BlueOval, a joint venture between Ford and South Korean battery maker SK, will receive a $9.2B conditional loan from the US Department of Energy (DOE). The DOE loan proceeds will finance the construction of three battery production facilities in the US. It’s the largest loan the DOE has ever made to a US car maker since the financial crisis and represents a significant step towards the onshoring of EV battery production.
The news comes as US imports of lithium-ion batteries are soaring. As shown below, imports of lithium-ion batteries increased nearly 66% YoY in the first quarter. According to S&P Global Market Intelligence, almost 88% of those imports came from China. This represents an increase from China’s 78% share just last year. The relationship with the DOE exemplifies the dire need for domestic battery production to support a US energy transition without giving rise to strategic vulnerabilities.
What To Watch Today
Market Trading Update
This week, the market finally cooled after the recent runup. The question is whether the recent correction has been enough to trigger an entry point to add exposure to equity risk in portfolios. Our money flow index and the MACD indicator show signs of weakening but have not triggered “sell signals” yet.
More importantly, while the market has corrected this week somewhat, it has not worked off much of the previous overbought condition or deviation from the major moving averages. The conclusion is that the current correction has not provided a setup for more aggressively adding equity exposure. We will be watching our sell signals closely to see if they trigger, which would be a good first indicator that a better entry point is approaching.
Perceptions of Wealth
Charles Schwab released the findings of its 2023 Modern Wealth Survey last week. The survey asked a nationally representative sample of Americans their view of the average net worth required to be deemed wealthy. While the respondents considered that number $2.2 million, the group provided contradictory responses to other survey questions.
Boasting an average net worth of $560,000, 48% of survey respondents said they feel wealthy in their current circumstances—a far cry from the $2.2 million figure mentioned earlier. Putting numbers aside, some think that simply keeping up with their peers makes them wealthy. Particularly among Gen Z and Millennials, as shown in the chart below.
Still, most respondents agree that wealth goes deeper than just money. Almost two-thirds said wealth is better defined as having healthy relationships with loved ones. Finally, 70% responded that wealth is more about not worrying about money than the size of your net worth. The survey clearly shows that definitions of wealth are subjective. We suspect that a person’s definition of wealth is shaped by experience as life goes on. When did you last stop to consider your perception of wealth, and how it has changed over the years?
Goldman’s Take on the Market Impact of AI
Goldman Sachs equity analysts recently forecasted that AI could justify a 9% increase in the fair value of the S&P 500. Their model includes a half-percent boost to the index earnings 20-year CAGR estimate, bringing it to 5.4%. However, there is uncertainty about whether the market will fully price that in throughout the early stages. Under different scenarios, Goldman predicts the upside could be anywhere from +5% to +14%.
While the Goldman team doesn’t view the broad market as overly optimistic about the benefits of AI, they admit there may be some irrational exuberance in individual names.
At the stock level, the absolute valuation of large potential beneficiaries such as Nvidia (NVDA) (P/E of 49x) is comparable to some beneficiaries from the Dot Com Boom (Microsoft (MSFT), 60x and Intel (INTC), 40x) but not yet the most extreme example (Cisco (CSCO), 125x).
However, historical precedent from the Dot Com Boom shows the perils of high expectations. Even though most (tech, media, telecom) companies were still able to generate strong sales growth between 2000 and 2002, the failure to meet lofty investor forecasts led to a sharp 50%+ contraction in P/E multiple and a plunge in share prices.
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