AI could drive a natural gas boom as power companies face surging electricity demand

A chimney from the Linden Cogeneration Plant is seen in Linden New Jersey April 22, 2022. 

Kena Betancur | View Press | Corbis News | Getty Images

Natural gas producers are planning for a significant spike in demand over the next decade, as artificial intelligence drives a surge in electricity consumption that renewables may struggle to meet alone.

After a decade of flat power growth in the U.S., electricity demand is forecast to grow as much as 20% by 2030, according to a Wells Fargo analysis published in April. Power companies are moving to quickly secure energy as the rise of AI coincides with the expansion of domestic semiconductor and battery manufacturing as well as the electrification of the nation’s vehicle fleet.

AI data centers alone are expected to add about 323 terawatt hours of electricity demand in the U.S. by 2030, according to Wells Fargo. The forecast power demand from AI alone is seven times greater than New York City’s current annual electricity consumption of 48 terawatt hours. Goldman Sachs projects that data centers will represent 8% of total U.S. electricity consumption by the end of the decade.

The surge in power demand poses a challenge for Amazon, Google, Microsoft and Meta. The tech companies have committed to powering their data centers with renewables to slash carbon emissions. But solar and wind alone may be inadequate to meet the electricity load because they are dependent on variable weather, according to an April note from consulting firm Rystad Energy.

“Economic growth, electrification, accelerating data center expansion are driving the most significant demand growth in our company’s history and they show no signs of abating,”

Robert Blue

Dominion Energy, Chief Executive Officer

Surging electricity loads will require an energy source that can jump into the breach and meet spiking demand during conditions when renewables are not generating enough power, according to Rystad. The natural gas industry is betting gas will serve as the preferred choice.

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Natural gas prices year to date

“This type of need demonstrates that the emphasis on renewables as the only source of power is fatally flawed in terms of meeting the real demands of the market,” Richard Kinder, executive chairman of pipeline operator Kinder Morgan, told analysts during the company’s first-quarter earnings in April.

“The primary use of these data centers is big tech and I believe they’re beginning to recognize the role that natural gas and nuclear must play,” Kinder said during the call. Kinder Morgan is the largest natural gas pipeline operator in the U.S. with 40% market share.

Natural gas is expected to supply 60% of the power demand growth from AI and data centers, while renewables will provide the remaining 40%, according to Goldman Sachs’ report published in April.

Gas demand could increase by 10 billion cubic feet per day by 2030, according to Wells Fargo. This would represent a 28% increase over the 35 bcf/d that is currently consumed for electricity generation in the U.S, and a 10% increase over the nation’s total gas consumption of 100 bcf/d.

“That’s why people are getting more bullish on gas,” said Roger Read, an equity analyst and one of the authors of the Wells Fargo analysis, in an interview. “Those are some pretty high growth rates for a commodity.”

The demand forecasts, however, vary as analysts are just starting to piece together what data centers might mean for natural gas. Goldman expects a 3.3 bcf/d increase in gas demand, while Houston-based investment bank Tudor, Pickering, Holt & Co. sees a base case of 2.7 bcf/d and a high case of 8.5 bcf/d.

Powering the Southeast boom

Power companies will need energy that is reliable, affordable and can be deployed quickly to meet rising electricity demand, said Toby Rice, CEO of EQT Corp., the largest natural gas producer in the U.S.

“Speed to market matters,” Rice told CNBC’s “Money Movers” in late April. “This is going to be another differentiator for EQT and natural gas to take a very large amount of this market share.”

Natural gas market looks oversupplied right now, says EQT CEO Toby Rice

EQT is positioned to become a “key facilitator of the data center build-out” in the Southeast, Rice told analysts on the company’s earnings call in April.

The Southeast is the hottest data center market in the world with Northern Virginia in the thick of the boom, hosting more data centers than the next five largest markets in the U.S. combined. Some 70% of the world’s internet traffic passes through the region daily.

The power company Dominion Energy forecasts that demand from data centers in Northern Virginia will more than double from 3.3 gigawatts in 2023 to 7 gigawatts in 2030.

Further south, Georgia Power sees retail electricity sales growing 9% through 2028 with 80% of the demand coming from data centers, said Christopher Womack, CEO of Georgia Power’s parent Southern Company, during the utility’s fourt-quarter earnings call in February.

“Economic growth, electrification, accelerating data center expansion are driving the most significant demand growth in our company’s history and they show no signs of abating,” Dominion CEO Robert Blue said during the company’s March investor meeting.

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EQT shares over the past year.

The surging power demand in the Southeast lies at the doorstep of EQT’s asset base in the Appalachian Basin, Rice said during the earnings call. Coal plant retirements and data centers could result in 6 bcf/d of new natural gas demand in EQT’s backyard by 2030, the CEO said.

EQT recently purchased the owner of the Mountain Valley Pipeline, which connects prolific natural gas reserves that EQT is operating and developing in the Appalachian Basin to southern Virginia. EQT is the only producer that can access the growing data center market through the pipeline, said Jeremy Knop, the company’s chief financial officer.

