Hamilton Capital Partners | Atlanta, GA — Hamilton Capital Partners

AI Rally Continues

By Kelvin Lee, Alonso Munoz


Quarter Earnings Wrap Up:

This week marks the end of earnings season for fourth quarter of 2023, and what an earnings season it was! Overall, the S&P 500 beat expectations for a 15th consecutive quarter with 377 of the S&P500 companies beating earnings and revenue estimates. The index’s earnings rose 8.2% from last year, much higher than the expected 1.2%. At the sector level, technology and communications performed best with better-than-expected sales and margins from last year. Obviously, the M7 stocks were the drivers here and the positive price reactions from these mega caps has led the S&P to its all-time high. Short story, things went well, much better than what Wall Street expected. The “pros” were mostly caught off guard coming off negative sentiment stemmed from high interest rates, multiple ongoing wars, and a Biden vs Trump rematch. Here’s some things that caught our attention:
AI Hype? Fact or Fiction

Instead of AI being referenced thousands of times on earnings calls, it was only a few hundred. Companies pulled back from the AI claims that they made last quarter. That’s a relief, since having an intern use Chat GPT probably doesn’t qualify as being AI powered. However, that’s not to say tech companies aren’t spending heavily on AI. Last year’s “Year of Efficiency” helped advance margins, and now, cash is being put to work in increased forecasted capex spending on datacenters and learning models. That’s great news for true AI forward companies like Microsoft and Nvidia on realizing their growth potential. We’re forecasting trillions of dollars to be spent on AI over the next decade and firms at the forefront now still have plenty of runway to grow market share. We are in an amazing time where accelerated computing is decoupling Moore’s Law, and unlike the dot com bubble twenty years ago, earnings are growing in line with expectations.


GLP-1 Miracle Drugs

The Health Care sector recorded the fourth-largest percentage decrease in estimated earnings of all sectors since the start of the quarter. Main concerns we saw here were the growing number of generic competitions from expiring patents and increasing medical care costs for insurers. However, pharmaceuticals with GLP-1 exposure were notable outliers. Eli Lilly and Novo Nordisk are likely to continue to top sales expectations with their rapidly expanding diabetes and obesity franchises. We expect this trend to continue to dominate the Pharma sector for the next few years. Like AI, there’s more demand than supply and a huge unrealized market exists, especially as trials continue to indicate further positive health effects for GLP-1.  We’re also looking forward to some key product approvals in Alzheimer treatments later this year. Eli Lilly’s Donanemab can be another catalyst for growth as legacy products start slowing down.


Retail Weakness

While the fourth quarter was strong across the board for both consumer staple and discretionary stocks, the outlook for 2024 generally disappointed investors. Continued weakness in China has and will continue to hurt luxury goods providers like Gucci and Hermes who’ve relied on Asia in the past to make up for slower sales in North America. In the U.S., the earnings for food and household product manufacturers are expected to slow as well. Companies like Coke and Proctor & Gamble have raised prices with (and exceeding) inflation, and the inelastic demand for their products resulted in double digit earnings growth over the past two years. Inflation has fallen and high prices are no longer justifiable, as a result, these company’s sales and margins are going to have to take a hit. Great for consumers, not good for shareholders. Retail also forecasted weakness with the likes of Nike, forecasting much lower traffic into their stores this year. The fervid retail sales numbers from last year are set to wane now as shoppers run out of savings.




To contact the author of this story:
Kelvin Lee at kelvin@hamiltoncapllc.com


To contact the editor responsible for this story:
Alonso Munoz at alonso@hamiltoncapllc.com








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