Strong earnings, along with a robust labor market and cautious investor optimism, have been key to the U.S. economy’s resilience. The stock market remains strong, with indices like the S&P 500 and Dow Jones rising on better-than-expected earnings across sectors. The Dow surged over 300 points, hitting a fresh record. However, risks remain from geopolitical tensions, government debt, and tech-related trade disputes, which could impact future growth.
Domestically, strong earnings drive stock performance. Bank of America (BAC) saw its net interest income rise to $14.1 billion in Q3, benefiting from falling rates and bond maturation. As more loans reprice at higher rates, and trading revenue remains strong, BAC is well-positioned for gains. The broader market has also gained from strong earnings, with firms like United Airlines showing similar results.
GLOBAL CONCERNS
Soaring Government Debt Warning
While strong earnings support U.S. domestic performance, international developments cloud the long-term outlook.
The IMF has raised concerns about rising government debt in major economies like the U.S., China, and Europe. Global government debt is expected to hit $100 trillion this year, or 93% of global GDP, driven by pandemic fiscal measures and ongoing geopolitical issues like the Ukraine conflict. The IMF warns that without spending cuts or tax hikes, debt could become unsustainable, forcing difficult government policy decisions in the future.
Source: IMF
Debt concerns are worsened by the growing impact of U.S. fiscal policy on global interest rates. The IMF noted that shifts in U.S. borrowing costs often affect other economies, heightening risks for heavily indebted countries. With U.S. elections nearing, uncertainty about future fiscal policy could add more volatility to global markets.
Weaker International Trade & Conflicts
Japan’s exports fell by 1.7% in September, the first decline in ten months, driven by weaker demand from China and the U.S. This drop, especially in key sectors like automobiles, raises concerns about Japan’s economic recovery. The yen’s appreciation has also made Japanese goods less competitive. While some blame natural disasters like typhoons for the decline, the trend signals challenges for global trade.
The international backdrop is further complicated by ongoing conflicts in the Middle East, which have added volatility to global energy markets and increased investor uncertainty. As geopolitical tensions in regions such as Lebanon and Gaza persist, the global economy could face further disruptions that may negatively impact U.S. stock markets and broader economic conditions.
WATCHOUT
Increasing China-U.S. Technology Tensions,
U.S companies face challenges
The ongoing tensions between the U.S. and China, particularly in the technology sector, remain a critical issue. Recently, the CyberSecurity Association of China called for a national security review of Intel (INTC) products, citing security vulnerabilities. This development is part of a broader trend of increasing scrutiny and regulatory challenges faced by U.S. tech companies operating in China.
For Intel, which derives more than a quarter of its revenue from China, this move could have severe financial implications, especially as the company struggles to compete in the AI chip market, where competitors like Nvidia are taking the lead. Intel’s future remains uncertain due to increasing scrutiny in China, one of its largest markets. The potential cybersecurity review could severely limit its sales, especially in the face of stiff competition from Nvidia and other AI chipmakers. Intel has already been struggling, with its stock down over 50% this year
- The IV smile chart for Intel (INTC) options expiring on 2024-11-22 shows a typical skew. PUT options (blue dots) have higher implied volatility at lower strikes, indicating concern for downside risk. CALL options (red dots) show higher IV at higher strikes, reflecting upside speculation. Most trading volume is around the 22-24 strike prices, suggesting traders are focusing on these levels for movement or hedging. The pattern shows balanced trading interest, with a slight skew toward downside protection.
And Micron Was Once a Target Too
This is not the first time China has targeted U.S. tech firms. Last year, Micron Technology faced similar scrutiny, resulting in a ban that significantly impacted its sales in China. Intel’s stock has already taken a hit from the news, falling by 1.5% in response to the announcement. As tensions between the U.S. and China escalate, other U.S. tech companies could face similar challenges, putting their revenue and growth prospects at risk. These tech tensions are part of a broader geopolitical struggle that is increasingly shaping the global economy.
Investment Opportunity & Risk
Nvidia (NVDA)
- Nvidia continues to dominate the AI chip market, driven by massive investments in AI infrastructure by major tech firms like Microsoft, Amazon, and Google. Nvidia’s data-centre revenue is expected to grow by nearly 97% year-over-year, positioning it as a leader in the AI revolution. However, the sustainability of this growth is uncertain, as capital expenditures in the tech sector may taper off in 2025, particularly as concerns about the return on AI investments rise.