“I think we are very uniquely positioned in that sense,” Knop said during the call. Rice said the Southeast will become an even more attractive gas market than the Gulf Coast later in the decade. EQT is planning to expand capacity on the Mountain Valley Pipeline from 2 bcf/d to 2.5 bcf/d. The pipeline is expected to become operational in June.

The level of electricity demand could help lift natural gas prices out of the doldrums.

Prices plunged as much more than 30% in the first quarter of 2024 on strong production, lower demand due to a mild winter and historic inventory levels in the U.S. By 2030, prices could average $3.50 per thousand cubic feet, a 46% increase over the 2024 average price of $2.39, according to Wells Fargo.

Grid reliability worries

Dominion laid out scenarios in its 2023 resource plan that would add anywhere from 0.9 to 9.3 gigawatts of new natural gas capacity over the next 25 years. The power company said gas turbines will be critical to fill gaps when production drops from renewable resources such as solar. The turbines would be dual use and able to take clean hydrogen at some point.

“We’re building a lot of renewables, which all of our customers are looking for, but we need to make sure that we can operate the system reliably,” Blue told analysts during Dominion’s earnings call Thursday.

Renewables will play a major role in meeting the demand but they face challenges that make gas look attractive through at least 2030, Read, the Wells Fargo analyst, told CNBC.

An all of the above strategy is the only thing that we see as the way to maintain the reliability and the affordability that our customers count on.”

Lynn Good

Duke Energy, Chief Executive Officer

Many of the renewables will be installed in areas that are not immediately adjacent to data centers, he said. It will take time to build power lines to transport resources to areas of high demand, the analyst said.

Another constraint on renewables right now is the currently available battery technology is not efficient enough to power data centers 24 hours a day, said Zack Van Everen, director of research at investment Tudor, Pickering, Holt & Co.

Nuclear is a potential alternative to gas and has the advantage of providing carbon free energy, but new advanced technology that shortens typically long project timelines is likely a decade away from having a meaningful impact, according to Wells Fargo.

Richard Kinder, executive chairman of pipeline operator Kinder Morgan, said significant amounts new nuclear capacity will not come online for the foreseeable future, and building power lines to connect distant renewables to the grid will take years. This means natural gas has to play an important role for years to come, Kinder said during the company’s earnings call in April.

“I think acceptance of this hypothesis will become even clearer as power demand increases over the coming months and years and it will be one more significant driver of growth in the demand for natural gas that will benefit all of us in the midstream sector,” Kinder said.

Environmental impact

Any expansion of natural gas in meeting U.S energy demand is likely to be met with opposition from environmental groups who want fossil fuels to be phased out as soon as possible.

Goldman Sachs forecast carbon emissions from data centers could more than double by 2030 to about 220 million tons, or 0.6% of global energy emissions, assuming natural gas provides the bulk of the power.

Virginia has mandated that all carbon-emitting plants be phased out by 2045. Dominion warned in its resource plan that the phase out date potentially raises system reliability and energy independence issues, with the company relying on purchasing capacity across state lines to meet demand.

Duke Energy CEO Lynn Good said natural gas “can be a difficult topic,” but the fossil fuel is responsible for 45% of the power company’s emissions reductions since 2005 as dirtier coal plants have been replaced. Good said electricity demand in North Carolina is growing at a pace not seen since the 1980s or 1990s.

“As we look at the next many years trying to find a way to expand a system to approach this growth, I think natural gas has a role to play,” Good said at the Columbia Global Energy Summit in New York City in April. The CEO said natural gas is needed as a “bridge fuel” until more advanced technology comes online.

“An all of the above strategy is the only thing that we see as the way to maintain the reliability and the affordability that our customers count on,” Good said.

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Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week

Stock-market investors may take their cues from a series of important events in the week ahead, including the Federal Reserve’s monetary-policy meeting, a closely-watched December employment report and an onslaught of earnings from megacap technology names, which all promise insight into the state of the economy and interest-rate outlook. 

The benchmark S&P 500 index
SPX
Thursday closed at a record high for five straight trading days, the longest streak of its kind since November 2021. The index finished slightly lower on Friday, but clinched weekly gains of 1.1%, while the Nasdaq Composite
COMP
advanced 1% and the blue-chip Dow Jones Industrial Average
DJIA
gained 0.7% for the week, according to Dow Jones Market Data.

“What we’re seeing is the market participants are still playing catch-up from 2023, putting money on the sidelines to work,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management.

“Wall Street is still back at it trying to eke out gains as quickly as possible, so it’s very short-term oriented until we get big market-moving events,” he said, adding that one of the events could well be “a disappointing Fed speech.”

Fed’s Powell has good reasons to push back on rate cuts

Expectations that the Fed would begin easing monetary policy as early as March after its fastest tightening cycle in four decades have helped fuel a rally in U.S. stock- and bond-markets. Investors now mostly expect five or six quarter-point rate cuts by December, bringing the fed-funds rate down to around 4-4.25% from the current range of 5.25-5.5%, according to the CME FedWatch Tool. 

