Three Things (8/2)

Macro corner

A key barometer of U.S. factories fell in July for the fourth consecutive month and hit an eight-month low - a sign that an ongoing slump in the industrial side of the economy has deepened. Numbers below 50% signal the manufacturing sector is shrinking and suggest a deep contraction. Couple that with the fact that unemployment has risen in each of the last three months and is now close to triggering a recession indicator developed by former Federal Reserve economist Claudia Sahm that has a perfect track record over the last half-century, investors are increasingly worried about the path ahead.

It turns out that bad news for the economy may actually be bad news for the stock market. So often over the last 12 months have we seen a ‘cooling job market’, ‘declining rents’, or ‘slowing CPI / PPI’ be positive signals for investors but the tides have clearly turned. Perhaps the bigger risk is that the Fed acts too slowly as signs of an economic slowdown build. Anecdotes from Corporate America this earnings season have tended to suggest that things could be a bit worse on the ground than aggregate. Markets reacted negatively yesterday and the pullback represents a departure from lukewarm data actually being a positive for market participants.

Apple of the eye

Apple marked a return to revenue growth over the quarter and topped analysts’ estimates, indicating that upgraded iPads and a strong services business helped make up for headwinds in China. The upbeat results bring a jolt of momentum to the company ahead of its next iPhone release in September. iPhone sales declined nearly 1% from the prior year to about $39.3 billion and overall Apple revenue increased about 5% to $85.8 billion, both of which beat Wall Street expectations.

It’s a good quarter for the hardware giant but investors are turning towards what’s next: its new suite of AI features — dubbed Apple Intelligence. The world’s biggest technology companies have yet to unveil a strategy that points to reliable AI-infused profits in the near future, especially as many have ramped up spending and Apple is no different. What’s certain, though, is that if Apple can gain momentum in AI consumer products, the upgrade cycle to gain access to them will be one of the banner moments for the company. They say the proof is in the pudding and it’s time for Apple to execute.

Meta earnings

Meta Platforms reported earnings on Wednesday and said quarterly digital advertising grew rapidly while the company’s investments in artificial intelligence weighed on profits. The company’s rising expenses have come as a result of its all-in approach toward capitalizing on the AI boom as the company increased its minimum spending guidance for 2024. Shares rose by about 5% on Thursday, suggesting that improved sales forecasts and profits outweighed concerns about spending increases moving forward.

Zuckerberg doubled down on the same language echoed by his Big Tech peers: “At this point, I’d rather risk building capacity before it is needed rather than [be] too late given the long lead times for spinning up new inference projects”. The risk of underinvesting clearly outweighs the risks of overinvesting and it was refreshing to hear Zuckerberg explain where exactly they see business opportunities from it. AI and GenAI will improve Meta both in terms of existing products and open up new business segments – according to Meta, advertisers will basically just be able to tell them a business objective and a budget, and they’ll be able to do the rest for them. Pretty sweet.

Disclosures:

As of writing META and APPL are holdings in Titan's Flagship strategy.

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