Inflation Retreats, While Earnings Soar

CommentaryLast Thursday, Taiwan Semiconductor Manufacturing (TSM) reported its June sales soaring 67.9% to a record $13.99 billion. TSM also said its second-quarter sales rose 36% and earnings surged 77.4%. Then they raised sales guidance above analyst estimates. That led to profit-taking and mean reversion algorithms causing a short sell on the news, but TSM’s results and guidance bode well for all AI stocks.Underlining the strength of data center stocks, The Wall Street Journal published an article entitled: “AI Data-Center Construction Is Booming—but Not Much Else Is.” This indicates AI data center stocks will likely dominate second-quarter announcement season. Not only did TSM pre-announce record sales growth, but ASML also announced stronger-than-expected second-quarter results and raised its guidance.Also, WD-40 surged in the wake of a 43.1% earnings surprise. The analyst community expects S&P 500 second-quarter earnings to rise 22%, but due to wave after wave of positive analyst earnings revisions, expectations are rising even more for many leading stocks. Typically, positive analyst earnings revisions precede positive earnings surprises. Energy-related stocks are forecasted to post strong earnings, as well as information technology and semiconductors, then material stocks. These three (of 11) S&P 500 sectors are forecasted to post stronger second-quarter earnings vs. the S&P 500, so we remain in a narrow market.Here are the most important developments recently and what they mean:- An important event this week will be GE Vernova’s (GEV) earnings announcement on Wednesday. I expect that GEV will exceed analysts’ consensus estimate for 18.1% sales growth and 73.6% earnings growth, but by far the most important development will be the company’s guidance and growing order backlog. Remember, GE Vernova’s backlog is about 4x 2025 sales.- New York became the first state to impose a data center moratorium that is only expected to last a year. The irony is that upstate New York is ideal for data centers, since it has (1) clean hydroelectricity, (2) abundant land, (3) cold nights to vent the heat from data centers, and (4) fast fiber optic internet. Concerns over water are not an issue in New York. The data center concerns in New York is attributable to a 20% increase in electricity in the Buffalo area over the past few years after the data centers moved in. The truth of the matter is upstate New York should be a data center haven, so it will be up to Brookfield and other data center operators to assure local communities and the state that data centers will boost the state’s economic growth.- The U.S. has been hitting Iran hard, especially after the U.S. military suffered more casualties at a U.S. base in Jordan. Southern Iran has been hit especially hard, and many bridges have been destroyed because the U.S. wants to stop the transportation of drones and missiles to the coast near the Strait of Hormuz. Despite slightly higher crude oil prices, there has been virtually no negative impact on the U.S. economy.- New British Prime Minister Andy Burnham is promising to revitalize stagnant economic growth and has promised a 10-year plan to be announced later this year. Interestingly, Burnham wants to revitalize Britain’s manufacturing might, but unfortunately, high electricity prices severely impede manufacturing industries in the United Kingdom. I wish Prime Minister Burnham well, but the reason that Britain gets a new Prime Minister almost every year is that the bond vigilantes squelch almost all government spending proposals, as former Prime Minister Liz Truss knows all too well. So, if Burnham wants to boost manufacturing, his only option is to tap Scotland’s vast energy resources, especially natural gas.- The Labour Party in Britain has been suppressing Scotland’s economic growth by pushing expensive green energy options that are so cost-prohibitive that approximately half of British households need subsidies to pay their electric bills. Since Prime Minister Burnham and many of his followers are from the north of London, it will be interesting to see if they embrace Scotland’s vast energy resources to revitalize Britain’s economic growth.Overall, this is a good time to remind investors that the U.S. remains an economic oasis compared to the rest of the world. There will be wave after wave of second-quarter earnings announcements this week. The recent profit-taking in AI and data center-related stocks has been unwarranted, so I expect a big rebound propelled by better-than-expected earnings announcements and positive guidance.