Big Tech Looks Ahead To A Potentially Bleak Q4 And The Housing Market Cools Off

TL;DR

• Silicon Valley’s finest have not had a great Q3, and things are looking worse for Q4
• The housing sector remains strong over the past 12 months, but it appears to be screeching to a halt with the biggest monthly drop in growth since records began in 1987
• Thematic investing is, potentially, a very attractive option
• Top weekly and monthly trades

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Major events that could affect your portfolio

More earnings news this week and not much of it is good. In contrast to the big wins notched up by the banking sector last week, it’s been all about tech these last few days and the announcements haven’t been too rosy.

There have been a couple of major themes that have carried across the announcements from Meta, Apple, Amazon, Alphabet, Microsoft and Spotify which have caused some problems in Q3. They’re projected to get worse rolling over into Q4.

The elephant in the room has been the strength of the US dollar. While the domestic market makes up the most sizable portion of revenue for all the major tech companies, the revenue from overseas such as in Europe and Asia still make up a large component of their revenue.

With most major currencies falling against the US dollar, it’s meant a downgrade in earnings, purely on currency movements. In some cases this has meant a drop in revenue into double digits, with Apple stating in their earnings announcement last night it has put a 10% dent in their bottom line.

The second major factor has simply been falling demand. With inflation remaining at high levels and the threat of a recession ever-present, companies have begun to scale back their marketing budgets. This is hitting advertising revenues, with companies like Meta and Alphabet particularly susceptible to declining ad rates. Obviously, consumers are tightening their belts, too.

Tech stocks have had a bumpy week. This isn’t just down to the misses in Q3, but particularly due to the overwhelmingly negative guidance for Q4.

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This week also saw the release of new housing data, which shows that the average home in the United States grew 13% in the year to August. That might sound pretty good, but the reality is that it’s showing a pretty major slowdown from the month before, when the 12 month rate of growth hit 15.6%.

This 2.6% change represents the biggest drop in the S&P CoreLogic Case-Shiller Home Price Index since it was launched back in 1987, which shows the rapid turnaround we’re experiencing in the real estate market right now.

It’s no major surprise given how swiftly rates have been rising. New mortgages are now significantly more expensive than they were just 12 months ago. At the beginning of 2022 the average 30 year mortgage rate was hovering around 3% and this has now risen to over 7%. On a mortgage of $300,000 that means the average monthly payment has increased from $1,265 up to $1,996.

This is likely to lead to lower levels of activity in the housing sector. Lower activity means less competition which leads to fewer price increases and higher discounts.

With that said there are obviously major differences across the country, with certain markets performing much better than others. The biggest year-on-year increases have been Miami (+28.6%), Tampa (+28%) and Charlotte (+21.3%) with the biggest falls being felt in San Francisco (-4.3%), Seattle (-3.9%) and San Diego (-2.8%).

This week’s top theme from Q.ai

During a bull market, investors can choose just about anything to invest in and they’ll make gains. Sure, some stocks or investments will do better than others, but the direction of the market as a whole tends to be in one direction. When markets get choppy, that’s not the case.

We’ve seen that over these past couple of weeks, with banking loving rising interest rates and tech hating it. In this type of environment, thematic investing makes a lot of sense. For example, right now times are likely to be more difficult for growth stocks, while allowing value and quality stocks to hold up relatively well.

At Q.ai, we package this idea of thematic investing through the use of factor based ETFs. There are five different factors we consider, and our AI automatically adjusts the blend based on its projections for the coming week. The factors we use are:

-Momentum: stocks that have outperformed during prior periods (iShares MSCI USA Momentum Factor ETF (MTUM))

-Value: stocks trading for relatively inexpensive financial ratios (iShares MSCI USA Value Factor ETF (VLUE))

-Size: stocks in companies with relatively smaller market capitalizations (iShares MSCI USA Size Factor ETF (SIZE))

-Quality: stocks of companies with high returns on capital and predictable earnings growth (iShares MSCI USA Quality Factor ETF (QUAL))

-Low Volatility: stocks that are less sensitive to overall market moves, both up and down (iShares MSCI USA Min Vol Factor ETF (USMV))

Each of these ETFs invests in hundreds of companies that match the related factor of the ETF. An AI-powered strategy, like Q.ai’s Smarter Beta, can help to maintain diversification while also adapting to changing market conditions as factors fall in and out of favor.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Green Brick Partners (GRBK) – The home builder is one of our Top Buys for next week with an B rating in our Growth and Low Momentum Volatility factors. Revenue was up 50.5% in the 12 months to the end of June.

Meiragtx Holdings (MGTX) – The gene therapy is one of our Top Shorts for next week with our AI rating them an F in Quality Value. Earnings per share are down -8.74% over the past 12 months.

Consol Energy (CEIX) – The coal producer is one of our Top Buys for next month with an A rating in our Quality Value factor and in Technicals. Earnings per share have increased 97.55% in the 12 months.

Cincor Pharma (CINC) – The pharmaceutical company is one of our Top Shorts for next month with our AI rating them an F in Low Momentum Volatility and a D in Quality Value. Net income was -$76.14 million in the 12 months to June.

Our AI’s Top ETF trade for the next month is to invest in metals, mining, crude oil and Germany and to short industrials and small caps. Top Buys are the SPDR S&P Metals & Mining ETF, the United States Brent Oil Fund LP and the iShares MSCI Germany ETF. Top Shorts are the Industrial Select Sector SPDR Fund and the Vanguard Small-Cap ETF.

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