Sentiment, Federal Reserve, Economic News and Value Stocks

The Prudent Speculator Weekly Commentary is expertly curated every week as a valuable resource for stock market news, investing tips, business insights, and economic trends as it relates to value stock investing. In this week’s Market Commentary, we discuss Sentiment, Federal Reserve, Economic News and Value Stocks. We also include a short preview of our specific stock picks for the week, the entire list is available only to our community of loyal subscribers.

Executive Summary

Newsletter Trades – 5 Sells Across 4 Portfolios

A.I.-Related Stocks – Selling Some to Reduce Portfolio Risk and Keeping Some to Ride the Momentum

Sentiment – AAII Still Pessimistic…a Contrarian Buy Signal

Wall of Worry – Stocks Have Overcome Every Prior Disconcerting Event

Fed – 25-Basis-Point Rate Cut

Econ News – Mixed Numbers, Solid GDP Growth the Forecast

EPS – Solid Growth Projected for 2025 & 2026

Value – Handsome, but not Excessive, Returns Over the Last Two Decades

Government Shutdowns – History Lesson for Stocks

Stock News – Updates on INTC, NVO, NRG, FDX & CAT

Sentiment – AAII Still Pessimistic…a Contrarian Buy Signal

Friday again was not so grand…for the average stock…but it was a terrific week for the kind of stocks we have long championed, with our portfolios bolstered by the continued run in A.I.-related stocks. Of course, we realize that equity prices do not move straight up, even as Value stocks have enjoyed stellar average annualized returns since the launch of The Prudent Speculator more than 48 years ago,…

so the flurry of Sales Alerts readers witnessed last week and over the past month or so have been aimed at reducing our A.I.-related risk, even as the financial metrics for our broadly diversified portfolios of undervalued stocks in total remain very attractive.

To be sure, many of the A.I.-related stocks are trading at elevated valuations, even as it is hard to bet against the A.I. momentum continuing. After all, it was reported on Friday afternoon that software titan Oracle (ORCL – $308.66) was in talks with Meta Platforms (META – $778.38) on a $20 billion A.I. computing deal.

As the Al Frank Way is general to find a middle ground in taking a little and leaving a little, the outsized profits we have taken along the way give us comfort to continue to ride the A.I. euphoria a while longer, as we won’t be surprised to see A.I. stock prices swell in the coming weeks, months and years.

No doubt, it brings a sense of accomplishment for us to be booking substantial profits, as stocks that were once neglected, beaten down or otherwise trading at a discount are finally getting their day in the sun.

We note that the A.I. theme first appeared in our 2024 Market Outlook, which we published in December 2023, and has been a big underlying contributor to performance over the past few years. We then wrote:

In many ways, we’ve found ourselves at the right place at the right time with some A.I. picks, thanks in large part to another theme for the last decade or so, cloud computing. We have long liked companies like Microsoft (MSFT), Apple (AAPL), Alphabet (GOOG) and Meta Platforms (META), who are scaling up their A.I. offerings with plans to generate additional revenue. We believe smaller-company names like power management concern Eaton (ETN) and data center REIT Digital Realty (DLR) also stand to benefit from widespread A.I. adoption.

Chipmaking giant Intel (INTC) has been somewhat left behind in the A.I. discussion, but shares soared more than 70% from January through November, after quarterly check-ins showed that [then] CEO Pat Gelsinger & Co may have finally reversed fortunes for the former market leader. Happily and in addition to turnaround work, Intel’s roadmap includes new chips specifically designed for A.I. and Nvidia has publicly stated that Intel is in the running to produce future generations of Nvidia graphics chips (GPU), which would diversify the company’s manufacturing exposure and improve GPU supplies. And speaking of manufacturing, we also like semiconductor capital equipment makers Lam Research (LRCX) and Kulicke & Soffa (KLIC).

