Daily Commentary

MarketMinder’s View: We don’t consider the investment plans discussed here a near-term market driver, but they show how near-term setbacks like the Strait of Hormuz’s closure can bear fruit in the long term—the kind of positive outcomes that can gradually lift sentiment. (We also don’t make individual security recommendations, and those companies mentioned here merely illustrate the broader theme.) In this case, ports operators and other infrastructure providers (together with national governments) are planning massive builds to curb the Strait of Hormuz’s long-term importance for oil and cargo shipping. “A series of new ports is planned for the Indian Ocean, allowing ships to land cargo in Oman and along the eastern coast of the UAE. From there, containers will be loaded on to trucks and driven 150 miles through the 9,000ft-high Hajar Mountains and across the Arabian Desert to Dubai and Abu Dhabi.” This creates a permanent, safe alternative to the dangerous road trip truck drivers have taken across the temporary “land bridge” since war broke out. Temporary land routes have helped goods keep flowing, a key ingredient to supply chains working much better than expected since war broke out—part of what stocks have been pricing since late March’s lows, we think. But the longer-term plans—including huge pipeline expansions to increase oil flows around the Strait—should help reduce the Strait’s long-term influence, perhaps taking some of the geopolitical risk premium out of oil prices in the long run.

MarketMinder’s View: This rather skeptical take on a solid US economic report is emblematic of sentiment right now. While there is plenty of hype and hope around Tech and AI, feelings about the broader US economy are more dour. In this case, S&P Global’s flash US purchasing managers’ index (PMI) showed more widespread growth in July, with the composite reading (services plus manufacturing) rising from 51.9 in June to 53.6. (Readings over 50 indicate expansion.) Services powered the rise, jumping from 51.2 to 53.6, which the article pins on a temporary World Cup hospitality boomlet. Which, fine, but hospitality isn’t all of services. Did the World Cup boost scientific and technical services? Real estate? Warehousing? Personal care? And what about activity outside the host cities? America is more than the San Jose, Los Angeles, Seattle, Kansas City, Miami, Atlanta, Philadelphia and New York metro areas, folks. Big country. Moving on to manufacturing, this piece makes a big deal out of its decline … from 53.9 to 53.8, which is a rounding error. Yes, new orders weakened, but they still registered expansion, per S&P Global’s Press release. Plus, PMIs measure growth’s breadth, not its magnitude. When coverage treats a solid report like this as a temporary reprieve or not as good as meets the eye, it indicates a low bar for reality to clear to continue delivering positive surprise.

MarketMinder’s View: Remember that popular claim from a couple years ago that Utilities stocks were primed for a generational boom due to soaring electricity demand from data centers? We told you at the time this looked far-fetched, considering soaring electricity demand requires soaring electricity infrastructure buildouts, which are expensive. Pair rising costs with regulated rates, and a theoretical positive (big demand) becomes an earnings headwind in the 3 – 30-month timeframe stocks look at. Now, we are starting to see this play out. “Surging demand for electricity from artificial-intelligence data centers—combined with equipment backlogs, permitting delays, tariffs and yearslong waits to connect to the grid—are pushing up construction costs for every type of power plant. … Capital-spending plans for 51 investor-owned utilities have reached an estimated $1.4 trillion for the next five years, up more than 20% from last year’s projections, according to PowerLines, a consumer-education group.” More projects are in the pipeline, and individual project construction costs are up. As the article notes, solar projects are up from $58 per megawatt hour (mwh) last year to $69. Gas plants jumped from $79 per mwh last year to $90. This article positions this as a problem for household electricity rates, which are sure to rise to cover these costs (to the extent regulators allow). We don’t dismiss that but consider also the investment implications: US Utilities stocks are basically flat over the last five months, per FactSet, while the S&P 500 is up. Utilities did outperform in the spring’s war-induced mini-correction, but they lagged equally hard as stocks recovered and their defensive traits were no longer in demand—another sign investors’ belief that Utilities was suddenly offensive didn’t pan out. (At best, that narrative may have held for one or two stocks that don’t face as strictly regulated rates. Sector-wide? No.) That popular view got priced ... then Utilities stocks did something different as reality sets in.