This past week we received several calls from clients and friends asking about the “movements” in the stock market. Our usual first response comes from an icon of our business, Benjamin Graham who said, “in the short run the markets are voting machines and in the long run they are weighing machines.” We look for the short run to be dominated by traders, and the long run to be dominated by earnings and fundamentals. Our second response is to ask where they found this information out, i.e.TV. If so, we need to point out the advertisers cause editorial coverage to be slanted in their direction. For example, if the advertisers tout their trading systems, then they want one to trade. Fear is a great way of getting someone to do something, even if it is not in their best interest in the long term. Be prepared for all the “breathless” election analysis we will be seeing for those that are still watching TV.
Earnings for First Quarter 2024
As of April 26th, and the release of the following data from FactSet, 46% of the S&P 500 companies have reported earnings. 77% have reported positive earnings surprises and 60% have reported positive revenue surprises. Earnings growth has come in at 3.5%, and finally, the net profit margin is 11.5%, which is inline from a year ago.
Partial first quarter 2024 earnings are good, indicating that US companies are navigating this higher rate environment by watching the bottom line for expenses and concentrating on profit margins.
We continue to watch capital expenditures through the Manufacturers’ New Orders in the chart below. This important for a company’s competitiveness, and we can see the investments in plant and equipment continue strong despite the rise in interest rates. This spending helps underpin the economy.
Several weeks ago, I (RM) had the chance to go to Phoenix on a due diligence trip on Blackstone and several of their Alternative Investment Strategies. While I had been to several of these sessions before, the highlight was the offer to see a Hyperscaler (very large data center) or one of their investment rental properties at ASU. I chose the data center.
The data center campus consisted of 5 building of which only one was finished, at a cost of $500mm and was rented to one tenant in advance. Therefore, the entire campus is a $2.5B investment. We were not allowed in the building for security reasons, and when we asked who the tenant was, a smiling answer was, “no comment however you can guess the name”. Not many firms can make a $500mm investment without blinking.
This is the building I was referring to. The small “railway box car trailers” on the right side of the building outside are all backup generators, approximately 32, if memory serves.
In the paragraph below please feel free to have your own opinion as to who the tenant is, as you see the capital expenditure spending in this field from the New York Times.
“Microsoft, Meta, and Google’s parent company, Alphabet, disclosed this week that they had spent more than $32 billion combined on data centers and other capital expenses in just the first three months of the year. The companies all said in calls with investors that they had no plans to slow down their A.I. spending. In the clearest sign of how A.I. has become a story about building a massive technology infrastructure, Meta said on Wednesday that it needed to spend billions more on the chips and data centers for A.I. than it had previously signaled." Source: NYT”
In conclusion we feel the economy is moving on post pandemic, and earnings are the driver of the stock market over the long term. In addition, we feel the country needs to make a major investment in infrastructure as seen by the growth in power needs. We conclude with this chart from Blackstone showing the rising data center demand due to growing technology use.
Image courtesy of Blackstone
We thank you all for taking the time and reading “Market Watch.” It is meant as an educational piece on the always evolving markets. It is something we plan on providing every month, and your feedback is very important to us.
On a personal note, RMH is now in the position to bring on new clients so please be sure to share this informational letter with whomever you wish. RMH’s focus is on the customizable investment needs of individuals, families, and foundations. We enjoy working with our clients to better understand their goals, values, and passions for what is important in their lives. In expanding our client base, we look forward to working with people who share these same desires.
Richard Mundinger, CFA
Ashlyn Tucker, M. Fin, Analyst