | -37% |
| Medtronic PLC |
MDT, |
3.62% | 2.3 | 1% | -23% | -22% |
| Texas Instruments Inc. |
TXN, |
3.30% | 2.1 | -3% | -10% | -12% |
| United Parcel Service Inc. Class B |
UPS, |
4.17% | 2.7 | -8% | -16% | -23% |
| Union Pacific Corp. |
UNP, |
2.52% | 1.6 | 2% | -16% | -15% |
| Source: FactSet | ||||||
Click on the tickers for more about each company, fund or index.
Now let’s see how these companies have grown their dividend payouts over the past five years. Leaving the companies in the same order, here are compound annual growth rates (CAGR) for dividends.
Before showing this next set of data, let’s work through one example among the nine stocks:
Home Depot hasn’t been the best dividend grower among the nine stocks named by Justman, but it is a good example of how an investor can build income over the long term, while also enjoying capital appreciation.
Here’s the dividend CAGR comparison for the nine stocks:
| Company | Ticker | Five-year dividend CAGR | Dividend yield on shares purchased five years ago | Dividend yield five years ago | Current dividend yield | Five-year price change | Five-year total return |
| CME Group Inc. Class A |
CME, |
9.46% | 2.44% | 1.55% | 2.04% | 20% | 42% |
| Home Depot Inc. |
HD, |
15.20% | 4.32% | 2.13% | 2.79% | 54% | 75% |
| Lowe’s Cos, Inc. |
LOW, |
18.04% | 4.14% | 1.81% | 2.17% | 91% | 109% |
| Morgan Stanley |
MS, |
23.16% | 7.62% | 2.69% | 4.24% | 80% | 108% |
| U.S. Bancorp |
USB, |
5.34% | 3.60% | 2.78% | 5.89% | -39% | -26% |
| Medtronic PLC |
MDT, |
6.65% | 2.90% | 2.10% | 3.62% | -20% | -9% |
| Texas Instruments Inc. |
TXN, |
11.04% | 5.24% | 3.10% | 3.30% | 59% | 82% |
| United Parcel Service Inc. Class B |
UPS, |
12.23% | 5.56% | 3.12% | 4.17% | 33% | 56% |
| Union Pacific Corp. |
UNP, |
10.20% | 3.37% | 2.07% | 2.52% | 34% | 49% |
| Source: FactSet | |||||||
This isn’t to say that Justman and Brown have held all of these stocks over the past five years. In fact, Lowe’s Cos.
LOW,
was added to the portfolio this year, as was United Parcel Service Inc.
UPS,
But for most of these companies, dividends have compounded at relatively high rates.
When asked to name an example of a stock the fund had sold, Justman said he and Brown decided to part ways with Verizon Communications Inc.
VZ,
last year, “as we became concerned about its fundamental competitive position in its industry.”
Summing up the scene for dividend stocks, Justman said, “It seems this year the market is treating dividend stocks as fixed-income instruments. We think that is a short-term issue and that this is a great opportunity.”
Don’t miss: How to tell if it is worth avoiding taxes with a municipal-bond ETF
Hong Kong
CNN
—
Samsung warned that operating profit in the third quarter likely plunged 78% as it continues to contend with lower than usual demand for consumer devices.
The South Korean tech giant released earnings estimates Wednesday, forecasting operating profit of about 2.4 trillion Korean won ($1.8 billion) for the three months ended September. That compares with 10.85 trillion won ($8 billion) in the same period last year.
Revenue was also projected to drop 12.7% from a year ago.
That continues a dreary run for the electronics maker, which has reported major losses in recent months as global economic uncertainty weighs on consumers around the world, leading many people to hold on to their cell phones and laptops longer.
According to Counterpoint Research, “2023 is on track to be the worst year for global smartphone shipments in 10 years,” with shipments forecast to decline 6% to fewer than 1.2 billion units.
In major markets like North America, “consumers are hesitant to upgrade their devices,” the firm noted in an August report.
Samsung has already been feeling the effects. The firm’s operating profit plummeted 95% in the first quarter, following a record loss in its semiconductor business. It saw similar results in the second quarter.
