GDP for the second quarter grew at 3%, showing no sign of a slowdown. Concurrently, there is an aggressive global monetary easing going on worldwide, as almost every central bank in the world is lowering interest rates. Money supply is expanding, financial conditions are easing, economic conditions are good, and global stocks are reaching for all-time highs. The number of advancing stocks to declining stocks, otherwise known as “breadth”, is suggesting a continuing bullish bias.
It is unusual for central banks to begin easing financial conditions when markets are at their highs, but usually a sign that expensive asset classes should continue to become more expensive. It may be argued that there will be a continuing “broadening” of the market and a “catching up” of sectors that have lagged the market. Central banks usually ease in response to weakness; today, they are seemingly lowering interest rates to reflect a lower level of inflation.
Of course, there are weak points in the economy. The most recent report from ISM on U.S. manufacturing, which accounts for 10.3% of the economy, indicated that it is in a recession and has been in contraction territory for the past six months. In that report, which is a canvass of major purchasing managers at US industries, only 2 of 18 industries saw a lift in new orders or an increase in employment growth. However, with prices paid for manufacturing inputs falling to a nine-month low and falling interest rates, conditions are poised for a rebound in activity in the coming months.
The corporate insider’s sell-to-buy ratio is at its highest since 2021, but as they sell stock, retail investors are turning more bullish, driving stock prices up.
Data center construction is increasing significantly due to the computer power demands of artificial intelligence, particularly “hyperscale” data centers which house IT equipment and network infrastructure that process and store large amounts of data. These data centers are at least 10,000 square feet and hold 5,000 servers at a minimum. A hyperscale data center can consume 20-150 megawatts of electricity, which is comparable to the electricity needs of a large city, which is putting huge demand on electricity and increasing the need for electrical infrastructure. Nevada based Synergy Research Group forecasts that 120-130 hyperscale data centers will come online each year for the next decade. They also predict that the total capacity of hyperscale data centers will double again in the next four years. Other research firms like ABI anticipate that 8,410 data centers will be in operation by 2030. All of this is causing explosive growth in servers, server cooling systems (which consume up to half of a data center’s power needs), AI chips (GPU’s, FPGA’s, and ASIC’s), electrical infrastructure, electricity itself, and inputs needed to make that electricity like natural gas and uranium.
With interest rates poised to fall, both in the US and worldwide, and a healthy economy, stock indices are underpinned by healthy tailwinds.
The U.S. election is a toss-up at this point. Both presidential candidates will significantly add to the absolute level of government debt, which is a storm cloud on the horizon, but probably won’t become an issue until the United States is downgraded by major ratings agencies. As for geopolitical tensions in the Middle East, the defense and energy sectors are poised to benefit from heightened uncertainty, as will precious metals like gold.
For the first nine months of the year, the S&P 500 index was up 20.8%, the Dow was up 12.3%, and the Nasdaq was up 21.1%.
