January 5, 2025

QuickTakes

MARKET CALL: AI Coming To Vegas, Baby, Vegas!

The Q4-2024 earnings reporting season is about to start, led by the big banks. We expect that during their conference calls, company managements will discuss how AI may be starting to boost their productivity. In effect, they'll be trying to convince investors that every company is now a technology company either producing AI hardware and software or using them.

The AI excitement will be palpable this week. As Vince Vaughn famously said: “Vegas, baby, Vegas.” The Consumer Electronics Show, or “CES” for short, kicks off Monday evening in Las Vegas and runs through Friday, January 10. It will undoubtedly be mostly all about AI. Indeed, Nvidia founder and CEO Jensen Huang will deliver a keynote address Monday at 6:30 p.m. Nvidia's stock price has been rising since December 18 (chart). It (and the stock market) got an extra boost on Friday after Microsoft announced plans to spend $80 billion on AI data centers this year, up from $50 billion in 2024.

On December 9, Google's stock price rebounded off its 200-day moving average after the company announced that Willow, its latest quantum computing chip "demonstrates error correction and performance that paves the way to a useful, large-scale quantum computer" (chart). The press release didn't specify how long the way might be to get there. When we do get there, quantum chips might replace GPU chips to power AI software.

When AI is combined with quantum computing, science fiction will no longer be fiction. It's hard to predict the impact of this development on our economy and society. However, it will probably be bad news for blockchain and the cryptocurrencies that depend on it because encryption codes will be easy to hack. For now, that possibility isn't stopping bitcoin's ascent (chart).

During the upcoming earnings reporting season, we expect to hear lots of guidance about the likely impact of AI on earnings. The question is whether the spending on AI technologies is showing signs of paying off in higher corporate profit margins.

Industry analysts are currently estimating that S&P 500 operating earnings per share rose 8.2% y/y during the last quarter of 2024. We are expecting a 10.0% increase. During the four quarters of 2025, the analysts are expecting double-digit increases: Q1 (11.0%), Q2 (10.8%), Q3 (12.0%), and Q4 (16.8%) (chart). That's a 12.5% increase in 2025.

We are forecasting a 17% increase because we expect the S&P 500 profit margin to rise to a record high this year (chart).

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