After a historic supply shortage during Covid, the global semiconductor industry is now seeing a glut in some areas that has driven losses for Samsung, the world’s largest memory chip and smartphone maker.
According to consultancy Bain, “the semiconductor industry’s post-pandemic rebound boosted capacity to the extent that some foresee an oversupply.”
In a report last month, Bain suggested the trend was merely cyclical, attributing it to “normal” ups and downs in the industry.
Samsung has also told shareholders it anticipates a gradual comeback in global demand in the second half of the year.
This “should lead to an improvement in earnings driven by the component business,” it said in a July earnings statement.
“However, continued macroeconomic risks could prove to be a challenge,” the company cautioned.
Analysts believe a downturn in memory chips will also turn around, benefiting manufacturers like Samsung.
In a recent note to clients, Nomura analysts said they expected a recovery in the sector “to accelerate” through the rest of this year.
“The team expects memory prices to remain flat or slightly increase in [the third quarter], then show strong growth in [the fourth quarter],” the analysts wrote, maintaining a buy rating on Samsung’s stock.
The company’s shares climbed 3.5% in Seoul on Wednesday following its announcement.
Two things investors can be sure about: Nothing lasts forever and the stock market always overreacts. The spiking of yields on long-term U.S. Treasury securities has been breathtaking, and it has led to remarkable declines for some sectors and possible bargains for contrarian investors who can commit for the long term.
First we will show how the sectors of the S&P 500
have performed. Then we will look at price-to-earnings valuations for the sectors and compare them to long-term averages. Then we will screen the entire index for companies trading below their long-term forward P/E valuation averages and narrow the list to companies most favored by analysts.
Here are total returns, with dividends reinvested, for the 11 sectors of the S&P 500, with broad indexes below. The sectors are sorted by ascending total returns this year through Monday.
| Sector or index | 2023 return | 2022 return | Return since end of 2021 | 1 week return | 1 month return |
| Utilities | -18.4% | 1.6% | -17.2% | -11.1% | -9.6% |
| Real Estate | -7.1% | -26.1% | -31.4% | -3.0% | -8.8% |
| Consumer Staples | -5.4% | -0.6% | -6.0% | -2.2% | -4.4% |
| Healthcare | -4.2% | -2.0% | -6.1% | -1.7% | -3.3% |
| Financials | -2.5% | -10.5% | -12.7% | -2.5% | -4.7% |
| Materials | 1.3% | -12.3% | -11.2% | -1.9% | -7.0% |
| Industrials | 3.5% | -5.5% | -2.1% | -1.8% | -7.3% |
| Energy | 4.0% | 65.7% | 72.4% | -1.9% | -1.4% |
| Consumer Discretionary | 27.0% | -37.0% | -20.0% | -0.6% | -5.2% |
| Information Technology | 36.5% | -28.2% | -2.0% | 0.8% | -5.9% |
| Communication Services | 42.5% | -39.9% | -14.3% | 1.1% | -1.3% |
|
S&P 500 |
13.1% | -18.1% | -7.4% | -1.1% | -4.9% |
|
DJ Industrial Average |
2.5% | -6.9% | -4.5% | -1.7% | -4.0% |
|
Nasdaq Composite Index COMP |
28.0% | -32.5% | -13.7% | 0.3% | -5.1% |
|
Nasdaq-100 Index |
36.5% | -32.4% | -7.7% | 0.5% | -4.2% |
| Source: FactSet | |||||
Returns for 2022 are also included, along with those since the end of 2021. Last year’s weakest sector, communications services, has been this year’s strongest performer. This sector includes Alphabet Inc.
GOOGL
and Meta Platforms Inc.
META,
which have returned 52% and 155% this year, respectively, but are still down since the end of 2021. To the right are returns for the past week and month through Monday.
On Monday, the S&P 500 Utilities sector had its worst one-day performance since 2020, with a 4.7% decline. Investors were reacting to the jump in long-term interest rates.
Here is a link to the U.S. Treasury Department’s summary of the daily yield curve across maturities for Treasury securities.
The yield on 10-year U.S. Treasury notes
jumped 10 basis points in only one day to 4.69% on Monday. A month earlier the 10-year yield was only 4.27%. Also on Monday, the yield on 20-year Treasury bonds
rose to 5.00% from 4.92% on Friday. It was up from 4.56% a month earlier.
