Last week, investors were grappling with the possibility of a new round of interest rate hikes by the Federal Reserve and growing concerns regarding the safety of artificial intelligence. This atmosphere led to considerable fluctuations on Wall Street. The Dow dropped by 1.7%, marking its third consecutive week of losses. This particular index experienced significant pressure from the Fed’s rate increase, especially affecting banking stocks. Goldman Sachs was notably hit, suffering an 8.5% decline over the week, making it the worst performer on the Dow. Other financial institutions, like Wells Fargo, BNY, and Capital One, also saw sharp declines. In contrast, the S&P 500 and the Nasdaq performed slightly better, with the former dropping just 0.08% and the latter gaining 0.7% as investors returned to tech-focused AI stocks following an initial sell-off. Among software stocks, there were some gains, though investors did cash in on profits from Salesforce, which had climbed more than 50% in the current quarter after a tough start to the year. Oil has been another source of volatility, with U.S. benchmark West Texas Intermediate and international Brent crude reaching their highest prices since mid-May due to supply concerns stemming from conflicts in the Middle East. Even though both oil benchmarks faced a downward trend later, the impact on stocks sensitive to oil prices was already set, resulting in declines for companies like Boeing and FedEx.
On Wednesday, the Federal Reserve increased rates by a quarter point, marking its first hike in three years and bringing the benchmark rate to a range of 3.75% to 4%. At the post-meeting press conference, Fed Chairman Kevin Warsh emphasized that inflation remains “too high and has been for too long,” asserting that this increase aims to guide inflation back to the central bank’s 2% target. While this hike was anticipated, Warsh’s repeated mentions of inflationary pressures led to a sharp market downturn. Stocks did see a rebound on Thursday, remaining relatively stable on Friday. Jim remarked that the latest hike complicates profitable stock picking, as investors now find themselves “fighting the Fed.” Higher interest rates typically restrain economic activity by making borrowing costlier, positioning bonds as a more appealing option compared to stocks. The yield on the 10-year Treasury ended the week at 5%, following a peak above 5.04% during Tuesday’s oil price spike. However, it’s important to remember that avoiding confrontation with the Fed doesn’t mean investors should abandon the market altogether. Historical patterns from past rate-hiking cycles often reveal shifts in market leadership, with defensive sectors holding strong initially and technology rebounding later. This highlights the importance of careful stock selection, which is why we increased our position in BNY earlier this week. This bank has a revenue model that leans heavily on fees, making it less vulnerable to the pressures of rising deposit costs and reduced loan growth.
The AI sector faced turbulence last week amid a flurry of conflicting headlines regarding safety issues surrounding artificial intelligence. The debate, ignited by Anthropic CEO Dario Amodei’s essay calling for a pause on the development of advanced AI models, drew mixed reactions from leading tech figures. Notably, OpenAI’s Sam Altman and SpaceX’s Elon Musk echoed Amodei’s concerns, while Nvidia’s CEO Jensen Huang argued that companies should handle their own safeguards. During a “Mad Money” discussion, Huang stressed the importance of proper testing before product launches. The uncertainty surrounding these discussions initially led to significant declines in AI-related stocks, with companies like Intel and Micron dropping over 5%. However, as the week progressed, investor concerns began to ease, and many of those losses were recouped. We took advantage of Monday’s downturn to bolster our position in Micron, as we don’t foresee any substantial slowdown in AI spending. Competitive pressures and the hefty financial motivations in the U.S. and China should maintain momentum in AI development. Conversations at Salesforce’s Dreamforce conference further affirmed our optimism, with predictions of sustained investment in AI. Additionally, rising cybersecurity threats tied to more powerful AI tools could bolster security spending, with CrowdStrike and Palo Alto Networks emerging as top performers for the week, gaining nearly 15% and 10%, respectively.
Speaking of Salesforce, the tech giant utilized its annual Dreamforce conference to highlight the potential of AI as an opportunity for enterprise software rather than the threat many previously anticipated during the so-called “SaaSpocalypse.” This term described the impact of negative expectations on software stocks earlier this year, but positive recent earnings combined with the announcements made at Dreamforce challenge that viewpoint. At the investor day of the conference, Salesforce projected over $63 billion in revenue for the fiscal year 2030, exceeding analysts’ estimates of $59.2 billion. They also introduced AIforce, a new interface integrated across the Salesforce ecosystem, along with Koa, their first reasoning model developed with Nvidia. One noteworthy takeaway from Dreamforce was Salesforce’s focus on how AI can empower clients to optimize their data and analytical capabilities on various platforms such as marketing, customer service, commerce, and sales. Jim mentioned that the market fails to adequately recognize the significance of this shift, deeming the stock to be “way too cheap” at around 15 times forward earnings. Furthermore, the company has taken savvy steps during this year’s downturn, with substantial stock buybacks totaling $60 billion.
