AI Boom Persists as Strong Earnings Fuel Market Optimism

I think that it is safe to conclude that the AI data center boom persists. Broadcom (AVGO), Hewlett Packard Enterprise (HPE), and Ciena (CIEN) announced that they all beat analyst sales and earnings estimates, plus raised their guidance. 

Ciena was the only one of these three AI-related stocks that gapped up in the wake of its strong results and higher guidance. The company posted a 1.4% revenue surprise and a 21.3% earnings surprise. Ciena CEO Gary Smith said in a press release, “AI continues to drive compounding waves of network investment.” Smith added that “As the only pure-play optical systems and interconnects provider, Ciena’s unmatched combination of incumbency, technology innovation, and deep expertise gives us a powerful competitive edge.’’

As the fall arrives and the weather cools, I expect that the stock market will heat up, since another round of record earnings is expected to be announced. The Anthropic IPO will likely help to get investors excited and refocus attention on AI-related stocks. The phenomenal earnings environment we are now in the midst of cannot be ignored, and the strongest GDP growth in decades should also help to boost investor sentiment.

Meanwhile, there is a narrative out there that soaring global bond yields will derail the stock market, but that only pertains to interest-rate-sensitive value stocks, especially dividend stocks. Regarding the bond market and interest rates, I remain convinced that the Fed will not be increasing key interest rates at its upcoming Federal Open Market Committee (FOMC) meeting in September. One big reason is that Fed Chairman Kevin Warsh at Jackson Hole said that inflation isn’t meaningfully slowing and vowed to bring it back “at sufficient speed” to the Fed’s 2% goal, which he described as a “firm and fixed” target. Furthermore, Warsh said that he believed that “the wiser course was to await new information,” particularly given “possible developments in supply chains, investment flows, and geopolitics … before deciding whether a change in interest rate policy was advisable.”

I was pleased that the Fed Chairman also talked about the AI boom and the incredible productivity gains it is unleashing. Warsh said his new task forces at the Fed are studying the impact of AI and productivity gains on the U.S. economy and implied that there appears to be no negative impact (e.g., inflation). Overall, Treasury yields were not significantly impacted by the Fed Chairman’s speech, but the U.S. dollar strengthened during Warsh’s speech, so that was a positive development.