Market Extra: Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007
The Treasury yield curve is still inverted, with 3-month T-bills
yielding 5.62% on Monday, but that was up only slightly from a month earlier. An inverted yield curve has traditionally signaled that bond investors expect a recession within a year and a lowering of interest rates by the Federal Reserve. Demand for bonds pushes their prices down. But the reverse has happened over recent days, with the selling of longer-term Treasury securities pushing yields up rapidly.
Another way to illustrate the phenomenon is to look at how the Federal Reserve has shifted the U.S. money supply. Odeon Capital analyst Dick Bove wrote in a note to clients on Friday that “the Federal Reserve has not deviated from its policy to defeat inflation by tightening monetary policy,” as it has shrunk its balance sheet (mostly Treasury securities) to $8.1 trillion from $9 trillion in March 2022. He added: “The M2 money supply was $21.8 trillion in March 2022; today it is $20.8 trillion. You cannot get tighter than these numbers indicate.”
Then on Tuesday, Bove illustrated the Fed’s tightening and the movement of the 10-year yield with two charts:
Bove said he believes the bond market has gotten it wrong, with the inverted yield curve reflecting expectations of rate cuts next year. If he is correct, investors can expect longer-term yields to keep shooting up and a normalization of the yield curve.
This has set up a brutal environment for utility stocks, which are typically desired by investors who are seeking dividend income. In a market in which you can receive a yield of 5.5% with little risk over the short term, and in which you can lock in a long-term yield of about 5%, why take a risk in the stock market? And if you believe that the core inflation rate of 3.7% makes a 5% yield seem paltry, keep in mind that not all investors think the same way. Many worry less about the inflation rate because large components of official inflation calculations, such as home prices and car prices, don’t affect everyone every year.
We cannot know when this current selloff of longer-term bonds will end, or how much of an effect it will have on the stock market. But sharp declines in the stock market can set up attractive price points for investors looking to go in for the long haul.
A combination of rising earnings estimates and price declines could shed light on potential buying opportunities, based on forward price-to-earnings ratios.
Let’s look at the sectors again, in the same order, this time to show their forward P/E ratios, based on weighted rolling 12-month consensus estimates for earnings per share among analysts polled by FactSet:
There is a limit to how many columns we can show in the table. The S&P 500’s forward P/E ratio is now 17.94, compared with 16.79 at the end of 2022 and 21.53 at the end of 2021. The benchmark index’s P/E is above its 10- and 15-year average levels but below the five-year average.
If we compare the current sector P/E numbers to 5-, 10- and 15-year averages, we can see that the current levels are below all three averages for four sectors: utilities, real estate, financials and communications services. The first three face obvious difficulties as they adjust to the rising-rate environment, while the real-estate sector reels from continuing low usage rates for office buildings, from the change in behavior brought about by the COVID-19 pandemic.
Your own opinions, along with the pricing for some sectors, might drive some investment choices.
A broader screen of the S&P 500 might point to companies for you to research further.
We narrowed the S&P 500 as follows:
Here are the 20 companies that passed the screen, for which analysts’ price targets imply the highest upside potential over the next 12 months.
There is too much data for one table, so first we will show the P/E information:
| Company | Ticker | Current P/E to 5-year average | Current P/E to 10-year average | Current P/E to 15-year average |
| SolarEdge Technologies Inc. | SEDG | 89% | N/A | N/A |
| AES Corp. | AES | 66% | 75% | 90% |
| Insulet Corp. | PODD | 18% | N/A | N/A |
| United Airlines Holdings Inc. | UAL | 42% | 50% | N/A |
| Alaska Air Group Inc. | ALK | 51% | 57% | N/A |
| Tapestry Inc. | TPR | 39% | 49% | 70% |
| Albemarle Corp. | ALB | 39% | 50% | 73% |
| Delta Air Lines Inc. | DAL | 60% | 63% | 21% |
| Alexandria Real Estate Equities Inc. | ARE | 59% | 68% | N/A |
| Las Vegas Sands Corp. | LVS | 96% | 78% | 53% |
| Paycom Software Inc. | PAYC | 61% | N/A | N/A |
| PayPal Holdings Inc. | PYPL | 33% | N/A | N/A |
| SBA Communications Corp. Class A | SBAC | 27% | N/A | N/A |
| Advanced Micro Devices Inc. | AMD | 58% | 39% | N/A |
| LKQ Corp. | LKQ | 92% | 44% | 78% |
| Charles Schwab Corp. | SCHW | 75% | 54% | 73% |
| PulteGroup Inc. | PHM | 94% | 47% | N/A |
| Lamb Weston Holdings Inc. | LW | 71% | N/A | N/A |
| News Corp Class A | NWSA | 93% | 73% | N/A |
| CVS Health Corp. | CVS | 75% | 61% | 67% |
| Source: FactSet | ||||
Click on the tickers for more about each company or index.