See: Economic growth underlined by fourth-quarter GDP reinforces Fed’s cautious approach to rate cuts

While no interest-rate change is expected for the central bank’s first policy meeting this year, some market analysts think comments from Fed Chair Jerome Powell during his news conference on Wednesday are likely to shift the market’s expectations and push back against forecasts of a March cut. 

Thierry Wizman, global FX and interest rates strategist at Macquarie, said a stock-market rally, “too-dovish” signals from the Fed’s December meeting, a still-resilient labor market and escalating Middle East conflicts may indicate that Powell has to keep the “[monetary] tightening bias” next week. 

The rally in the stock market could “conceivably backfire” by virtue of a loosening of financial conditions, while the labor market has not weakened to the extent that the Fed officials would have hoped, Wizman told MarketWatch in a phone interview on Friday.

Further complicating things, fears that inflation could spike again in light of the conflict in the Middle East and Red Sea could reinforce Fed’s cautious approach to rate cuts, he said. 

See: Oil traders aren’t panicking over Middle East shipping attacks. Here’s why.

Meanwhile, a shift to “neutral bias” doesn’t automatically mean that the Fed will cut the policy rate soon since the Fed still needs to go to “easing bias” before actually trimming rates, Wizman said. “I think the market gets too dovish and does not realize the Fed has very, very good reasons to push this [the first rate cut] out to June.” 

Markets are ‘laser-focused’ on January employment report

Labor-market data could also sway U.S. financial markets in the week ahead, serving as the “big swing factor” for the economy, said Patrick Ryan, head of multi-asset solutions at Madison Investments. 

Investors have been looking for clear signs of a slowing labor market that could prompt the central bank to start cutting rates as early as March. That bet may be tested as soon as Friday with the release of nonfarm payroll data for January.

Economists polled by The Wall Street Journal estimate that U.S. employers added 180,000 jobs in January, down from a surprisingly strong 216,000 in the final month of 2023. The unemployment rate is expected to tick up to 3.8% from 3.7% in the prior month, keeping it near a half century low. Wage gains are forecast to cool a bit to 0.3% in January after a solid 0.4% gain in December. 

“That’s going to have everyone laser-focused,” Ryan told MarketWatch via phone on Thursday. “Anything that shows you real weakness in the labor market is going to question if the equity market is willing to trade at 20 plus times (earnings) this year.” The S&P 500 is trading at 20.2 times earnings as of Friday afternoon, according to FactSet data. 

Six of ‘Magnificent 7’ may continue to drive S&P 500 earnings higher

This coming week is also packed with earnings from some of the big tech names that have fueled the stock-market rally since last year. 

Five of the so-called Magnificent 7 technology companies will provide earnings starting from next Tuesday when Alphabet Inc.
GOOG,
+0.10%

and Microsoft Corp.
MSFT,
-0.23%

take center stage, followed by results from Apple Inc.
AAPL,
-0.90%
,
Amazon.com
AMZN,
+0.87%

and Meta Platforms
META,
+0.24%

on Thursday. 

Of the remaining two members of the “Magnificent 7,” Tesla Inc.
TSLA,
+0.34%

has reported earlier this week with its results “massively disappointing” Wall Street, while Nvidia Corp.’s
NVDA,
-0.95%

results will be coming out at the end of February.

See: Here’s why Nvidia, Microsoft and other ‘Magnificent Seven’ stocks are back on top in 2024

A number of the companies in the “Magnificent 7” have seen their stock prices hit record-high levels in recent weeks, which could help to drive the value of the S&P 500 higher, said John Butters, senior earnings analyst at FactSet Research. He also said these stocks are projected to drive earnings higher for the benchmark index in the fourth quarter of 2023.

In One Chart: Tech leads stock market’s January rally by wide margin. Watch out for February.

In aggregate, Nvidia, Alphabet, Amazon.com, Apple, Meta Platforms, and Microsoft are expected to report year-over-year earnings growth of 53.7% for the fourth quarter of last year, while excluding these six companies, the blended earnings decline for the remaining 494 companies in the S&P 500 would be 10.5%, Butters wrote in a Friday client note.

“Overall, the blended earnings decline for the entire S&P 500 for Q4 2023 is 1.4%,” he said. 

Check out! On Watch by MarketWatch, a weekly podcast about the financial news we’re all watching — and how that’s affecting the economy and your wallet. MarketWatch’s Jeremy Owens trains his eye on what’s driving markets and offers insights that will help you make more informed money decisions. Subscribe on Spotify and Apple.  

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GPT and other AI models can’t analyze an SEC filing, researchers find

Patronus AI co-founders Anand Kannappan and Rebecca Qian

Patronus AI

Large language models, similar to the one at the heart of ChatGPT, frequently fail to answer questions derived from Securities and Exchange Commission filings, researchers from a startup called Patronus AI found.

