This is NOT SEEN very often: CIO highlights expansive earnings trend

Here's a summary of the provided YouTube video transcript:

Key Concepts

• Earnings Season Performance: Corporate America's strong earnings and revenue performance, exceeding expectations.
• Market Breadth: The outperformance of the broader market (493 companies) beyond the "Magnificent 7" tech stocks.
• Economic Growth: Underlying economic strength supporting corporate earnings, with an estimated full-year growth of around 1.8%.
• Consumer Spending: Differentiated consumer behavior, with higher-income consumers being selective and lower-income consumers spending less.
• Interest Rates and Fed Policy: The market's focus shifting from inflation to jobs, with expectations of Federal Reserve rate cuts.
• AI as a Market Force: The continued impact of Artificial Intelligence on economic and market trends, extending beyond tech to adjacent sectors.
• Investment Returns (ROI): The critical need for tech investments, particularly in AI, to translate into tangible revenue and returns.

Earnings and Market Performance

The transcript highlights an "absolutely mind-boggling" earnings season, with corporate America exceeding expectations not only in earnings but also in revenue. A key observation is that the broader market, represented by 493 companies (the "light green" in a chart), significantly outperformed the "Magnificent 7" tech stocks. This broad-based strength is seen as a positive sign for the market, indicating that economic growth is robust enough to support earnings across various sectors. Sinead Grant, Chief Investment Officer at BNY Wealth, emphasizes that while they are favorable on tech, they want to see the rest of the market participating, which is now happening.

Economic Growth and Consumer Behavior

The strong corporate earnings are attributed to stronger economic growth, with an estimated full-year growth rate of around 1.8%. This growth is underpinned by continued consumer spending, although the transcript notes that this spending is not uniform across all consumer segments. While aggregate consumer spending remains, there's a clear divergence: higher-income consumers are becoming more selective, while lower-income consumers are spending less. This is consistent with breakdowns of retail sales by income cohort. Despite some caution from consumers, evidenced by retail sales figures coming in less than expected (specifically the control number being negative), other indicators like the Johnson Red Book show solid performance. The transcript points to distinct winners in the retail space, such as Abercrombie (up 28%), Gap, Ross Stores, and Walmart, suggesting that even with caution, certain segments are performing well.

Corporate Resilience and Innovation

American corporations are adept at bringing results to the bottom line, even when the economy isn't in a "complete tailspin." This resilience is attributed to efficiency and innovation, factors expected to continue driving earnings expansion. The transcript notes this is the "fourth straight quarter of earnings expansion," a significant achievement.

Interest Rates and Federal Reserve Policy

The discussion shifts to the two primary drivers of equity markets: earnings and interest rates. With earnings performance strong, the focus turns to interest rates. The market is observing a softening in the labor market, which, along with inflation, is weighing on lower-income consumers. The sentiment regarding the Federal Reserve's policy is swinging from a focus on inflation to a focus on jobs. Expectations for rate cuts are increasing, with the CME Fed Funds futures indicating a higher probability of cuts.

Projected Fed Funds Rate:

• BNY Wealth models anticipate another 25 basis point hike (likely in December).
• Following this, they expect three to four additional cuts by the end of next year, totaling 75 to 100 basis points.
• This could lead to the lower end of Fed Funds reaching approximately 2.5%.

2024 Market Outlook and AI's Role

BNY Wealth has an aggressive target for the S&P 500 next year, forecasting an upper end of 7400. This projection is based on an expected earnings expansion of another 14% over the coming year. The implied multiple on earnings of 310 would be in the range of 21-22 times, with tech trading at higher multiples and the rest of the S&P 500 catching up.

Artificial Intelligence (AI) as a Significant Force:

• The AI boom is expected to remain a significant economic and market force in the next year.
• The focus is on increased spending in tech companies and broader proliferation of AI across the market.
• This includes seeing proof-of-concept use cases in sectors like energy and biotech.
• Beyond direct AI applications, the impact is seen in "AI-adjacent" sectors such as industrials and energy, driven by trends like reshoring and electricity supply needs.
• Utilities are highlighted as being in a "sweet spot" due to their traditional safe-haven appeal and their role in supporting the increased electricity demand driven by AI. Some utilities are expected to yield 7-8%, making them attractive.

Potential Wildcard Risk

The primary wildcard risk that could derail this positive outlook is the Return on Investment (ROI) for the significant tech investments being made in AI. While "eye-watering spend numbers" have been observed, these must translate into actual revenue. The transcript emphasizes that this is what they are watching "very closely."