Record ETF Inflows, Palantir leaves NYSE, Inflation Insights

Good Afternoon. The markets had a down week, with major indices losing approximately half of their post-election gains. The macro data, especially inflation (CPI) and retail sales, came stronger. The Fed uses the PCE index and not CPI for its inflation mandate—more on the difference between CPI and PCE in the curated insight section below.

On Thursday, Federal Reserve Chair Jerome Powell stated that robust U.S. economic growth allows policymakers to carefully assess the pace and extent of future interest rate reductions, raising doubts about the December rate cut.

Next week, the main event will be Nvidia's earnings on Wednesday after market close. Based on its track record, Nvidia should beat expectations, but by how much will matter a lot. In addition, the guidance coming from Nvidia will be very important, especially on Blackwell chips. Also, the flash PMI to be released next Friday will be important for sentiments.

For the week:

• The S&P 500 is down 2.08%, the Nasdaq is down 3.15%, and the Dow 30 is down 1.24%.

  

  Source: barchart

CNN's Fear & Greed Index now stands at 51 (Greed) out of 100, down 10 points from last week. Details here

The top five trending stocks on Reddit are SPY, Nvidia, Intuitive Machines, Tesla, and Palantir. Read More

Here is a summary of this week’s key economic releases:

According to the Bureau of Labor Statistics, the Consumer Price Index (CPI), a key measure of inflation, rose by 2.6% year-over-year in October, up from 2.4% in September. The result aligned with economists' forecasts, reflecting a modest acceleration in price pressures. Check here for the item-level YoY price increases. Eggs led the way with a 30.4% YoY increase.

Shelter costs, accounting for a third of the CPI, rose 0.4% in October, doubling September's pace and up 4.9% year-over-year, contributing over half of the CPI's overall increase.

Source: Bloomberg

Target Rate Probabilities for Dec 18th FOMC Meeting:

CME Fed Watch: * Data as of 16 Nov 2024 03:18:05 CT

Chair Powell says the Fed doesn’t need to be ‘in a hurry’ to reduce interest rates. Read

Record ETF Inflows: A surge in investor demand, record-high product launches, and a prolonged bull market following Donald Trump’s presidential victory have propelled -

• Net inflows into global ETFs exceeded $1.4tn in the first 10 months of the year, surpassing the $1.33tn accumulated in all of 2021. Read

• Net inflows of over $913 billion into U.S. ETFs. This figure surpasses the previous record set in 2021, with an entire month remaining. Read

  

xAI Valuation: Elon Musk’s xAI, is reportedly seeking to raise $6 billion in funding, targeting a valuation of $50 billion. Read

Palantir To Join Nasdaq100: The Company announced plans to transfer its stock listing to the Nasdaq from the New York Stock Exchange, effective November 26. The company anticipates meeting eligibility for inclusion in the Nasdaq 100 Index, which tracks the largest nonfinancial firms on the exchange—a move likely to attract interest from funds tied to the tech-focused index. Read

SpaceX Valuation: is reportedly in preliminary talks to sell insider shares, potentially raising its valuation to approximately $255 billion. This represents a significant premium over its prior valuation of $210 billion and would further solidify SpaceX’s position as the most valuable private company in the United States. Read

Delinquencies on office loans surged 56 basis points between September and October, reaching 10.35%—the highest level since August 2012, according to Moody’s Ratings. The rise underscores mounting pressure on landlords struggling with overdue debt obligations. The overall commercial delinquency rate edged up from 6.88% to 6.94%, reflecting a $1.93 billion increase, driven primarily by $831.1 million in delinquent office loans. Read

Hedge funds Lose: Hedge funds holding short positions against Tesla incurred an estimated $5.2 billion in paper losses between Election Day and Friday’s close, according to Bloomberg's analysis of S3 Partners' data. Read

TSMC Gets $6.6bn Grant: The Biden administration finalized a deal to grant Taiwan Semiconductor Manufacturing Company (TSMC) up to $6.6 billion to support three new factories in Phoenix, accelerating efforts to boost U.S. chip production. Funding will be distributed in stages as TSMC achieves key milestones. Read

Home Depot Beat: Home Depot revised its forecast, projecting a smaller decline in annual same-store sales, driven by steady demand from professional contractors and increased spending linked to hurricane recovery in the current quarter. The leading U.S. home improvement retailer exceeded expectations with its third-quarter results, marking a sharp improvement from the year's first half when consumer spending remained subdued. Read

Walt Disney Beat: Walt Disney reported quarterly earnings surpassing Wall Street expectations and strong forward guidance. The company projected adjusted EPS growth in the high single digits for fiscal 2025 despite approximately $8 billion in capital expenditures and announced plans to repurchase $3 billion in stock. Disney anticipates double-digit per-share earnings growth in fiscal 2026 and 2027, driven by strategic investments in theme parks, its cruise fleet, and streaming platforms, which are expected to yield significant returns. Read

