by Alex Harding, CFA
Vice President
Equity Research and Portfolio Management
Chocolate-loving parents may be in for a sour surprise as they rummage through their children’s Halloween candy this year. With cocoa prices double the levels seen last year, food companies are getting creative, reducing the size of chocolate bars and adding more non-chocolate treats to their Halloween candy bags for sale. Trick-or-treaters weren’t the only ones to experience an eventful week, as an action-packed capital markets provided investors with their own bag of surprises to unpack.
Five of the Magnificent Seven stocks drove the direction of stocks this week, as more than 160 S&P 500 companies reported third-quarter earnings. Alphabet (Google) delivered a “treat” early in the week, indicating their artificial intelligence (AI) investments were paying off with a 35% jump in its cloud business, sending shares 3% higher on the day. The next day, investors’ attitudes quickly soured after the earnings calls of Meta Platforms, Inc. (Meta) and Microsoft. For different reasons, the massive and ongoing investment cycle into AI impacted both stocks negatively. Although Meta reported record revenues and handily surpassed Wall Street profit expectations, management warned of a “significant acceleration” in the buildout of its AI infrastructure next year, stoking fears of a repeat of the capital-spending missteps of 2022. Microsoft guided slower growth in its prized cloud platform, Azure, due to data center capacity constraints. When discussing the external constraints impacting the growth trajectory, Microsoft’s CEO, Satya Nadella, reminded analysts that data centers “don’t get built overnight,” and the power required to run the data center is another factor to solve.
This comment highlights the lesser-known beneficiary of the billions of dollars being invested into AI technology: the utility sector. Often viewed as a defensive bond proxy, the power demand from data centers has electrified utility stocks this year. As shown in the chart below, the utility sector has outperformed the S&P 500 index by 8% in 2024 as tech companies shift their focus toward power generation, striking deals with regulated and unregulated utilities to meet the AI-fueled electricity demand.
Source: FactSet
In addition to the busiest week of the earnings season, investors were greeted with an abundance of economic data. On Wednesday, the third-quarter gross domestic product (GDP), a measure of U.S. economic growth, was released. Fueled by resilient consumer spending, GDP grew at a 2.8% annualized rate. While below economists’ expectations, the release was viewed favorably. Making things a bit trickier, the recent hurricanes and ongoing Boeing strike distorted the October jobs report released on Friday. The unemployment rate remained unchanged at 4.1%, but job growth missed estimates by a wide margin, adding a mere 12,000 jobs, which was well short of the expected 115,000 jobs. Despite the “spooky” jobs report this month, the labor market is cooling, not crashing. As such, we expect the Fed to view the October jobs report as noisy and stick with a 0.25% interest rate cut at their meeting next week.
Takeaways for the Week:
Technology stocks drove the S&P 500 lower this week as investors digested the earnings releases of Alphabet, Amazon, Apple, Meta and Microsoft
The utility sector is the third best-performing sector this year, up over 29% as electricity demand soars
The October Jobs report was more “trick” than “treat,” as hurricanes and the Boeing strike distorted the employment data