At this point Nvidia has become a macro-event in and of itself: Dickson on earnings season

Key Concepts

• Earnings Season Performance: Strong performance of S&P 500 companies in the current earnings season, with a high beat rate for both revenue and earnings.
• Topline Growth: Significant year-over-year revenue growth, indicating a healthy underlying business performance.
• Bottom Line Growth: Robust year-over-year earnings growth for the broad market.
• Consumer Health: Positive assessment of the consumer's financial standing, with low debt concerns.
• AI Theme: The significant impact of Artificial Intelligence on market performance and future investment considerations.
• Power Demand: A potential constraint for AI growth, highlighting the need for energy infrastructure development.
• Retail Sector: Upcoming earnings reports from retailers to provide insights into consumer spending during the holiday season.
• MAG 7 / AI Hyperscalers: Large-cap technology companies driving market growth, with attractive valuations despite strong fundamentals.
• Small and Mid-Cap Space: Opportunities in smaller companies with strong growth and attractive valuations.
• Healthcare Sector: A contrarian play with digested regulatory hurdles and strong revenue growth, yet not fully participating in the rally.
• Industrial Sector (Small/Mid-Cap): Cyclical areas poised to benefit from AI infrastructure buildout and capital expenditure.

Earnings Season Strength and Market Outlook

Mike Dixon, Head of Research and Quantitative Strategies at Horizon Investments, describes the current earnings season as one of the best in recent years. As of the discussion, 90% of S&P 500 companies have reported, with an impressive 84% beat rate. This strong performance is not limited to earnings but also extends to topline growth, which saw an 8% year-over-year increase, a rate not seen in recent years. This revenue growth is identified as the primary driver for the 12% year-over-year earnings growth observed in the broad market. The positive trend is not confined to large-cap companies, with other market segments also showing participation.

Key Data Points:

• S&P 500 Beat Rate: 84%
• Topline Revenue Growth (Year-over-Year): 8%
• Broad Market Earnings Growth (Year-over-Year): 12%

Upcoming Catalysts and Potential Dampeners

While the earnings season has been strong, several key events and themes will shape the market's trajectory.

Nvidia and AI's Macro Impact

Nvidia is highlighted as a "macro event in and of itself" and the "tip of the spear" for the AI theme driving the market. Investors are keenly awaiting Nvidia's earnings to gauge demand for its products. A critical factor to watch is power demand, which is anticipated to be a more significant constraint than chip availability. The discussion points to the need for further developments in meeting this energy demand, citing an example in Canada with Camco's partnership with Westinghouse and Brookfield. This energy infrastructure development is seen as the "next leg of the trade" within the AI theme.

Retail Sector and Consumer Health

The upcoming retail earnings reports over the next two weeks are crucial for understanding the consumer's health, especially in the absence of extensive economic data in the US. Despite some headlines concerning margins and Black Friday sales, the underlying data suggests a healthy consumer starting position. The New York Fed's quarterly debt and credit report indicated no alarms regarding extended credit concerns, a positive sign compared to recent regional bank issues. This strong consumer foundation is expected to support the upcoming busy holiday season for retailers.

Investment Positioning and Opportunities

Given the current market dynamics, Dixon outlines a strategic approach to investment.

Top of the Market: AI Hyperscalers

The AI hyperscalers, particularly within the MAG 7, are experiencing significant topline growth, with revenue increasing by approximately 15% year-over-year, up from 10% at the beginning of the year. Despite this strong fundamental performance, valuations in the MAG 7 are flat to down. This presents an attractive setup where fundamentals are driving the market's top. Dixon advises against being underweight these companies, recommending maintaining exposure.

Small and Mid-Cap Space

The small and mid-cap space is identified as another area with numerous catalysts. These companies have demonstrated strong bottom-line and topline growth, mirroring large-cap performance. Notably, the small-cap space has seen valuations decrease by 5-6% year-to-date, offering an attractive entry point.

Contrarian Sector Plays: Healthcare

The healthcare sector is presented as a contrarian play. Many regulatory hurdles have been largely digested, and the sector has shown strong topline revenue growth, second only to tech in the US. Despite being a perennial underperformer in recent years, the fundamentals appear to be inflecting higher, making it an attractive entry point as it has not fully participated in the recent rally.

Industrial Sector within Small/Mid-Caps

Within the small and mid-cap segment, the industrial space is particularly favored. As the AI trade matures and AI infrastructure is built out, cyclical areas like industrials and materials are poised to benefit from increased capital expenditure. These companies can offer a value and cyclical tilt to offset the top-end market exposure while still capitalizing on announced capital spending.

Conclusion

The current earnings season is exceptionally strong, driven by robust topline and bottom-line growth across the S&P 500. While the AI theme, exemplified by Nvidia, continues to be a major market driver, potential constraints like power demand need to be monitored. The consumer appears to be in a healthy financial position, which bodes well for the upcoming retail season. Investment opportunities exist at the top of the market with AI hyperscalers, despite their current valuations, and in the small and mid-cap space, particularly in industrials. The healthcare sector also presents a compelling contrarian opportunity due to its strong fundamentals and underexposure to the recent rally.