Even the best-performing artificial intelligence model configuration they tested, OpenAI’s GPT-4-Turbo, when armed with the ability to read nearly an entire filing alongside the question, only got 79% of answers right on Patronus AI’s new test, the company’s founders told CNBC.

Oftentimes, the so-called large language models would refuse to answer, or would “hallucinate” figures and facts that weren’t in the SEC filings.

“That type of performance rate is just absolutely unacceptable,” Patronus AI co-founder Anand Kannappan said. “It has to be much much higher for it to really work in an automated and production-ready way.”

The findings highlight some of the challenges facing AI models as big companies, especially in regulated industries like finance, seek to incorporate cutting-edge technology into their operations, whether for customer service or research.

The ability to extract important numbers quickly and perform analysis on financial narratives has been seen as one of the most promising applications for chatbots since ChatGPT was released late last year. SEC filings are filled with important data, and if a bot could accurately summarize them or quickly answer questions about what’s in them, it could give the user a leg up in the competitive financial industry.

In the past year, Bloomberg LP developed its own AI model for financial data, business school professors researched whether ChatGPT can parse financial headlines, and JPMorgan is working on an AI-powered automated investing tool, CNBC previously reported. Generative AI could boost the banking industry by trillions of dollars per year, a recent McKinsey forecast said.

But GPT’s entry into the industry hasn’t been smooth. When Microsoft first launched its Bing Chat using OpenAI’s GPT, one of its primary examples was using the chatbot to quickly summarize an earnings press release. Observers quickly realized that the numbers in Microsoft’s example were off, and some numbers were entirely made up.

‘Vibe checks’

Part of the challenge when incorporating LLMs into actual products, say the Patronus AI co-founders, is that LLMs are nondeterministic — they’re not guaranteed to produce the same output every time for the same input. That means that companies will need to do more rigorous testing to make sure they’re operating correctly, not going off-topic, and providing reliable results.

The founders met at Facebook parent company Meta, where they worked on AI problems related to understanding how models come up with their answers and making them more “responsible.” They founded Patronus AI, which has received seed funding from Lightspeed Venture Partners, to automate LLM testing with software, so companies can feel comfortable that their AI bots won’t surprise customers or workers with off-topic or wrong answers.

“Right now evaluation is largely manual. It feels like just testing by inspection,” Patronus AI co-founder Rebecca Qian said. “One company told us it was ‘vibe checks.'”

Patronus AI worked to write a set of more than 10,000 questions and answers drawn from SEC filings from major publicly traded companies, which it calls FinanceBench. The dataset includes the correct answers, and also where exactly in any given filing to find them. Not all of the answers can be pulled directly from the text, and some questions require light math or reasoning.

Qian and Kannappan say it’s a test that gives a “minimum performance standard” for language AI in the financial sector.

Here’s some examples of questions in the dataset, provided by Patronus AI:

  • Has CVS Health paid dividends to common shareholders in Q2 of FY2022?
  • Did AMD report customer concentration in FY22?
  • What is Coca Cola’s FY2021 COGS % margin? Calculate what was asked by utilizing the line items clearly shown in the income statement.

How the AI models did on the test

Patronus AI tested four language models: OpenAI’s GPT-4 and GPT-4-Turbo, Anthropic’s Claude 2 and Meta’s Llama 2, using a subset of 150 of the questions it had produced.

It also tested different configurations and prompts, such as one setting where the OpenAI models were given the exact relevant source text in the question, which it called “Oracle” mode. In other tests, the models were told where the underlying SEC documents would be stored, or given “long context,” which meant including nearly an entire SEC filing alongside the question in the prompt.

GPT-4-Turbo failed at the startup’s “closed book” test, where it wasn’t given access to any SEC source document. It failed to answer 88% of the 150 questions it was asked, and only produced a correct answer 14 times.

It was able to improve significantly when given access to the underlying filings. In “Oracle” mode, where it was pointed to the exact text for the answer, GPT-4-Turbo answered the question correctly 85% of the time, but still produced an incorrect answer 15% of the time.

But that’s an unrealistic test because it requires human input to find the exact pertinent place in the filing — the exact task that many hope that language models can address.

Llama 2, an open-source AI model developed by Meta, had some of the worst “hallucinations,” producing wrong answers as much as 70% of the time, and correct answers only 19% of the time, when given access to an array of underlying documents.

Anthropic’s Claude 2 performed well when given “long context,” where nearly the entire relevant SEC filing was included along with the question. It could answer 75% of the questions it was posed, gave the wrong answer for 21%, and failed to answer only 3%. GPT-4-Turbo also did well with long context, answering 79% of the questions correctly, and giving the wrong answer for 17% of them.

After running the tests, the co-founders were surprised about how poorly the models did — even when they were pointed to where the answers were.

“One surprising thing was just how often models refused to answer,” said Qian. “The refusal rate is really high, even when the answer is within the context and a human would be able to answer it.”

Even when the models performed well, though, they just weren’t good enough, Patronus AI found.

