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On Australia & The Global Mountain Of Debt
The Reserve Bank of Australia is tightening monetary policy to corral stubbornly high inflation and limit imported second-round inflationary effects from the Middle East war. Australia serves as a bellwether for the global economy, argues William, so its challenges presage the same for other economies. … Aggravating Australian inflation stickiness is hot services inflation rates and years of productivity declines. … Also: Mountainous government debt globally hasn’t alarmed global financial markets much, yet. Will it when money is no longer cheap? William looks at the risks of such high debt, particularly for emerging market economies, and the potential responses of governments.
On Inflation, Capital Spending & Economic Resilience
Today, Ed and Elias take a deep dive into core inflation, i.e., minus volatile food and energy prices. The Fed’s preferred measure, the core PCED, justifies tightening monetary policy—both the recent September rate hike and presumably future ones provided that underlying inflation remains elevated. … The alternative measure, the core CPI, is structured differently, causing it to diverge from the core PCED in response to price changes in AI-related spending, financial services, and shelter. … The US economy should remain resilient during this tightening cycle, as GDP growth has become increasingly desensitized to interest rates. That’s one reason the recession widely expected in 2022 and 2023 never happened.
US SECTORS CALL: Semiconductors, Utilities & Materials
Stocks opened last week with a big rally. The S&P 500 rose 1.5% on Monday, and the Nasdaq closed at a record high as oil prices and bond yields fell. The reprieve didn't last. The 10-year Treasury yield climbed to 5.17% by Friday's close, its highest level since 2007. The S&P 500 still finished the week up 1.2%, and six of the 11 sectors rose. Information Technology (MW) led with a 3.1% gain, followed by Communication Services (MW) at 2.2% and Health Care (OW) at 1.7% (chart). Utilities (OW>MW) was the weakest performer at -3.2%, followed by Energy (OW) at -3.0% and Financials (OW) at -1.6%. Here's more on the S&P 500 Information Technology, Utilities, and Materials sectors: (1) Information Technology. Monday's rally was led by chip stocks, which jumped on early signs of success for Meta's Muse agent. AMD rose 10% to close above $1 trillion in market value for the first time, and Intel gained 12%. The S&P 500 Semiconductors industry rose 3.6% for the week and is up 6.8% mtd (chart). The CPU makers did the heavy lifting for the industry. Muse does more than answer questions. It runs a browser, calls external tools, and keeps working on tasks in the background. That work needs general-purpose processors alongside AI accelerators. A report that AMD plans a 10% price increase in Q4 helped too. AMD is up 34.0% mtd, while Nvidia is up just 1.9% (chart). Analysts have continued to raise their estimates for companies in the Semiconductors industry index. Their consensus estimates imply collective earnings growth of 113.0% this year and 73.5% in 2027, on revenue growth of 71.6% and 60.7% (chart). The industry's forward profit margin is 51.2%. Investors still pay less for these earnings prospects than they do for prospective earnings in the rest of the market as a whole. The Semiconductors industry index trades at 16.5 times forward earnings against 19.2 for the S&P 500. The industry now accounts for 53.8% of the Information Technology sector's forward earnings, up from 51.9% in August, against 41.2% of its market cap (chart). We maintain our market weight rating on Information Technology. (2) Utilities. Rising bond yields have hit Utilities harder than any other sector. Utilities is down 7.4% ytd, the worst of the 11 sectors. Electric Utilities is down 8.3% ytd, and Independent Power Producers is down 11.2% (chart). Water Utilities is the only industry in the sector still up this year, but by just 0.3%. Earnings and margins are not the problem; valuation is. The sector's forward earnings is up 6.4% ytd, while its forward P/E is down 12.4% ytd (chart). The bears have a case. At 5.17%, the 10-year Treasury yield competes with utility dividends for income investors. Electric Utilities, the sector's largest industry, is 11.7% below its 200-day moving average (chart). Analysts have also trimmed their 2027 earnings growth forecast for the sector to 9.1%. We think the multiple has suffered enough damage. Analysts expect the sector's earnings to grow 11.3% this year, and it trades at 15.5 times forward earnings against 19.2 for the S&P 500 (chart). That discount pays investors to wait out the bond market. We are retaining our overweight rating on Utilities. (3) Materials. President Trump and President Xi met in Washington on Thursday and extended their trade truce by two months, to January 10, 2027. They made no firm new commitments on rare earths. Materials rose 0.3% this week. Copper led the metals industries, up 1.1% (chart). The sector's earnings boom is mostly a 2026 story. Analysts expect Materials earnings to grow 38.7% this year and 11.4% next. The Steel industry shows the drop-off most clearly. Its earnings are forecast to jump 137.4% this year, grow 8.0% in 2027 and fall 6.9% in 2028 (chart). Both 2027 and 2028 estimates have been gradually falling over time. The Copper industry is the exception. Its earnings are forecast to grow 70.3% this year and 38.9% in 2027 (chart). Its revenue growth is expected to accelerate from 14.0% to 20.6%. The copper price rose to $6.70 per pound on Friday, above the $6.57 record we noted on August 9. Gold has not kept pace. The Gold industry fell 1.7% this week. The gold price is $4,286 per ounce, down 1.0% ytd and below our $5,000 year-end target (chart). Analysts have cut the Gold industry's 2026 earnings growth forecast to 36.1% from above 50% earlier this year (chart). The industry still earns a 38.8% forward profit margin and trades at 12.1 times forward earnings. Investors have priced in the forecast 2027 earnings slowdown. The sector's forward earnings is up 22.6% ytd, while its forward P/E is down 9.7% (chart). At 17.0 times forward earnings, Materials trades below the S&P 500's 19.2. We are retaining our overweight rating on Materials.
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GENERAL MOTORS: PRICE, FORWARD EARNINGS & VALUATION
S&P 500 COMMUNICATION SERVICES SECTOR & INDUSTRIES: ANNUAL EARNING GROWTH FORECAST
MORGAN STANLEY: PRICE, FORWARD EARNINGS & VALUATION
TARGET: STOCK PRICE INDEX, EARNINGS & P/E
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