ArPas

[fred hickey @htsfhickey]

In recent weeks, how many times have you heard from Wall St. talking heads that the essentially closed Strait of Hormuz, soaring energy prices (on top of already climbing inflation), shortages (examples: jet fuel in Asia & Europe, nat. gas, fertilizer, helium, Sulphur etc.) don't matter because the soaring stock market is "all about earnings"?

In my case, I can't count the number of times I've heard or read it (so many). Earnings growth is Wall Street's justification for pushing up stock prices to record highs.

However, that argument is mostly BOGUS.

According to Deutsche Bank analysis released this week, the Q1 earnings growth for the S&P 500 is projected at 19% and Micron and Nvidia alone are driving over 50% of that total growth. That number has received some notice in the financial media.

But nowhere do I hear that there's a gigantic timing mismatch between what Nvidia and Micron report as earnings in Q1 and what their customers (mostly hyperscalers) report. Nvidia & Micron's semiconductor sales are reported currently, much of which immediately flows to their bottom lines as earnings (especially with their inflated margins due to shortages). Yet the hyperscalers' capex costs for their datacenter buildouts are mostly put on the balance sheet (inventories, property, plant & equipment) and do not subtract from their bottom lines until the datacenters are put into use. And even then, the costs are spread out over several years into the future (as depreciation).

But Nvidia & Micron are not the only stocks in the S&P 500 whose current earnings are benefitting from the great hyperscaler datacenter buildout. What about the skyrocketing earnings from SanDisk, Western Digital, and Seagate - as well as other beneficiaries such as Broadcom, Cisco Systems (networking equipment) and Dell (computer servers used in datacenters)?

I asked AI (Gemini) to include those names and here's the answer:
"The "Extended AI Infrastructure" Group: When adding Broadcom (which recently reported 29% revenue growth), Dell, and the storage players (Western Digital/Seagate), this expanded group of eight companies accounts for approximately 68% to 72% of the index's total year-over-year EPS increase."

"The tech sector as a whole is expected to grow earnings by 44% to 45% this quarter, effectively carrying the rest of the market. Without these specific names, the S&P 500's Q1 earnings growth would likely drop from 19% to the low single digits."

So, never mind the question as to whether all this massive AI datacenter spending will ever lead to any decent returns on investments (ROIs). Excluding the earnings from the AI datacenter suppliers (adjusting for the timing mismatch) creates "low single digit" earnings growth for the rest of the S&P 500 index. Does that justify soaring stock prices to record levels in the current unstable global economic environment?
It does not! Investors are caught up in an irrational stock mania/bubble based upon faulty analysis and it will end as all manias do - very badly.

[ArPas @ArmandPassilli1]

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[ArPas @ArmandPassilli1]

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[ArPas @ArmandPassilli1]

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[ArPas @ArmandPassilli1]

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