News Corp
NWSA
is on the list. The company owns Dow Jones, which in turn owns MarketWatch.
Here’s the list again, with ratings and consensus price-target information:
| Company | Ticker | Share “buy” ratings | Oct. 2 price | Consensus price target | Implied 12-month upside potential |
| SolarEdge Technologies Inc. | SEDG | 74% | $122.56 | $268.77 | 119% |
| AES Corp. | AES | 79% | $14.16 | $25.60 | 81% |
| Insulet Corp. | PODD | 68% | $165.04 | $279.00 | 69% |
| United Airlines Holdings Inc. | UAL | 71% | $41.62 | $69.52 | 67% |
| Alaska Air Group Inc. | ALK | 87% | $36.83 | $61.31 | 66% |
| Tapestry Inc. | TPR | 75% | $28.58 | $46.21 | 62% |
| Albemarle Corp. | ALB | 81% | $162.41 | $259.95 | 60% |
| Delta Air Lines Inc. | DAL | 95% | $36.45 | $58.11 | 59% |
| Alexandria Real Estate Equities Inc. | ARE | 100% | $98.18 | $149.45 | 52% |
| Las Vegas Sands Corp. | LVS | 72% | $45.70 | $68.15 | 49% |
| Paycom Software Inc. | PAYC | 77% | $260.04 | $384.89 | 48% |
| PayPal Holdings Inc. | PYPL | 69% | $58.56 | $86.38 | 48% |
| SBA Communications Corp. Class A | SBAC | 68% | $198.24 | $276.69 | 40% |
| Advanced Micro Devices Inc. | AMD | 74% | $103.27 | $143.07 | 39% |
| LKQ Corp. | LKQ | 82% | $49.13 | $67.13 | 37% |
| Charles Schwab Corp. | SCHW | 77% | $53.55 | $72.67 | 36% |
| PulteGroup Inc. | PHM | 81% | $73.22 | $98.60 | 35% |
| Lamb Weston Holdings Inc. | LW | 100% | $92.23 | $123.50 | 34% |
| News Corp Class A | NWSA | 78% | $20.00 | $26.42 | 32% |
| CVS Health Corp. | CVS | 77% | $69.69 | $90.88 | 30% |
| Source: FactSet | |||||
A year may actually be a short period for a long-term investor, but 12-month price targets are the norm for analysts working for brokerage companies.
Don’t miss: This fund shows that industry expertise can help you make a lot of money in the stock market
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Nvidia Corp.’s offices in France were the subject of a dawn raid Wednesday by French antitrust regulators, according to a report by the Wall Street Journal on Thursday, which cited sources close to the raid.
Nvidia
NVDA,
is widely recognized by Wall Street as the biggest chipmaker that stands to gain from the current AI frenzy, as data centers that run the AI models need more and more hardware and software to sustain workloads. Shares of the $1.065 trillion company are up 195% year to date.
On Wednesday, the Autorité de la Concurrence, France’s national competition regulator, said it had carried out the raid at “the premises of a company suspected of having implemented anticompetitive practices in the graphics-cards sector,” and refused to comment on “the entity or on the practices in question.”
Nvidia declined to comment to both the Wall Street Journal and MarketWatch.
Nvidia’s stock closed up 1.5% at $430.89 in Thursday trading following the report, while the S&P 500 index
SPX,
gained 0.6%.