“There just is no margin for error that’s acceptable, because, especially in regulated industries, even if the model gets the answer wrong 1 out of 20 times, that’s still not high enough accuracy,” Qian said.

But the Patronus AI co-founders believe there’s huge potential for language models like GPT to help people in the finance industry — whether that’s analysts, or investors — if AI continues to improve.

“We definitely think that the results can be pretty promising,” said Kannappan. “Models will continue to get better over time. We’re very hopeful that in the long term, a lot of this can be automated. But today, you will definitely need to have at least a human in the loop to help support and guide whatever workflow you have.”

An OpenAI representative pointed to the company’s usage guidelines, which prohibit offering tailored financial advice using an OpenAI model without a qualified person reviewing the information, and require anyone using an OpenAI model in the financial industry to provide a disclaimer informing them that AI is being used and its limitations. OpenAI’s usage policies also say that OpenAI’s models are not fine-tuned to provide financial advice.

Meta did not immediately return a request for comment, and Anthropic didn’t immediately have a comment.

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Friday’s S&P 500 and Nasdaq-100 rebalance may reflect concerns over concentration risk

It’s arguably the biggest stock story of 2023: a small number of giant technology companies now make up a very large part of big indexes like the S&P 500 and the Nasdaq-100. 

Five companies (Apple, Microsoft, Amazon, Nvidia and Alphabet) make up about 25% of the S&P 500. Six companies (Apple, Microsoft, Amazon, Nvidia, Alphabet and Broadcom) make up about 40% of the Nasdaq-100. 

The S&P 500 and the Nasdaq are rebalancing their respective indexes this Friday. While this is a routine event, some of the changes may reflect the concerns over concentration risk. 

A ton of money is pegged to a few indexes 

Now that the CPI and the Fed meeting are out of the way, these rebalances are the last major “liquidity events” of the year, corresponding with another notable trading event: triple witching, or the quarterly expiration of stock options, index options and index futures. 

This is an opportunity for the trading community to move large blocks of stock for the last gasps of tax loss harvesting or to position for the new year. Trading volume will typically drop 30%-40% in the final two weeks of the year after triple witching, with only the final trading day showing significant volume.

All of this might appear of only academic interest, but the big move to passive index investing in the past 20 years has made these events more important to investors. 

When these indexes are adjusted, either because of additions or deletions, or because share counts change, or because the weightings are changed to reduce the influence of the largest companies, it means a lot of money moves in and out of mutual funds and ETFs that are directly or indirectly tied to the indexes. 

Standard & Poor’s estimates that nearly $13 trillion is directly or indirectly indexed to the S&P 500. The three largest ETFs (SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF, and Vanguard S&P 500 ETF) are all directly indexed to the S&P 500 and collectively have nearly $1.2 trillion in assets under management. 

Linked to the Nasdaq-100 — the 100 largest nonfinancial companies listed on Nasdaq — the Invesco QQQ Trust (QQQ) is the fifth-largest ETF, with roughly $220 billion in assets under management. 

S&P 500: Apple and others will be for sale. Uber going in 

For the S&P 500, Standard & Poor’s will adjust the weighting of each stock to account for changes in share count. Share counts typically change because many companies have large buyback programs that reduce share count. 

This quarter, Apple, Alphabet, Comcast, Exxon Mobil, Visa and Marathon Petroleum will all see their share counts reduced, so funds indexed to the S&P will have to reduce their weighting. 

S&P 500: Companies with share count reduction

(% of share count reduction)

  • Apple        0.5%
  • Alphabet   1.3%
  • Comcast    2.4%
  • Exxon Mobil  1.0%
  • Visa                0.8%
  • Marathon Petroleum  2.6%

Source: S&P Global

Other companies (Nasdaq, EQT, and Amazon among them) will see their share counts increased, so funds indexed to the S&P 500 will have to increase their weighting. 

In addition, three companies are being added to the S&P 500: Uber, Jabil, and Builders FirstSource.  I wrote about the effect that being added to the S&P was having on Uber‘s stock price last week.  

Three other companies are being deleted and will go from the S&P 500 to the S&P SmallCap 600 index: Sealed Air, Alaska Air and SolarEdge Technologies

Nasdaq-100 changes: DoorDash, MongoDB, Splunk are in 

The Nasdaq-100 is rebalanced four times a year; however, the annual reconstitution, where stocks are added or deleted, happens only in December. 

Last Friday, Nasdaq announced that six companies would be added to the Nasdaq-100: CDW Corporation (CDW), Coca-Cola Europacific Partners (CCEP), DoorDash (DASH), MongoDB (MDB), Roper Technologies (ROP), and Splunk (SPLK). 

Six others will be deleted: Align Technology (ALGN), eBay (EBAY), Enphase Energy (ENPH), JD.com (JD), Lucid Group (LCID), and Zoom Video Communications (ZM).

