Gaming stocks poised to outperform, the best cities for AI startups

Market Catalyst - December 29, 2023 Summary

Key Concepts:

• Federal Reserve Policy: Division within the Fed regarding future interest rate cuts, impact of recent economic data, and potential changes in Fed composition in 2026.
• Artificial Intelligence (AI): Rapid growth of the AI industry, investment trends, competitive landscape (OpenAI, Gemini, Coreweave), and impact on various sectors.
• Gaming Sector: Current state of the gaming market (console sales, software performance), upcoming releases (Grand Theft Auto 6), and investment opportunities.
• Banking Sector: Performance of large and regional banks, factors influencing future growth (capital markets, net interest income, regulatory changes).
• Market Volatility: Low volatility environment indicated by the VIX index.

---

I. Market Overview & Index Performance

The US trading day, 30 minutes in, showed minimal movement across major indices. The Dow was down slightly (approximately 28 points), while the NASDAQ and S&P 500 were relatively flat. The Russell 2000 (small caps) was at its low for the day, down 0.2%. The VIX (volatility index) was at 14, near its year-to-date low, indicating low market fear. Bond yields (10-year Treasury) were up 2 basis points to 4.14%, and the 30-year was at 4.82%. The dollar was trading slightly higher. Sector performance was mixed, with energy and communication services leading gains, and consumer discretionary and staples lagging.

II. Federal Reserve Outlook & Policy Debate

The upcoming release of the minutes from the December FOMC meeting is expected to provide insight into the Fed’s thinking on interest rates. Jennifer Shawnberger (Fed Correspondent) highlighted a division within the Fed, with six members not favoring rate cuts based on the December projections ("DOT plot"). Two members (Jeff Schmid and Austin Goulsby) dissented specifically against rate cuts. The focus will be on the level of division regarding future cuts and the Fed’s assessment of economic data, particularly in light of the post-government shutdown data challenges.

Shawnberger also discussed the changing composition of the Fed in 2026 and the uncertainty surrounding the replacement of Chair Jerome Powell in May. She anticipates the Fed will remain on hold for the near term, not cutting rates in January or potentially March, pending further data. Political pressure from President Trump, who expressed frustration with Powell, is also a factor. Trump threatened to sue Powell, alleging “incompetence” in handling renovations.

III. Artificial Intelligence: Investment & Competitive Landscape

AI startups have raised over $150 billion in 2023, driven by rapid industry growth. The NASDAQ Entrepreneurial Center identified key factors driving innovation in specific cities.

Suro Capital, an investor in OpenAI ($17.5M investment in 2024) and Coreweave, sees continued strong demand for AI technologies. OpenAI’s valuation has risen significantly, with recent estimates exceeding $800 billion. While competition is increasing (e.g., Gemini), the rate of improvement in AI models is accelerating, leading to increased use cases and ROI for companies. The ability of companies like Whoop and Canva to integrate AI into their products is driving growth and improving customer value.

A key concern is potential regulatory scrutiny, particularly regarding market dominance and competition. The FTC may block a potential Netflix acquisition of Warner Brothers Discovery due to concerns about market control.

IV. Gaming Sector Analysis

November saw the lowest video game console sales since 1995 (1.6 million units), but anticipation for Grand Theft Auto 6 (release in Fall 2026) is expected to drive significant growth in 2026. Michael Per (Wedbush Securities) noted that console sales data from Circana is incomplete (only reflects physical sales). Microsoft’s Game Pass subscription service is impacting traditional game sales.

Key investment considerations include:

• Console Sales: The console market is potentially declining, becoming a niche market.
• Software Performance: 2026 is expected to be a strong year for software sales due to anticipated releases.
• Subscription Services: The growth of subscription services like Game Pass is a significant trend.
• Sony’s Strategy: Sony’s strategy is being questioned, with concerns about high console prices and a lack of a clear plan for the future of gaming.
• Grand Theft Auto 6: The release of GTA 6 is expected to be a major catalyst for the gaming industry.

V. Banking Sector Performance & Outlook

Christopher McGrady (KBW) discussed the performance of banks, noting a bifurcation between large banks (outperforming) and regional banks. He identified three key factors for investors to watch in 2026:

1. Capital Markets Exposure: Banks geared towards capital markets (JP Morgan, City, Morgan Stanley, Goldman Sachs) are expected to continue performing well.
2. Capital Return to Shareholders: Banks returning capital through dividends and share repurchases are attractive investments.
3. Net Interest Income: Topline growth driven by the yield curve, loan growth, and deposit repricing is crucial.

McGrady highlighted the importance of monitoring credit spreads and volatility as indicators of potential stress in the market. He noted that banks have generally handled recent credit market challenges well, and regulatory changes have improved the stability of the banking system.

VI. Market Data & Notable Quotes

• VIX: 14 (near year-to-date low)
• 10-Year Treasury Yield: 4.14%
• 30-Year Treasury Yield: 4.82%
• OpenAI Valuation: Estimated over $800 billion (recent reports)
• AI Startup Funding: Over $150 billion in 2023
• Jennifer Shawnberger: "They've done three cuts this year and they're at a point where they can sort of take stock on the economy and see how the data come in."
• Corey Johnson: "The construct of the mag 7 is a market phenomenon not a business phenomenon."
• Michael Per: "Sony is just ridiculously overpaying for things."

Conclusion:

The market currently exhibits low volatility, with minimal movement across major indices. Key themes for 2026 include the evolving Federal Reserve policy, the rapid growth of AI, the potential for a rebound in the gaming sector, and the ongoing performance of the banking industry. Investors should closely monitor these developments and consider the factors influencing each sector to make informed investment decisions. The AI sector, while promising, faces potential regulatory hurdles. The gaming sector is poised for growth with the release of GTA 6, but faces challenges in the console market. The banking sector's performance will depend on capital markets, net interest income, and regulatory changes.