Early Q1 Earnings Reports Are Stunning

Commentary

Most of the early reports of first-quarter earnings and sales came from financial companies, and most of them reported very good results. Goldman Sachs (GS) kicked off the earnings announcement season with its strongest result in the past five years. Then, JPMorgan (JPM) posted a big beat on Tuesday, followed by Taiwan Semiconductor (TSM) on Wednesday, announcing 41% annual sales growth and 58% earnings growth – both exceeding analyst expectations – which got many investors excited about data center and AI stocks.

This week, many fundamentally superior stocks in our portfolio will begin to announce their quarterly results, and expectations are very high due to positive analyst earnings revisions. Also, some welcome news from our stocks, such as Bloom Energy (BE) surging on news that Oracle (ORCL) is expanding its purchase of the company’s natural gas fuel cells for its data centers. Oracle’s goal is to become the largest data center company in the U.S., so naturally, Bloom Energy should be a big beneficiary. With Bloom Energy’s natural gas fuel cells, Oracle’s data centers do not have to depend on utilities to provide electricity for its aggressive expansion.

On the world scene, the big news was the initial failure of negotiations with Iran in Pakistan during the previous week. This triggered a U.S. Naval blockade of all Iranian ports.

Here are the most important developments recently and what they mean:

– Traffic in the Strait of Hormuz is at a standstill after the U.S. Navy seized an Iranian cargo ship off the port of Jask in the Gulf of Oman as it was headed to the Strait of Hormuz. Iran is now refusing to negotiate with the U.S., but the ceasefire apparently still persists. I should add that the U.S. Navy is using sea drones to help clear any mines that may be in the Strait of Hormuz, so until this minesweeping is completed, the Strait of Hormuz is expected to remain closed.

– It is clear that the U.S. is squeezing Iran economically, since the Iranian Republican Guard Corps (IRGC) makes money from commerce. Although Israel has eliminated most of the IRGC leaders, new leaders keep popping up, like in a “Wack-a-Mole” game. These new IRGC leaders then have to figure out how to extort money to rise to power. It is clearly a poor economic model, so the U.S. continues to squeeze Iran economically to get it back to the negotiation table.

– China is now importing a record amount of ethane from the U.S. due to the disruption in the Strait of Hormuz. Ethane is a specialty natural gas liquid used to produce ethylene, which is a building block used to make plastics. So, the U.S. continues to supply the world with petroleum products that are in short supply due to the disruption in the Strait of Hormuz. Ironically, the longer the Strait of Hormuz remains closed, the more dominant in the world the U.S. becomes.

– In case it is not obvious, investors are increasingly confident that the U.S. is the safest place in the world to invest. Foreigners now hold a record $9.5 trillion in U.S. Treasuries and are also expected to benefit from an appreciating U.S. dollar due to stronger economic growth as well as higher interest rates than available in China, Japan, and the European Union. Finally, the U.S. has better demographics than most countries, so its potential for future economic growth is simply unmatched.

– The Senate hearings for incoming Fed Chairman Kevin Warsh are going to be interesting. Warsh is not expected to reveal his plan for key interest rate cuts, but instead is expected to talk about U.S. productivity gains and how they are not inflationary. The senators are also expected to ask Warsh why he is not a fan of quantitative easing and how he plans to shrink the Fed’s balance sheet. Overall, Kevin Warsh is expected to be easily confirmed by the Senate.

– The Commerce Department reported on Tuesday that retail sales soared 1.7% in March, which was above economists’ consensus estimate of 1.4%. This was the strongest increase in retail sales in over three years (since January 2023), due somewhat to the fact that gasoline sales surged 15.5% due to higher prices at the pump. Excluding autos and gasoline sales, retail sales rose an impressive 0.6% in March, which was double economists’ consensus estimate of a 0.3% increase. Nearly all of the 13 categories surveyed improved in March, so this was unquestionably a great sign that consumer spending is picking up.

Overall, the U.S. remains an oasis. I expect second-quarter GDP growth to surge and 5% GDP growth to arrive no later than the third quarter. The key for the U.S. economy to hit 5% annual GDP growth that I have predicted remains tied to (1) AI-led productivity gains, (2) a shrinking trade deficit from booming U.S. exports, and (3) robust consumer spending.