Commentary
I spent most of last week at the Las Vegas Money Show, where I caught up with our favorite economist, Ed Yardeni, who pointed out in his Wednesday morning briefing that the “bond vigilantes” (a term Ed created in the 1980s) are skeptical of new British Prime Minister Andrew Burnham’s plans. (The role of bond vigilantes, Ed has said, is to protest inflationary policies by selling bonds, pushing yields higher.)
Burnham is Britain’s seventh Prime Minister since the Brexit vote a decade ago (in June 2016), including five in the last four years. I wish Prime Minister Burnham well, but the reason Britain gets a new Prime Minister almost every year is due to the bond vigilantes squelching their government spending proposals. In fact, Burnham told ITV Britain was deep “in hock” after politicians lost control of public finances in various key sectors – like energy, water, and housing. Since Britain has the highest borrowing costs in the G7 and has lost many affluent households, the bond vigilantes are ready to pounce on any misstep Burnham makes.
Here at home, we are in the midst of second-quarter earnings announcements, and I am proud to see our portfolios exhibiting relative strength so far. Our portfolios were especially resilient last Thursday, when the Dow lost over 500 points, the S&P 500 declined 1.2% and the NASDAQ Composite dropped 2.15%. On the same day, an 80-stock portfolio I manage was actually up +0.25%. As I discussed on a recent episode of Navellier Market Buzz, we can buck negative market sentiment with our fundamentally superior high-Alpha stocks.
Here are the most important developments recently and what they mean:
– Mean reversion algorithms returned this week on the perception that Asia would take the AI crown away from the U.S. This is a false narrative, since we are still in the early stages of the AI buildout. Right now, AI is constrained by memory and computing restrictions, so the backlog to build more data centers is real; otherwise, OpenAI, Anthropic, Grok, and other AI developers will continue to hit a computing wall. Nvidia (NVDA) is my largest holding, and I have no intention of selling the stock, which I expect will be $300 by the end of this year and at least $500 by the end of this decade.
– Growing order backlogs remain the most important development this year for data center-related companies. After Google (GOOG) announced 24% second quarter sales growth and 294% earnings growth that was a whopping 208.8% higher than analyst estimates, the company also said it now expects to spend between $195 billion and $205 billion on AI infrastructure, up from its prior guidance of $180 billion to $190 billion. Naturally, this higher AI infrastructure spending bodes well for many data center-related stocks. Right now, the order backlog is so big that the data center boom is expected to persist through at least 2029.
– As the second quarter earnings unfold and shore up fundamentally superior stocks, the stocks without earnings or disappointing results are being crushed. In case it had not been obvious, Tesla (TSLA) and SpaceX (SPCX) have been a drag on the overall stock market recently. Despite strong sales, Tesla’s operating margins are collapsing, and the company now has negative cash flow as it ramps up the manufacturing of the Optimus robot that is initially designed for factories. SpaceX has declined approximately 50% from its highs and is not expected to be profitable until late 2027 or 2028. This is why money managers that “bet the ranch” on Elon Musk, like Ron Baron and Cathie Wood, have negative year-to-date returns. The bottom line is we are in the midst of a strong earnings announcement season, and the stock market has no patience for companies that are not announcing strong sales, earnings, surprises, and guidance.
– I am not anti-Elon Musk and realize that he made a lot of people, including himself, rich. However, Tesla has never scored well in my 8-factor fundamental model. SpaceX will not be in Stock Grader until it has traded for 52 weeks, but I can tell you already that SpaceX already scores poorly in my 8-factor fundamental model. All the fuss on the SpaceX initial public offering (IPO) was about 21 Wall Street underwriters collecting record investment banking fees and not about a good investment. Furthermore, SpaceX only floated 5% of its outstanding stock to help the investment banker hype, but now more shares are becoming unrestricted, and insider selling is now contributing to sinking the stock. So essentially, all that fuss over the SpaceX IPO was just a big hype job by the financial media and 21 investment bankers.
In summary, we are now in the midst of another phenomenal earnings announcement season, which can be best described as “judgement day” for fundamentally superior stocks. Even when stocks like Comfort Systems (FIX) and Google do not go up immediately after their earnings announcements, they tend to firm up fast. Nvidia also tends to rally on anticipation of its earnings rather than pop immediately after announcing its better-than-expected results. Nowadays, a company’s guidance and order backlog are becoming increasingly important, rather than just a spectacular sales and earnings beat.