Micron Technology Inc. is far from out of the woods yet when it comes to profitability as quarterly results came in better than expected Wednesday, but the memory-chip maker’s chief executive was upbeat about data-center sales in 2024 as AI fever rages on.
While the Boise, Idaho-based chip maker topped expectations for its fiscal fourth quarter, it forecast a loss of $1.14 to $1 a share on revenue of $4.2 billion to $4.6 billion for the fiscal first quarter. Analysts surveyed by FactSet, however, had forecast, on average, a loss of 88 cents a share on revenue of $4.24 billion.
Micron also expects negative gross margins for a fourth consecutive quarter in the fiscal first quarter, between a 6% and 2% loss, which Micron Chief Financial Officer Mark Murphy said on the call assumed no additional inventory write-down because of memory-chip pricing.
Following gross margins of 22.9% reported in the first quarter of fiscal 2023, gross margins swung sharply to negative-31.4% as Micron reported its largest quarterly loss on record in March, writing off more than $1.4 billion in inventory. Those margins improved to negative-16.1% in the third quarter. On Wednesday, those continued to improve sequentially, to negative-9.1% in the fourth quarter.
Additionally, the company said it is still experiencing headwinds from China’s cybersecurity review of the company’s products, which surfaced in March.
Micron
MU,
shares declined nearly 4% after hours Wednesday following a 0.4% rise to close the regular session at $68.21.
On a conference call, Micron Chief Executive Sanjay Mehrotra told analysts he expects revenue from high-bandwidth memory chips designed for data centers “to begin in early 2024,” and that the company is “very much still on track for meaningful revenue, several hundred million dollars in our fiscal year 2024.”
Back in July, Micron and Nvidia Corp.
NVDA,
announced that Nvidia was using Micron’s HBM3 Gen2 high-bandwidth memory 1-beta DRAM chips in its AI data-center products. As the AI frenzy has raged on all year, data centers that must handle the enormous amounts of data and throughput required by AI models like Open AI’s ChatGPT, backed by Microsoft Corp.
MSFT,
have boosted demand for hardware.
Micron specializes in making DRAM and NAND memory chips. DRAM, or dynamic random access memory, is the type of memory commonly used in PCs and data-center servers, while NAND chips are the flash memory chips used in smaller devices like smartphones and USB drives.
Read: Micron’s stock might be an excellent play for AI investors who want to diversify beyond Nvidia
In the company’s last earnings report, Mehrotra called the bottom in the memory-chip market, but warned that smartphone and PC weakness could cut into AI gains. This time around, the CEO said smartphone and PC markets were “now at normal levels.”
Read: AI will accelerate Micron’s recovery, analyst says
For the fiscal fourth quarter, Micron reported a loss of $1.43 billion, or $1.31 a share, versus net income of $1.49 billion, or $1.35 a share, in the year-ago period.
The adjusted loss, which excludes stock-based-compensation expenses and other items, was $1.07 a share, versus adjusted earnings of $1.45 a share in the year-ago period. Revenue fell to $4.01 billion from $6.64 billion in the year-ago quarter.
Analysts had forecast Micron to report a fourth-quarter loss of $1.15 a share on revenue of $3.95 billion.
Micron shares are up 36.5% year to date, compared with a 32.8% gain by the PHLX Semiconductor Index
SOX,
an 11.3% gain by the S&P 500 index
SPX
and a 25.1% rise in the Nasdaq Composite
COMP.
Intel’s Big Chip-Making Push in Germany Hits Bottleneck
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Intel Stock Slips as CFO Warns of Excess Data Center Chip Inventories
Klaviyo Inc. is reportedly raising the target of its upcoming initial public offering to more than $550 million.
Bloomberg News reported late Sunday that Klaviyo has decided to raise the target range for its shares to $27 to $29, up from its previously stated range of $25 to $27 a share. At the top of that new range, the IPO would raise $557 million, with the company valued at about $8.7 billion, according to Bloomberg.
There are more signs that investors are cooling a bit on the hot artificial intelligence play, though no one appears ready to let go of their Nvidia stock just yet.
