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GDP Growth Is AI-Powered & G-Shaped (Not K-Shaped)
Looking solely at Q2’s GDP growth rate, one would think the economy is weakening. Not so, say Ed and Elias. In fact, demand of all types strengthened last quarter, buoyed by brisk consumer spending, thanks to the Baby Boomers, and brisk business investment, thanks to the AI boom. The lower GDP growth rate was a function of surging imports, which aren’t bad news. Imports often rise in response to a strong domestic economy. … Also: As the economic engine heated up last quarter, so did inflation. The same consumer spending and AI capex trends keeping the economy vibrant are also boosting inflation, along with higher energy prices. … And: Ed reviews “Shipwrecked: Nightmare at Sea” (+ + +).
GLOBAL MARKET CALL: Damage From AI & War Shocks Has Been Minimal
The global economy has been hit by two shocks this year and absorbed them well. The war that started in March pushed oil prices higher and disrupted global supply chains. The AI trade then took a dive in July, with Asian semiconductor stocks hit the hardest. Neither the initial shocks nor the aftershocks seem to have damaged the global economy so far. President Donald Trump said on Saturday that he will hold off on a fresh attack on Iran if a deal can be reached quickly to reopen the Strait of Hormuz and end Iran's nuclear program. The price of a barrel of Brent crude oil is down $4 this evening to $84. Last week on Thursday, Samsung reported a 19-fold increase in Q2 operating profit to 89.5 trillion won, telling investors the memory shortage is set to run into 2028. AI-related stocks rebounded. Here's more: (1) Global Economy. Emerging economies took the war on the chin. Their industrial production fell sharply following the beginning of the war, but since has stabilized, while production in the advanced economies barely registered the shock (chart). Export volumes tell the same story with more volatility. Hardest hit, of course, were the Middle East countries that rely on safe passage for commercial shipping through the Strait. Forward revenues per share of the All Country World MSCI is at a record high (chart). There's no sign of a global recession or even a slowdown in this series. Copper is at a record high (chart). It has tracked the Emerging Markets MSCI (in local currency) closely for many years (chart). It is a sensitive indicator of global economic activity, which is getting a strong boost from the AI boom, requiring lots of copper. The FIBER Industrial Materials Spot Price Index is near its recent cyclical high (chart). It too is highly correlated with the Emerging Markets MSCI (in dollars). This is another sign that the global economy is performing well. (2) Stay Home vs Go Global. The All Country World ex-US ETF and the US MSCI ETF have moved stride for stride this year, both marginally below their recent highs (chart). The ratios of the US MSCI to the Developed World MSCI have been relatively flat since early 2025 (chart). The ratios of the US MSCI to the Emerging Markets MSCI have declined sharply since early 2025. Both rose sharply in July as South Korea and Taiwan were hard hit by corrections in their AI trades (chart). (3) Performance. China led all country ETFs in July with a 15.5% gain, with Poland, Hong Kong, Indonesia, and Singapore following as momentum shifted into the markets that had been left behind (chart). South Korea lost 22.2%, Taiwan 11.1%, and Vietnam 8.1% as the AI momentum trade faltered. This year to date, the playbook remains the same. South Korea is up 61.6% with Taiwan up 52.0%. EM ex-China is up 26.7% versus 9.5% for the US (chart). China remains firmly negative. (4) South Korea. Korea leads the world’s stock markets ytd for a good reason: Its exports are booming (chart). The KOSPI’s correction is a momentum unwind. The index closed July at 6,595.4 with support near its 200-day moving average of 5,884.7 (chart). Friday’s 17.91% gain shows buyers stepping in. It is still up 110% over the past 12 months. The South Korea MSCI is trading at a 4.5 forward P/E, the lowest reading in its history (chart).
US SECTORS CALL: Information Technology Is On Sale
The S&P 500 closed Friday at 7,489.72. It has been stuck around 7,500 in a summer stall that actually started May 14. Below the calm surface of the market, there has been plenty of turbulence. Adding to last week's volatility was the forced liquidation of Leopold Aschenbrenner's Situational Awareness hedge fund. Apparently, Leo was unaware of the risks of leverage bets in the stock market. His fund grew from $225 million to $45 billion in under two years. It was also levered roughly four times, and the same concentration that produced those gains worked in reverse in July. His largest positions included Nebius, SanDisk, Micron, and CoreWeave, all down more than 15% last month, while his shorts in software moved against him. July was a good month to be long software and short semiconductors (chart). Leo was on the wrong side of both trades. We continue to recommend market-weighting the S&P 500 Information Technology sector (table). The recent selloff in the AI trade represents a buying opportunity, in our opinion. Citadel thought so when it snapped up Leo's distressed fund. Goldman Sachs, JPMorgan, and Bank of America issued margin calls. Citadel bought the entire public book in one trade on Thursday morning. Nebius, CoreWeave, and IREN rallied hard once the overhang cleared, though all remain well off their cycle highs (chart). The S&P 500 Information Technology sector is cheap, trading at a forward P/E of 20.0, only slightly higher than the S&P 500 valuation multiple of 19.4 (chart). The S&P 500 Semiconductors industry is selling at a significant discount to the market with a forward P/E of 15.9 (chart). It has dropped in recent weeks as forward earnings rose faster than stock prices fell. None of the selling was driven by a deteriorating outlook. Samsung confirmed as much this week, reporting a 19-fold increase in Q2 operating profit to 89.5 trillion won, telling investors the memory shortage is set to run into 2028. Thursday's tech-led rebound was wildly uneven. Among the tech industries that rose that day were Semiconductor Equipment (up 13.6%) and Systems Software (12.6%); among those falling were Application Software (down 2.4%) and IT Consulting (down 3.5%) (chart). The S&P 500 Information Technology sector rebounded 5.2% on Thursday. The four biggest spenders on AI infrastructure all reported earnings over the last two weeks, with different market reactions. Microsoft raised its capital spending guidance, and its share price rose 16% on Thursday, its best day since 2008. Amazon raised its spending too, and its stock jumped 15% on record AWS growth. Meta raised its spending but fell 8% on weak revenue guidance and a 91% y/y drop in Q2 free cash flow. Google, meanwhile, fell over 7% following its announcement of planned increased capex last week. Google and Amazon have been the clear leaders recently thanks to exceptional growth in Google Cloud and AWS, while Meta and Oracle continue to lag on ROI concerns (chart). Meta trades at 16.2 times forward earnings, the cheapest of the hyperscalers, against Amazon at 24.7 (chart). Nvidia and Alphabet are also relatively cheap, with their multiples at 18.0 and 19.4 currently. Apple is a Mag-7 company that has resisted massive AI capex. It has been rewarded with a multiple of 34.8. Semiconductor stocks closed Friday roughly unchanged and finished July with their worst month since 2008. The memory names show a clear reset: Micron, SanDisk, and SK Hynix all are trading at 30%-50% below their highs even after Thursday, when Micron rose 18% and SanDisk 26% (chart). Micron trades at just 5.8 times forward earnings, and SanDisk trades at 6.4.
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