The “Forever” Rally

Earn While You Learn! ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ [EARN WHILE YOU LEARN! JOIN OUR FREE LIVE TRADING SESSION!]( Hello investor, The “Forever” Rally You can find plenty of negative headlines in daily newspapers in the last few months. The Middle East conflict. Worries about an economic slowdown. The Ukraine-Russia war. Rising tensions between China and the USA. And so on. Regardless, the market brushed them off to keep rallying. Yesterday was no different. Stocks hit new all-time highs just as the earnings season is starting. We won’t get major economic data releases over the next few days, so earnings will be in the spotlight. Lately, Wall Street analysts have downgraded earnings expectations for Corporate America. In fact, they predict S&P 500 companies will post their weakest growth in the past four quarters. (A 4.3% y-o-y growth.) However, corporate guidance implied a growth of about 16%. It’s a big divergence, right? Investors anticipate that companies will beat analysts’ low expectations easily, driving a bullish sentiment in the market. Callie Cox at Ritholtz Wealth Management warned that investors could miss out on the rally if they are paralyzed with fear. - “Wall Street has underestimated Corporate America lately,” said Callie Cox at Ritholtz Wealth Management. “This environment is tough to get a read on, and I don’t blame anybody who’s approaching this rally with a bit of skepticism. We still think the biggest – and most expensive – risk here is to miss a rebound and an eventual rally higher.” Callie Cox at Ritholtz Wealth Management (Photo: LinkedIn) JPMorgan Chase and Wells Fargo gave the earnings season a good start by beating expectations. Big banks will continue to report their results this week, along with Netflix and JB Hunt Transport Services. - “While there is a risk of earnings slowing, corporates nevertheless appear well-positioned to weather the storm. Going forward, they will likely play an essential role in maintaining economic stability and supporting consumer confidence,” said Christian Floro at Principal Asset Management. As shown in the graphic below, analysts expect S&P 500 earnings to grow over the next few quarters after this one. (Source: Bloomberg Intelligence) Why the growth? Several catalysts include the Federal Reserve’s interest rate cuts, AI-driven growth, and robust economic growth, said Solita Marcelli at UBS Global Wealth Management. - “We maintain our positive outlook for US equities, supported by healthy economic and profit growth, the Fed’s easing cycle, and AI’s growth story,” she said. “While valuations are high, we think they are reasonable against the favorable backdrop.” Bond markets supported Marcelli’s analysis. The 10-year Treasury yield rose lately, indicating traders expect the economy to grow so much that the Fed will keep rates elevated. Federal Reserve Governor Christopher Waller seemed to agree with this outlook. He said yesterday that future rate cuts will be less aggressive than the September cut due to a hotter-than-expected economy, saying “the data is signaling that the economy may not be slowing as much as desired.” - “While we do not want to overreact to this data or look through it, I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting,” Waller said. He pointed to the final revision for the 2nd quarter growth, where the Commerce Department boosted the gross domestic income gain to 3.4% — a major adjustment of 2.1% from the previous estimate. - “These revisions suggest that the economy is much stronger than previously thought, with little indication of a major slowdown in economic activity,” Waller said. Federal Reserve Governor Christopher Waller (Photo: Federal Reserve Bank of St. Louis) Operating income as a percentage of GDP grew over the last few years for the USA, while it declined for the developing world excluding USA. A Safe Bet on the AI Supercycle Today’s Stock Pick: UiPath Inc. (PATH) Automation is the future. The main sticking point for the dockworkers’ strike was the fear that automation could make many jobs obsolete. While the hype about AI replacing white-collar jobs is somewhat overblown (for now), the adoption rate for AI will only continue to grow over the next few years. UiPath is the company that’s leading the trend. It is a process automation firm that helps companies leverage AI to automate routine tasks. Frequently, these tasks are what workers hate because of their mundane nature. For example, salespeople despise paperwork because it takes time away from selling activities. UiPath helps quicken these processes. The first step in the process is to identify the highest-ROI opportunities for optimizing certain processes by automating with AI. So, a company might “mine” tasks to see which ones would deliver the biggest ROI. The next step is to build AI-powered automation using different technologies like generative AI or low-code development. Finally, the final step is to analyze, test, and optimize the automation process. (Source: UiPath) Is the inflection point coming? UiPath was previously limited to low-value tasks like data extraction or updating databases. Companies can outsource these tasks to third-world countries for “pennies.” So, UiPath couldn’t win bigger contracts because companies don’t want to add higher costs just for the convenience of using the software. However, UiPath is poised to benefit from the recent advancement in AI. It will enable UiPath to offer capabilities to automate more complex tasks like insurance claims processing. Meaning? The company might win bigger contracts down the road. After all, UiPath already built relationships with big companies like Spotify, Siemens, Heineken, Uber, and so on. There will be plenty of opportunities to cross-sell these customers with newer AI offerings. (Source: UiPath) The company has a track record of delivering robust revenue growth. It never failed to show growth in the last 10 quarters. It boasts a 115% dollar-based net retention rate. Its ARR y-o-y growth rate is 19%. (Source: UiPath) Bottom line: Automation is the future, and UiPath has a strong foothold in this market. The rise of generative AI and other AI technologies may boost the company’s product offerings which will make it more valuable to companies. But you don’t have to gamble on its future. It is already making money from its process automation tools, so it can arguably be considered a safe bet on AI. [EARN WHILE YOU LEARN! 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