Second Quarter Gains NASDAQ +21.4% Russell 2000 +21.2% S&P 500 +14.9% Dow Industrials +13.1% (Data source: Yahoo Finance)
Both the NASDAQ Composite and S&P 500 posted their best quarter in the past six years. Although NASDAQ posted an impressive 21.4% gain for the second quarter, that is below the average annual earnings among NASDAQ stocks, according to FactSet, so price-to-earnings (P/E) ratios are being compressed. Furthermore, I expect third-quarter GDP growth to accelerate to a 5% to 6% annual pace, fueled by AI productivity gains, surging energy exports and robust consumer spending. Order backlogs for AI and data center-related companies reached a 3-year delay, so the data center boom should continue.Here are the most important developments recently and what they mean:
- Memory-related stocks like SanDisk (SNDK) and Seagate Technology (STX) improved this week, which demonstrates that every dip is a buying opportunity in fundamentally superior stocks. The other reason that memory stocks have firmed up is that South Korean memory company SK Hynix is raising $28.07 billion in its IPO. Specifically, SK Hynix is planning to sell 17.79 million ADR shares traded on NASDAQ. Institutional investors immediately signaled indications of interest for up to $7 billion for the SK Hynix IPO, but I suspect there will be much more demand due to an acute global memory shortage attributable to the boom in AI data centers.
- The other interesting development this week is that SpaceX (SPCX) is being added to the NASDAQ 100, but its weight will be restricted due to the fact that the IPO only sold 5% of its outstanding shares. As SpaceX unlocks stocks for insiders, the number of shares outstanding will rise, and its weight in the NASDAQ 100 should naturally increase. However, in the meantime, SpaceX’s percentage in the NASDAQ 100 is being restricted due to its relatively thin float.
- Bears continue to try to throw cold water on the AI boom. British investor Jeremy Grantham, who is a perma bear, said on CNBC’s Squawk Box that “Based on the value of the stock market compared to GDP, with modifications, this is the most expensive market in American history.” First, Jeremy Grantham is a bond investor who has never liked stocks, to my knowledge. Second, Jeremy Grantham clearly does not look at earnings growth, order backlogs, analyst earnings revisions, earnings surprises, and forecasted price-to-earnings ratios. Being such an un-American, negative naysayer is shocking. I should also add that Joe Kernan gave Jeremy Grantham a hard time and pointed out that he has been bearish since 2010 and wrong with his market forecasts.
- The Institute of Supply Management (ISM) announced this week that its non-manufacturing, service index came in at 54 in June, down from 54.5 in May. Since any reading over 50 signals an expansion, the service sector remains very healthy. The big news in the ISM service sector report is that the prices component declined to 67.7 in June, down from 71.3 in May, which is indicative of moderating prices and that service inflation is apparently cooling. Also positive is that the backlog of orders component rose to 54.9 in June, up from 51.3 in May. Fully 14 of the 18 service industries that ISM surveyed reported expanding in June.
In summary, we are in the strongest economic environment in decades that is generating robust corporate profits. Price-to-earnings (PE) ratios are collapsing, since most stocks are not going up as much as their underlying earnings. The truth of the matter is that we cannot stop the current technology train, so you must get on the train, invest with the billionaires, or get left behind. The naysayers are pathetic people who cannot see the forest through the trees, so please ignore them. Every dip in fundamentally superior stocks remains a buying opportunity, so please do not worry about daily gyrations, since good stocks typically bounce right back.