That’s according to Vanda Research analysts, who shared a chart of their latest weekly data showing how retail investor’s net purchases of AI-themed stocks is “steadily waning”:
Marco Iachini, senior vice president, Giacomo Pierantoni, head of data and Lucas Mantle, data scientist at Vanda, said they’ve also noticed fewer news stories covering the sector as well, in their Vandatrack weekly comment that published Thursday.
The fervor for AI-related stocks and technology took off earlier this year, with a pinnacle moment in May when Nvidia
NVDA,
made big predictions on a boom for demand for its AI-related chips. Shares of the company are still up 211% so far this year, but enthusiasm for many tech stocks faded in August as China and interest rate-hike worries cropped up and some companies stressed AI benefits might not happen right away.
That said, Vanda analysts don’t expect Nvidia will feel the hurt of any such waning interest. They point out that short interest in the chip maker has seen a “considerable decline,” in line with its soaring stock price.
“This phenomenon suggests that bearish institutional investors, including long/short hedge funds, may have been compelled to cover their short positions,” said Iachini and his team. “As a result they are unlikely to want to sell the stock in the near term barring strong conviction to do so.”
“It is crucial to recognize that a slowdown in retail demand, by itself, is improbable to trigger substantial price movements, without active bearish participation from institutional investors,” they added.
However, the story is different for smaller AI-related companies such as smaller-cap C3.ai
AI,
as seen in their chart:
For C3.ai, they see a selling trend persisting in coming weeks. The AI software group’s shares are up 154% so far this year, but down 9% this month, taking a hit recently from solid quarterly results that came with forecasts for a bigger-than-expected full year loss. Analysts aren’t quite giving up — among 10 covering the company tracked by FactSet most have hold or a similar rating.
“We believe C3.ai is taking the proper steps to capitalize on Generative AI, but it will take time to prove out,” said a team of analysts at Oppenheimer led by Timothy Horan, after those results were released on Sept. 7. They rate the company perform.
Vanda analysts said another exception to an AI buying slowdown has been IonQ
IONQ,
“a relatively small quantum computing company that has been outperforming its AI-related counterparts.” They noted “remarkably resilient” demand for the stock, as short interest also increases rapidly.
“This juxtaposition raises a cautionary flag, as a potential weakening of retail interest, coupled with speculative institutional investors accumulating short positions, could create a demand-supply imbalance, potentially triggering a selloff,” they said. Shares of IONQ have soared 422% year-to-date. The company lifted its lifted full-year bookings guidance last month as it reported blowout second-quarter sales.
Young Money blogger Jack Raines highlighted the slowing interest in AI in a post on Thursday , citing data from analytics firm Similarweb that showed ChatGPT traffic down 3.2% in August, after 10% declines in June and July.
“While ChatGPT will probably experience a resurgence this fall as students return to the classroom and expedite their homework via chatbot, it seems like talks of AI disrupting/replacing anything and everything have cooled down,” he said, adding that the “initial euphoria was a bit much.”
Deutsche Bank strategists hopped on the topic in a note to clients entitled “Even hype needs a summer break,” on Thursday, noting how AI interest waned as investors went to the beach and the media turned its attention to extreme weather and “silly season” stories.
“Under the surface, though, there have been important developments indicating a slow maturing of the cycle, of the underlying technologies and of attitudes to a revolution in waiting,” said a team led by analyst Adrian Cox.
Those include Ai being the “elephant in the earnings room,” this summer that also brought a steady stream of AI-related tech announcements. Another theme “Your job is safe..for now,” came via fresh evidence that AI might boost rather than replace white-collar jobs, while yet another saw U.S. politicians also got involved.
This week saw Tesla CEO Elon Musk telling Capital Hill politicians that a new federal agency to oversee AI development is a must.
Another big theme that erupted this summer was the chatter by contrarian commentators questioning the hype around generative AI. Cox alluded to the Similarweb report that got everyone excited as it showed Chat GPT traffic falling to 1.4 billion visitors in August from 1.8 billion in May.
“The bigger picture is that open.ai had zero visitors before the launch of ChatGPT less than a year ago and is now No. 28 in the world, according to Similarweb,” said the Deutsche Bank team.