- This chart shows NVDA’s implied volatility (IV) smile for options expiring on 2024-11-22. PUT options have higher IV at lower strikes, signaling downside risk, while CALLs show slightly higher IV at higher strikes, indicating upside speculation. Volume is concentrated around 120-140 strikes for PUTs and 140-150 for CALLs, highlighting trader focus on these levels for hedging or directional moves. The pattern reflects typical market behavior, with more volatility priced into out-of-the-money options.
Apple (APPL)
- Berkshire Hathaway’s decision to sell nearly half its Apple stake earlier this year has proven to be ill-timed. Apple’s stock has rallied significantly since the sale, hitting new highs. Warren Buffett’s value-oriented strategy may have led to the sale, but in hindsight, this move cost Berkshire an estimated $25 billion in unrealized gains. Despite this, Apple remains a key holding for Berkshire, with over 400 million shares still in its portfolio.
- The IV smile chart for Apple (AAPL) options expiring on 2024-11-22 reveals a steep drop in implied volatility for PUT options (blue dots) as the strike price rises. This indicates strong demand for downside protection at lower strike prices. In contrast, CALL options (red dots) show a relatively flat IV curve, suggesting less aggressive bullish speculation. Volume is concentrated around the 240-250 strike prices, with significant spikes in CALL volume at 240, indicating market interest in upward movement at this level. Overall, the chart highlights a strong emphasis on managing downside risk, while CALL interest is focused within a specific price range.
Abbott Laboratories (ABT)
- Abbott delivered strong earnings in the third quarter, beating expectations with $1.21 per share in earnings and net sales of $10.64 billion. The company’s diversified business model, which spans medical devices, diagnostics, and nutrition, continues to drive growth. Abbott has raised its full-year earnings guidance, signaling confidence in its ability to maintain momentum heading into 2025.
- The IV smile chart for Abbott Laboratories (ABT) options expiring on 2024-11-22 shows a typical skew. PUT options (blue dots) have higher implied volatility at lower strike prices, indicating traders’ concerns about downside protection. In contrast, CALL options (red dots) display slightly increasing IV at higher strike prices, suggesting some speculative interest in upward movements. Volume centers around the 22-24 strike prices, highlighting their significance in current market activity. Overall, the pattern indicates a moderate balance between managing downside risk and speculative upside expectations.
Salesforce (CRM)
- Salesforce has been a standout performer in the SaaS sector, with its revenue increasing from $21.1 billion in fiscal 2021 to $36.46 billion in the last twelve months. Operating income has surged, and free cash flow continues to grow, positioning Salesforce as a long-term winner in the cloud computing space.
- The IV smile chart for Salesforce (CRM) options expiring on 2024-11-22 indicates higher implied volatility for PUT options (blue dots) at lower strike prices. This suggests traders are concerned about downside risk as the stock price declines. CALL options (red dots) display a flatter IV curve, with a slight increase at higher strike prices, reflecting mild speculation on potential upward movements. Overall volume is sparse, but there is a significant spike in CALL volume at the 320 strike price, suggesting a focus on this level for upside potential. The overall pattern indicates cautious downside protection with limited bullish interest.
CONCLUSION
- The U.S. economy is navigating a complex landscape of strong earnings and domestic performance, tempered by significant international risks.
- While strong earnings continue to impress, external pressures—ranging from rising government debt and U.S.-China tech tensions to geopolitical conflicts—could introduce volatility in the coming months.
- For investors, staying informed about both domestic and global developments is crucial in understanding how these factors will shape the future of the U.S. stock market.
- Companies like Nvidia, and Abbott present compelling growth stories, while firms like Intel and Apple face strategic challenges.
- As the global economy adjusts to these new realities, a diversified approach to investing, with careful attention to international risks, will be essential for navigating this evolving market environment.
Please note that all information in this newsletter is for illustration and educational purposes only. It does not constitute financial advice or a recommendation to buy or sell any investment products or services.
About the Author
Rein Chua is the co-founder and Head of Training at AlgoMerchant. He has over 15 years of experience in cross-asset trading, portfolio management, and entrepreneurship. Major media outlets like Business Times, Yahoo News, and TechInAsia have featured him. Rein has spoken at financial institutions such as SGX, IDX, and ShareInvestor, sharing insights on the future of investing influenced by Artificial Intelligence and finance. He also founded the InvestPro Channel to educate traders and investors.
Rein Chua
Quant Trader, Investor, Financial Analyst, Vlogger, & Writer.