Concentration risk: The rules

Under federal law, a diversified investment fund (mutual funds, exchange-traded funds), even if it just mimics an index like the S&P 500, has to satisfy certain diversification requirements. This includes requirements that: 1) no single issuer can account for more than 25% of the total assets of the portfolio, and 2) securities that represent more than 5% of the total assets cannot exceed 50% of the total portfolio. 

Most of the major indexes have similar requirements in their rules. 

For example, there are 11 S&P sector indexes that are the underlying indexes for widely traded ETFs such as the Technology Select SPDR ETF (XLK). The rules for these sector indexes are similar to the rules on diversification requirements for investment funds discussed above. For example, the S&P sector indexes say that a single stock cannot exceed 24% of the float-adjusted market capitalization of that sector index and that the sum of the companies with weights greater than 4.8% cannot exceed 50% of the total index weight. 

At the end of last week, three companies had weights greater than 4.8% in the Technology Select Sector (Microsoft at 23.5%, Apple at 22.8%, and Broadcom at 4.9%) and their combined market weight was 51.2%, so if those same prices hold at the close on Friday, there should be a small reduction in Apple and Microsoft in that index. 

S&P will announce if there are changes in the sector indexes after the close on Friday. 

The Nasdaq-100 also uses a “modified” market-capitalization weighting scheme, which can constrain the size of the weighting for any given stock to address overconcentration risk. This rebalancing may reduce the weighting in some of the largest stocks, including Apple, Microsoft, Amazon, Nvidia and Alphabet. 

The move up in these large tech stocks was so rapid in the first half of the year that Nasdaq took the unusual step of initiating a special rebalance in the Nasdaq-100 in July to address the overconcentration of the biggest names. As a result, Microsoft, Apple, Nvidia, Amazon and Tesla all saw their weightings reduced. 

Market concentration is nothing new

Whether the rules around market concentration should be tightened is open for debate, but the issue has been around for decades.

For example, Phil Mackintosh and Robert Jankiewicz from Nasdaq recently noted that the weight of the five largest companies in the S&P 500 was also around 25% back in the 1970s.

Disclosure: Comcast is the corporate parent of NBCUniversal and CNBC.

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These 10 portfolio names outperformed the stock market amid the October decline

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., October 26, 2023. 

Brendan Mcdermid | Reuters

Despite a downbeat month for stocks and mounting macroeconomic uncertainty, several Club names outperformed the market in October — and landed in the green.  

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Top Wall Street analysts pick these five stocks for compelling returns

Shantanu Narayen, CEO, Adobe.

Mark Neuling | CNBC

Investors are grappling with uncertainty after a difficult September left the major averages reeling.

However, the current scenario also offers an opportunity to pick stocks that could generate attractive returns despite short-term pressures.

To that end, here are five stocks favored by Wall Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performance.

Adobe

Software giant Adobe (ADBE) recently reported fiscal third-quarter earnings. The company is experiencing strength in subscriptions to its cloud-based software offerings.

Impressed with the quarter’s print, Deutsche Bank analyst Brad Zelnick boosted his price target for ADBE stock to $610 from $550 and reaffirmed a buy rating. The analyst said the results reinforce his view of Adobe as a winner in an emerging generative artificial intelligence world.  

Ahead of the results, Adobe announced the commercial availability of its Firefly generative AI offering and increased the pricing of its Creative Cloud product to reflect the integration of the new AI features. The analyst said that this pricing strategy could drive the adoption of the core Creative Cloud product with the embedded generative AI tools, which is better than selling the new features separately.

“This strategy should enable creatives to better appreciate the productivity benefits of generative AI more quickly, and make Firefly-powered generative AI offerings a critical part of their workflows, creating competitive differentiation as well as increasing the overall value of Creative Cloud,” said Zelnick.

The analyst also sees additional monetization opportunities through new standalone offerings like GenStudio. 

Zelnick ranks No.50 among more than 8,500 analysts tracked by TipRanks. His ratings have been profitable 71% of the time, with each delivering a return of 15.5%, on average. (See Adobe’s Technical Analysis on TipRanks)   

Salesforce

Zelnick is also bullish on another cloud software vendor: Salesforce (CRM). The analyst reiterated a buy rating on the stock with a price target of $260 following the company’s Dreamforce annual conference and investor meetings with the CEO of a Salesforce consulting partner and a global consulting firm executive.

He said that the Dreamforce event emphasized Salesforce’s leadership in AI customer relationship management (CRM), supported by a combination of “trust, data and interoperability.” (See Salesforce Hedge Fund Trading Activity on TipRanks).

The analyst noted that data cloud commentary from partners was optimistic, based on real demand and ongoing implementations.             

“With strong pricing power, unparalleled access to enormous trusted data, an eventual rotation back to front office spending, as well as management’s laser-focus on margins and cash flow growth, we believe Salesforce shares are poised to outperform,” said Zelnick.

Pinterest

Image-sharing platform Pinterest (PINS) held its investor day on Sept.19. At the event, the company said that it expects a compound annual growth rate in the mid to high teens for its revenue and an earnings before interest, taxes, depreciation and amortization margin that is in the low 30% range over the next three to five years.