Chris Ratcliffe/Bloomberg
Arm Holdings
priced its initial public offering at $51 a share. That’s at the top of the expected range of $47 to $51, giving the chip design company a valuation of $54.5 billion on a f…
Arm Holding Ltd. priced its initial public offering at the high end of its expected range late Wednesday following intense interest.
The British chip-design company priced shares at $51, raising $4.87 billion, following earlier reports that Arm would be pricing its IPO at $52 a share. A source close to the deal confirmed to MarketWatch that $52 had been the expected price, but that it was reduced to $51. That puts the chip designer at just over a $52 billion valuation. Recently, Arm had stated a targeted range of $47 to $51.
Nvidia Stock’s Losing Streak Keeps Going. What Happened to Wall Street’s Darling?
The second week of September, as in the NFL, marks a kickoff of sorts for the tech year.
Headlined by Apple Inc.’s
AAPL,
seminal iPhone event on the second Tuesday of the month at Apple Park, and anchored by Salesforce Inc.’s
CRM,
wildly popular Dreamforce conference up the road in San Francisco, these several days set a tempo as well as establish a road map for the industry over the next 12 months. They also open the floodgates on tech conference season, with shows stacked up over the next several weeks for Facebook parent Meta Platforms Inc.
META,
Microsoft Corp.
MSFT,
and Oracle Corp.
ORCL,
Oh, and there’s that initial public offering from Arm Holdings Plc, the chip designer owned by SoftBank Group Corp.
9984,
that is expected to value Arm at $50 billion to $54.5 billion on a fully diluted basis. Another IPO candidate, delivery startup Instacart, also plans a public offering that would value it at $7.5 billion. Both deals could jump-start what has been a somnolent tech IPO market the past few years.
For that reason alone, this jam-packed tech week might hold even more import, and consequences, than previous years. A confluence of legal tussles, macroeconomic conditions, a trade war with China, and regulatory bluster have raised the stakes.
“It’s a tale of two cities with this week’s events highlighting both the issues and opportunities in tech,” Silicon Valley analyst Maribel Lopez said in an interview, assessing the week. “Arm’s IPO showcases the strength of tech and AI at a time when the AI forum and Google-DoJ shine a light on the concern that a few companies are wielding tremendous power for the future of the world.”
Consider: Hours before Apple is expected to unveil a new crop of iPhones more noteworthy for pricing than features, Alphabet Inc.’s
GOOGL,
GOOG,
Google faces off with the Justice Department in a federal court in Washington, D.C.
Justice Department officials argue that Google illegally leveraged agreements with phone makers such as Apple and Samsung Electronics Co.
005930,
and with internet browsers like Mozilla to be the default search engine for their customers, thus preventing smaller rivals from gaining access to that business.
“This is a backwards-looking case at a time of unprecedented innovation, including breakthroughs in AI, new apps and new services, all of which are creating more competition and more options for people than ever before,” Google General Counsel Kent Walker said in a statement.
The following day, Wednesday, Senate Majority Leader Chuck Schumer, D-N.Y., convenes an all-star panel of CEOs from Meta, Microsoft, Google, OpenAI and Palantir Technologies Inc.
PLTR,
As lawmakers ruminate on how to harness AI responsibly, bipartisan legislation is in the works. Sens. Richard Blumenthal, D-Conn., and Josh Hawley, R-Mo., are among those crafting a bill.
Even Apple and Salesforce aren’t immune from recent events: Apple has endured a relatively rough patch of disappointing (for them) revenue and iPhone sales while balancing risk/reward with its huge investment in China, and Salesforce CEO Marc Benioff has threatened to relocate Dreamforce to Las Vegas after more than two decades in his hometown of San Francisco if drug use and homelessness disrupt this year’s event.
The most pressing concern, when all is said and done, is AI — which hovers like the Death Star over the tech landscape.
“The biggest concern is the forum is behind closed doors, which could lead to regulatory capture, where dominant players in the industry help influence the regulations being imposed,” Kimberlee Josephson, associate professor of business administration at Lebanon Valley College (Pa.), said in an interview. “It’s almost as if it puts them in the hot while giving them a seat at the table at the same time.”
“At the very least, it sends the signal that something is being done,” she said. “Antitrust cases are so subjective. What constitutes barriers to entry? DoJ adds a level of seriousness.”
