In today’s email:

  • Two days of “Fedspeak”: Federal Reserve chairman Jerome Powell wraps up two days of speaking on Capitol Hill.

  • AI powers chip growth: Taiwan Semiconductor rides AI boom to 32% jump in sales.

  • What sends this market higher: Altimetry Director of Research Rob Spivey shows the one indicator that could send stocks higher over the next year.

Congress wants to know about rate cuts…

Fed chair Jerome Powell just wrapped up two long days in front of Congress. Back-to-back days of testimony before the Senate Banking Committee and the House Financial Services Committee. Usually, his comments don’t differ between the two days, with many of his comments fighting off questions from folks in Congress.

But markets can still hang on to every small detail he shared…

All eyes are on interest rates. The market is looking (and hoping) for any clue that the Federal Reserve is about to lower rates once again. And they may have gotten their wish.

Our colleague and Stansberry Digest editor Corey McLaughlin shared this Powell quote with his readers yesterday…

In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment.

That sure sounds like the Fed is getting ready to cut interest rates. Which stands in line with the market’s opinion of a quarter point cut coming in September.

Futures traders are anticipating Powell’s rate cuts. And a few sectors are predicted to benefit from it.

And when interest rates go down, consumer spending goes up. In turn, there’s usually an uptick in inflation.

Our colleague at Wide Moat Research, Brad Thomas, shared that real estate investment trusts (REITs) will experience a rise in prices with rate cuts:

REITs are seen as very interest-sensitive vehicles since they’re so reliant on borrowing – to the point where investors ignore everything else.

These companies can raise their capital and bring more profit to the table if rate cuts are truly on the horizon.

And inflation wouldn’t be the worst thing for the Fed. As Corey wrote…

Remember, the only thing they fear more than inflation is deflation.

Moving on to a company reaping the rewards of AI…

Over the past year or so, Nvidia (NVDA) has been the poster child for the artificial intelligence (AI) boom. Its graphic processing units (GPUs) have been in sky-high demand, leading to a huge jump in revenue. The first quarter of fiscal year 2025 reported a revenue of $26 billion, up 18% from the previous quarter.[1]

And this rise in semiconductor demand is increasing rapidly, which means we are seeing another beneficiary in this space.

Taiwan Semiconductor (TSM) just reported a 32% jump in sales for the second quarter. Taiwan Semi has a different business than many chip stocks. Companies like Nvidia design their chips, then outsource the production to Taiwan Semi.

Taiwan Semi dominates this industry, too. The company manufactures nearly 70% of all chips across the globe. So, it’s a surefire beneficiary of the surge in demand for chips. Its shares have shown that.

So far in 2024, TSM shares have soared more than 80% and now sit at an all-time high. Looking backward is fine, but let’s take a look at whether or not TSM shares are still in a good spot to buy today.

For that, we’re going to use our Chaikin Analytics affiliate’s Power Gauge.

Chaikin Analytics founder Marc Chaikin built his Power Gauge system as a way to rank stocks. His system looks at more than 20 different factors and combines them into one rating to indicate where the stock could be headed over the next one to six months.

Even after the huge run-up in shares, the Power Gauge has a “Bullish” rating on Taiwan Semiconductor. The rating most recently flipped Bullish on April 22, and the stock hasn’t looked back since…

At the time, shares were trading for about $130 per share. Since then, the stock is up about 42% to $184 per share.

Another promising earnings sign…

Taiwan Semi isn’t the only one seeing positives around earnings season. According to FactSet, the S&P 500 has grown its earnings per share 8.8% in the second quarter. If this rate holds, it will be the highest quarterly growth rate since the first quarter of 2022.

And this strength is leading to even more strength. As our colleague and Altimetry Director of Research Rob Spivey recently explained, Wall Street is raising its estimates for future earnings growth.

In today’s MarketWise Daily, originally from the July 8 issue of the free Daily Authority e-letter, Rob tells readers why higher earnings estimates are a good sign for a sustained rally in stocks. As he wrote…

If companies can still boost earnings, the market should keep rising in kind.

Over to Rob…

Earnings Growth, Stupid

James Carville never expected an insult to be the most memorable part of his campaign strategy…

Carville was presidential candidate Bill Clinton’s political adviser in his 1992 campaign against George H.W. Bush. Part of his strategy involved creating a unified message for everyone working on the campaign.

He hung a sign in Clinton’s campaign headquarters in Little Rock, Arkansas, with three key agenda points…

  1. Change vs. more of the same

  2. The economy, stupid

  3. Don’t forget health care

These three points paved the way for Clinton’s eventual win. But it was the second that became a rallying cry…

You see, the U.S. had entered a recession just a few years earlier. Following the end of the Cold War, U.S. defense spending slowed way down. The savings and loan crisis was still causing bank failures.

The Federal Reserve was once again fighting inflation. It brought interest rates as high as 9.9% to cool down the economy.

All those challenges were a sore subject under Bush’s term (whether or not it was his fault). Clinton’s campaign kept voters focused on the economy by hammering it home at every chance.

The rest, as they say, is history.

Similar to the campaign trail, in the world of Wall Street, investors focus on one thing above all else…

Earnings growth, stupid.

For as many other trends as these folks pretend to care about, it all boils down to this one factor.

If the credit market freezes up, companies go bankrupt… which hurts earnings growth.

The rise of AI is so powerful because it’s helping companies become more efficient… which boosts earnings growth.

The stock market cannot sustainably rally without earnings growth. That’s why last year was such an anomaly. U.S. earnings fell 9% thanks to higher inflation and interest rates cutting into earnings. And yet, the S&P 500 rallied 24%.

If the market keeps rising at its current pace, this year could be even better. The S&P 500 is already up 15%. We’re only about halfway through the year.

And unlike in 2023, this year’s rally seems to be backed up by – you guessed it – earnings growth…

We can see this through Wall Street analyst forecasts for quarterly earnings per share (“EPS”).

Analysts provide estimates for just about every public stock. The biggest stocks, like those trading on the S&P 500, tend to have the most coverage.

If you’ve followed our work for a while, you know we don’t look to Wall Street for buy and sell recommendations.

But we recognize that these analysts are paid to be experts on the companies they cover. Their one- to two-year earnings forecasts tend to be pretty accurate.

So when it comes to forecasting the next several quarters of as-reported EPS… Wall Street can be a useful indicator.

The following chart shows Wall Street’s EPS expectations for the entire S&P 500 over the next four quarters. As you can see, analysts expect EPS to reach an all-time high over the next year…

Estimates previously peaked in September 2022. Now, Wall Street expects the biggest companies to beat their old record.

Those lofty expectations could be reason enough to keep the market rallying.

While the credit market remains tight, it doesn’t seem tight enough to stop refinancing activity. And if companies can still boost earnings, the market should keep rising in kind.

After all… it’s all about earnings growth, stupid.

Like Rob said, earnings growth is one of the most important things for the market. As long as earnings continue to rise, and expectations point that way right now, stocks will have a reason to head higher.

So remember that when you see headlines about geopolitics, the Federal Reserve, and more in the mainstream financial media. While these things can have an impact on earnings growth, as long as the trend is still higher, it’s a good sign for stocks.