Baird analyst Colin Sebastian noted that management expects an upside to its long-term targets if the underlying trends improve. The analyst highlighted that the shopping experience remains vital in the company’s overall strategy. Specifically, 96% of searches on Pinterest are unbranded, providing advertisers a huge opportunity to target users, with more than 50% of them using the platform to shop.

“Importantly, the Amazon ads integration seems to be going well, exceeding management’s initial expectations, with Pinterest using its recommendation engine to target Amazon ads at its own users,” added Sebastian.

The analyst reaffirmed a buy rating on PINS stock and a price target of $34, with a valuation that reflects rapid growth rate, an early stage of market share gains, as well as significant cash flow generation over the long term.

Sebastian ranks 328th out of more than 8,500 analysts tracked on TipRanks. Also, 54% of his ratings have been profitable, with an average return of 11.7%. (See Pinterest Blogger Opinions & Sentiment on TipRanks) 

Microsoft

Tech giant Microsoft (MSFT) recently made several announcements spanning its Microsoft 365 Copilot, Bing, Windows and Surface products.

Goldman Sachs analyst Kash Rangan thinks that the developments announced by the company reflect solid execution against its Copilot product roadmap and the strength of its OpenAI partnership.

“Microsoft’s speed to market, strong presence across the tech stack and well-established footprint within the enterprise give us confidence that Microsoft is well positioned to drive growth on the back of these announcements and be a key leader in the Gen-AI era,” said Rangan.

The analyst thinks that the company should be able to capture a solid part of its more-than-$135 billion total addressable market within Microsoft 365, with additional opportunities across its Azure, Windows, Dynamics and Bing/Edge offerings. He reiterated a buy rating on MSFT with a price target of $400.

Rangan holds the 509th position among more than 8,500 analysts on TipRanks. His ratings have been profitable 58% of the time, with each delivering an average return of 8.5%. (See Microsoft Financial Statements on TipRanks)

FedEx

We end this week’s list with logistics giant FedEx (FDX). The company recently reported fiscal first-quarter earnings that beat expectations, but a decline in revenue due to macro pressures. The bottom line benefited from the company’s cost-reduction initiatives.

Evercore analyst Jonathan Chappell, who holds the 156th position out of more than 8,500 analysts on TipRanks, noted the improvement in the company’s full-year earnings guidance range, despite the lower revenue outlook. The earnings outlook was fueled by the cost reductions under FedEx’s DRIVE program that is targeting savings of $1.8 billion in fiscal 2024.

Chappell said that FedEx grabbed about 400,000 packages of volume from its closest peer (UPS), with a lower possibility of these share gains reversing immediately. Further, FedEx gained almost 5,000 shipments per day from the liquidation of a key competitor (Yellow).

The analyst said, “FDX continues to build a track record of execution on its ambitious cost-cutting and efficiency targets, rendering the equity as a unique investment opportunity for when demand returns.”

Chappell maintained a buy rating on FDX and raised his price target to $291 from $276, saying that FDX remains his top pick. His ratings have been successful 65% of the time, with each rating delivering an average return of 19.7%. (See FedEx Insider Trading Activity on TipRanks).  

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Top Wall Street analysts say these stocks have the best growth prospects

CrowdStrike IPO at the Nasdaq exchange June 12, 2019.

Source: Nasdaq

While macro uncertainty continues to distract investors, it is prudent to focus on companies that are well-positioned to navigate challenges with their solid execution and deliver attractive growth over the long term by capitalizing on secular trends. 

Here are five such stocks chosen by Wall Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performance.

Zscaler

First, we will look at cybersecurity solutions provider Zscaler (ZS). Earlier this month, the company reported its fiscal fourth-quarter results and outlook, which topped Wall Street’s expectations. That said, management cautioned that deals are taking longer to close due to a challenging macro backdrop.

Praising Zscaler’s performance, TD Cowen analyst Shaul Eyal said that the rising demand for the company’s Zero Trust solutions and disciplined spending drove the fourth-quarter outperformance.

The analyst noted that over the past seven quarters, Zscaler’s annual recurring revenue (ARR) has doubled to $2 billion from $1 billion. Other interesting points that the analyst focused on included the company’s large deals, a strong pipeline, and growing federal contracts. (Zscaler serves 12 of the 15 U.S. cabinet-level agencies.)  

Further, the company continues to invest in AI and sees huge growth potential for its AI-powered features. It provides data protection capabilities to prevent the leakage of sensitive data through generative AI.  

Overall, the analyst reiterated a buy rating on ZS stock with a price target of $195, saying, “Investments in AI, Cloud and go-to-market are set to accelerate growth.”

Eyal holds the 9th position among more than 8,500 analysts tracked on TipRanks. In all, 70% of his ratings have been profitable, with each generating an average return of 25.5%. (See Zscaler’s Financial Statements on TipRanks)

CrowdStrike Holdings

Another cybersecurity stock in this week’s list is CrowdStrike (CRWD), which recently reported upbeat fiscal second-quarter results and issued solid guidance.

