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Tech stocks were soaring in Santa Claus fashion late kast week in response to strong earnings results and an optimistic outlook from semiconductor producer Broadcom. The performance is injecting a fresh dose of AI enthusiasm into investor sentiment, with the Nasdaq 100 benchmark reaching a fresh all-time high before paring about half of those gains. However, sector breadth is in the tombs, holding back the other major domestic indices — the Dow Jones Industrial, S&P 500, and Russell 2000 — drifting south. And while the stateside economic calendar is quiet today, featuring just import and export prices, European data reflects continued weakness as the continent braces for Trump 2.0 and the turbulence that tariffs and trade restrictions can generate for the continent. Meanwhile, manufacturing reports from Ottawa and Tokyo did depict growth in the goods-producing sector.
US Pays More for Imports
According to data released this morning, US import prices climbed in November at the same rate as the preceding month, while prices of products shipped beyond the border were unchanged. Meanwhile, Canada, the United Kingdom, the European Union, and Japan finished the week with mixed economic results.
In the US, import prices climbed 0.1% month over month (m/m), matching October’s increase and surpassing the analyst expectation for a 0.2% decline. On a year-over-year (y/y) basis, prices climbed 1.3%, compared to the 0.6% decline in October. Meanwhile, export tickets were flat m/m. Wall Street expected a 0.2% decline. On a y/y basis, exporters charged 1.3% more for their products, compared to the 0.6 % decline in October.
Canada Outperforms While Europe Struggles
Looking across the northern border, Canada’s manufacturing sales advanced 2.1% m/m in October, reversing from the September decline of 0.5% and coming in ahead of the 1.2% Wall Street anticipation. Across the Atlantic, however, industrial production in the European Union stalled, coming in unchanged m/m despite expectations calling for a 0.1% drop. The result, however, was better than the decline of 1.5% m/m in September. For the y/y result, production contracted a 1.2% easing from the 2.2% drop in September, which was better than the anticipated 1.9% softening. Great Britain’s data, broadly speaking, moved in the opposite direction, with construction, industrial production, and manufacturing all deteriorating as follows:
- GDP moved south by 0.1% m/m in October, the same rate as September and worse than the expectation for a 0.1% increase.
- Construction output fell 0.7% y/y in October compared to the expectation for the metric to be flat and the previous month’s 0.4% contraction.
- October’s industrial production descended 0.6% and 0.7% m/m and y/y, respectively, compared to falling 0.5% and 1.8% in the last report and worse than the 0.3% and 0.2% gain expected by analysts.
Asia also disappointed with Japan’s industrial production expanding 2.8% m/m in October, beneath the 3% median forecast and the 1.6% growth rate from September.
AI Enthusiasm Surges
Broadcom’s (AVGO) earnings call has reignited optimism for artificial intelligence, while retailers Costco (COST) and Restoration Hardware (RH) have reported mixed results. The following are highlights from the companies’ earnings calls:
- Broadcom pumped up enthusiasm this morning for AI after Adobe (ADBO) provided disappointing guidance, which had caused investors to question the pace of monetizing the technology. While Broadcom’s revenue slightly missed expectations, earnings surpassed the analyst consensus. The chip manufacturer announced it is working with three large cloud-computing companies to develop AI products, and its guidance has exceeded expectations.
- Consumers, meanwhile, have started to increase their spending on goods, apparently reversing a trend of focusing on services, at least at Costco stores. Chief Financial Officer Gary Millerchip says sales of health and beauty aids, gold and jewelry, home furnishings, gift cards, sporting goods, health and beauty aids, luggage and hardware increased in the double digits y/y. However, consumer results were bifurcated, and he believes increased sales of meat and produce point to a decline in consumers dining out. Furthermore, sales of the company’s privately labeled Kirkland products are growing faster than items from other brands. The retailer’s earnings and sales exceeded expectations.
- Restoration Hardware missed revenue and earnings expectations, but the company upgraded its guidance despite its sales being closely tied to the ailing residential real estate market. It anticipates fourth-quarter revenue to climb as much as 20%. It attributes the optimistic guidance to rebranding and revamping its product offering.
Investors Tilt Bearish
Markets are tilted bearishly as most sectors sink lower, rates rise, and commodities ex-oil get hammered. But tech stocks and bitcoin are the exceptions, benefitting from Broadcom’s profit results and their on and oft-correlated relationship. The Nasdaq 100 and S&P 500 indices are gaining 1.1% and 0.3%, but the cyclically oriented Russell 2000 and Dow Jones Industrial benchmarks are down 0.4% and 0.1%. Sector breadth is languishing, however, with 10 out of 11 segments lower on the session; technology is the only gainer, up 0.9%. Treasurys are also getting sold amidst the 2- and 10-year maturities, changing hands at 4.21% and 4.36%, 2 and 3 basis points (bps) heavier on the session. The dollar is slightly positive as it benefits from loftier borrowing costs. The greenback is gaining relative to most of its major counterparts, including the pound sterling, franc, yen, yuan, and Aussie and Canadian tenders. It is down versus the euro, though. Commodities are experiencing selling pressure, evidenced by silver, copper, gold, and lumber trading lower by 1.6%, 1.1%, 0.8%, and 0.3%. WTI crude is bucking the trend, however; it’s up 1% to $70.65 per barrel as optimism regarding Chinese stimulus measures bolster the demand outlook and Middle East tensions hamper supply prospects.
How Much Further?
Despite today’s market action being dominated by the technology sector, there’s still an opportunity for upside in the overall equity market as we progress into next year. I expect a broadening as the Trump administration sets up shop in Washington next month. An important question is which market segments are poised to benefit the most from lighter regulations and reduced taxation? Small cap and value-oriented areas tend to be domestically oriented and are the most levered to those stateside benefits since their global reach is limited on a relative basis. They pay almost all of their taxes here and are burdened mostly by US and not international regulations, generally speaking. With that in mind, I expect the Russell 2000 and Dow Jones Industrial benchmarks to perform well in the next few months. Turning to the US economic calendar as we approach some strong seasonality for stocks, we have flash PMIs, retail sales, housing starts, homebuilder sentiment, personal income, outlays and more. As for monetary policy announcements, we have the Fed, the BoE and the BoJ, which can go in all different directions. Two out of three central banks are quite predictable in terms of the quantity of the move, as Washington is almost certainly going to cut by a quarter while London holds. Tokyo is more complex, however, amidst a closer call regarding a 25-bp hike or a hold, but swaps markets favor a steady BoJ at this juncture.