At present, all the aforementioned stocks remain on our open list. Despite the knee-jerk to let the winners ride, we have to remind ourselves that our approach to broad diversification necessitates keeping weights and factor exposure in check. That doesn’t mean we are forced to sell a stock because it reaches “Growth” territory. Indeed, we often do not. But it does mean that we often hold our Value stocks through the Growth at a Reasonable Price (GARP) and even Growth phases while mitigating risk via partial trims and redeploying those proceeds to other corners of the market that are less expensive. Rather than executing any additional sales than those discussed above, we have raised Target Prices across the board for our A.I.-related stocks.

Wall of Worry – Stocks Have Overcome Every Prior Disconcerting Event

Certainly, we realize that downturns are always part of the investment process,…

but we continue to believe that the only problem with market timing is getting the timing right, as evidenced by the preponderance of pessimism from investors, at least on Main Street, throughout the recent rally. Whether it is LSEG Lipper data showing folks had their largest net sales week from U.S. equity funds since December 2024 in the week to September 17 or the latest Sentiment Survey from the American Association of Individual Investors (AAII), a lot of money has been sitting on the sidelines.

To be sure, we are not suggesting that there is nothing to worry about, as we are now three weeks into the seasonally weak September-October time span,

but we always remember the Vannevar Bush admonition, “Fear cannot be banished, but it can be calm and without panic; it can be mitigated by reason and evaluation.” After all, equities have overcome every disconcerting event on the historical timeline over the last 15 years,

while seven decades of data show that stocks have performed fine, on average, whether the Federal Reserve is tightening or easing monetary policy.

Fed – 25-Basis-Point Rate Cut

True, they generally have performed better when the Fed is cutting interest rates, which was the case last week when the Fed lowered the target for the Fed Funds rate by 25 basis points to a range of 4.0% to 4.25%,

with Jerome H. Powell & Co. focusing more attention on the maximum employment side of its dual mandate than the inflation side.

The health of the economy is a question mark, even as the latest projections from the Federal Reserve Board members and Federal Reserve Bank presidents showed a modest increase from the June estimates for GDP growth this year, next year and 2027,

Econ News – Mixed Numbers, Solid GDP Growth the Forecast

while retail sales for August rose a better-than-expected 0.6%,

manufacturing activity in the Philadelphia area for September picked up considerably,

and first-time-filings for unemployment benefits at 231,000 in the latest week came in below forecasts of 240,000 and retreated from the prior week’s revised tally of 264,000.

On the other hand, the latest read on manufacturing activity in the New York area dipped this month,

housing starts last month trailed estimates with a sizable drop from July,

and the forward-looking Leading Economic Index (LEI) for August declined by a worse-than-predicted 0.5%.

Still, though the projection was made mid-week and did not include the new LEI reading, the latest estimate for Q3 U.S. GDP growth from the Atlanta Fed resided at a robust 3.3%,

and Fed Chair Powell was not exactly downbeat on his economic assessment in the opening remarks for his Press Conference following Wednesday’s announcement on interest rates,

even as market expectations continue to call for as many as two more 25-basis-point cuts in the Fed Funds rate by year end and as many as four cuts over the next 10 months.

EPS – Solid Growth Projected for 2025 & 2026

All else equal, lower interest rates are a positive for equity prices, and the outlook for corporate profit growth the balance of this year and in 2026 remains favorable,

so we see no reason why time in the market won’t continue to reward those who share our long-term investment horizon, even with the inevitable trips south along the journey,

Value – Handsome, but not Excessive, Returns Over the Last Two Decades

while we note that returns on Value stocks over the past two decades, despite being very good, have not been excessive.

Government Shutdowns – History Lesson for Stocks

Yes, there will be new things to worry about, with another potential government shutdown looming,

but time is a terrific risk-mitigation tool!

Stock News – Updates on five stocks across five different sectors

Keeping in mind that all stocks are rated as a “Buy” until such time as they are a “Sell,” a listing of all current recommendations is available for download via the following link: https://theprudentspeculator.com/dashboard/. We also offer the reminder that any sales we make for our newsletter strategies are announced via our Sales Alerts. Jason Clark, Chris Quigley and Zack Tart take a look at earnings reports and other market-moving news of note out last week for more than a few of our recommendations.