Cisco Beat: Cisco projected quarterly revenue and profit surpassing Wall Street expectations, following strong first-quarter results fueled by rising demand for its networking equipment amid the AI-driven surge. The acceleration in AI investments, requiring significant computational capacity, has bolstered demand for data centers, which rely on Cisco's ethernet switches and routers. Read

Applied Material Miss: Applied Materials issued a first-quarter revenue forecast below Wall Street expectations, reflecting tepid demand for chipmaking equipment outside the AI sector. While demand for advanced equipment used in AI chip production remains strong, broader market weakness has constrained spending, weighing on companies like Applied Materials. Read

Why The Fed Uses PCE Inflation Index (Over CPI):

While most investors associate inflation with the Consumer Price Index (CPI), the Federal Reserve relies more heavily on the Personal Consumption Expenditures (PCE) Price Index when shaping interest rate decisions. The Fed’s 2% inflation target is based on the PCE, not the CPI, reflecting its preferred gauge of price stability.

However, discrepancies between the two indexes can complicate the narrative, particularly over shorter timeframes. For example, in early 2024, the CPI signaled stagnation in inflation progress, whereas the PCE painted a more optimistic outlook. While both measures now trend in the same direction, the CPI reflects more persistent inflation pressures than the PCE.

Source: Morningstar

Since 2000, the Federal Reserve has prioritized PCE inflation as its primary gauge of price pressures in the U.S. economy, with several advantages outlined by former St. Louis Fed President James Bullard. Read

• Comprehensiveness: PCE data captures a wider range of goods and services prices, including spending by both rural and urban consumers, making it more inclusive than CPI.

• Adaptive weighting: PCE adjusts weights more frequently (monthly versus biennially for CPI), allowing it to reflect consumer substitution patterns. Bullard highlighted this flexibility in 2022, noting how PCE quickly adapted to the shift from services to goods consumption during the COVID-19 pandemic.

• Revisions: PCE data can be retroactively revised to incorporate new information or methodologies, unlike CPI, which is typically only revised for seasonal adjustments.

  The last 10-year PCE vs CPI comparison is below. The CPI generally tends to report somewhat higher inflation due to these differences. CPI data is released early, and hence, it catches more headlines. So it's not that we should not use CPI, but it’s essential to know its limitations and the Fed’s preference for PCE. Read

  

  Source: St. Louis Fed

Companies With International Exposure Growing Faster: Recent trends suggest that the stronger U.S. dollar has not led to weaker earnings and revenue growth for S&P 500 companies with greater international revenue exposure. According to FactSet's Geographic Revenue Exposure data, companies generating over 50% of sales outside the U.S. are outperforming those with more domestic exposure in Q3 2024.

• The blended earnings growth rate for internationally focused companies is 12.9%, compared to just 1.5% for their domestically focused counterparts.

• Similarly, these international firms' blended revenue growth rate is 6.1%, slightly ahead of the 5.3% growth seen among domestic revenue companies. This outperformance is primarily driven by companies like NVIDIA, Pfizer, Alphabet, and Meta Platforms, three of which are part of the "Magnificent 7."

• Aggregate revenue exposure for the S&P 500 companies is 59% US vs. 41% International. Read

  

Next 12 Month Outlook:

Multiple factors impact the following twelve-month outlook for the markets and economy. As the markets are at an all-time high with the stretched valuations (except small caps), earnings growth needs to keep up for markets to deliver above-average returns next year. This week, Bloomberg reported that Wall Street analysts slightly lowered their 12-month S&P 500 earnings forecast from $277 last year to $274 as the companies hesitated to give guidance. Wall Street analysts got things wrong many times, like this year.

Source: Bloomberg

Wall Street analysts got things wrong many times, like this year. Still, market participants look at these forecasts seriously, so in the short term, it may put breaks on the market rallies; however, next year, as long as PCE inflation remains under 2.5%, which is highly likely, the Fed will continue with rate cuts and drive EPS growth. If the Trump administration moves quickly on tariffs, it may raise inflation and slow down Fed rate cuts, thereby slowing EPS growth. A clean sweep election outcome makes this a real possibility, but these policy actions take time to materialize. Also, the new administration will have some smart people like Elon Musk and others advising Trump. With Tesla's huge China exposure, I am sure that Musk will guide Trump not to go all out on tariffs and to do economically sensible things. The US economy is expected to grow at a healthy rate next year as per the Goldman Sachs forecast released this week -

Source: Goldman Sachs