In reaction to the impressive performance, Needham analyst Alex Henderson raised his price target for CRWD stock to $200 from $170 and reiterated a buy rating on the stock. The analyst noted that the company achieved strong growth in new products under its Identity, Cloud, and LogScale Security Information and Event Management (SIEM) offerings.

The analyst also highlighted management’s commentary about the company’s generative AI cybersecurity product called Charlotte AI, which they believe can immensely improve execution for customers by automating workflows. He added that the use of AI helped the company enhance its own adjusted operating margin, which increased by 472 basis points to 21.3% in the fiscal second quarter.

Henderson called CRWD one of his top recommendations in cybersecurity and said, “Crowd is taking market share with relatively stable pricing and strong new product uptake.”

The analyst also said that the company’s managed services, which are core to the Falcon Complete offering, are enjoying high demand and differentiate the platform from others like Microsoft (MSFT).    

Henderson ranks 162nd among more than 8,500 analysts tracked by TipRanks. His ratings have been profitable 58% of the time, with each rating delivering a return of 15.1%, on average. (See CrowdStrike’s Technical Analysis on TipRanks) 

Chipotle Mexican Grill

Next up is Mexican fast food chain Chipotle Mexican Grill (CMG). Baird analyst David Tarantino, who ranks 357 out of more than 8,500 analysts on TipRanks, said that CMG remains his top idea for investors with a 12-month horizon.

The analyst observed that the stock has pulled back since the mixed second-quarter results due to concerns about late Q2 2023 and early Q3 traffic, subdued Q3 restaurant margin outlook, and macro factors. Nevertheless, he feels that this pullback has created an attractive opportunity to buy CMG stock based on multiple positive catalysts that could emerge in the months ahead.

“Specifically, we expect signs of strong same-store traffic momentum and further pricing actions to lead to an upward bias to EPS estimates and support robust valuation metrics on CMG heading into year-end,” said Tarantino.

Additionally, he sees the possibility of CMG accelerating its unit growth to the high end of its target of 8% to 10% annually, supported by the hiring of additional construction managers this year. Tarantino estimates that a combination of about 10% unit growth and mid-single-digit comparable sales could drive low-to-mid teens revenue growth and more than 20% EPS increase, a profile which he believes deserves a premium valuation.

Tarantino reaffirmed a buy rating on CMG stock with a price target of $2,400. His ratings have been successful 62% of the time, with each rating delivering an average return of 10%. (See CMG Hedge Fund Trading Activity on TipRanks).

Lululemon

Athletic apparel retailer Lululemon (LULU) impressed investors with its fiscal second-quarter performance and improved outlook. The company experienced strong momentum in North America and a spike in its international business, mainly due to robust sales in China.

Commenting on the 61% growth in sales from Greater China, Guggenheim analyst Robert Drbul said that he continues to believe that China holds significant growth potential for Lululemon, as the company aims to quadruple international revenues by 2026. He also highlighted that Lulu intends to open a majority of its 35 new international stores, scheduled for this year, in China. 

The analyst raised his Fiscal 2023 and 2024 earnings estimates and believes that demand for the company’s merchandise remains strong, as competitive pressures from upcoming athletic brands seem overestimated.  

Drbul maintained a buy rating on LULU and a price target of $440, justifying that the company “stands to benefit from favorable secular tailwinds (health, wellness, casualization, and fitness, including at-home).”

Drbul ranks No. 958 out of more than 8,500 analysts tracked on TipRanks. Additionally, 57% of his ratings have been profitable with an average return of 5%. (See Lululemon Insider Trading Activity on TipRanks)

Acushnet Holdings

The last stock on this week’s list is Acushnet Holdings (GOLF), a manufacturer of golf products. Tigress Financial analyst Ivan Feinseth believes that the company is well-positioned to benefit from the ongoing growth in golf, driven by product launches and biannual new golf ball design introductions.

The analyst highlighted that GOLF’s strong brand name continues to be a growth catalyst, as its Titleist brand golf balls remain the preferred choice of PGA and LPGA Tour players. He also noted the strong growth in Titleist golf clubs, Titleist gear, and FootJoy golf wear segments, fueled by a wide range of innovative launches, including new TSR models that rapidly emerged as the most-played model on the PGA tour.

Feinseth increased his price target for GOLF to $68 from $62 and reiterated a buy rating, while emphasizing that the company is enhancing shareholder returns through ongoing dividend increases and share repurchases.

“GOLF’s incredible brand equity, driven by its best-in-class and industry-leading product lines, including FootJoy and Titleist, are major assets and the primary drivers of its premium market valuation,” said Feinseth.  

Feinseth holds the 289th position among more than 8,500 analysts tracked on TipRanks. His ratings have been profitable 58% of the time, with each rating delivering an average return of 10.9%. (See Acushnet Stock Chart on TipRanks)

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The Investing Club’s top things to watch in the stock market Friday

The Club’s top things to watch Friday, August 25

1. Stocks edge up in premarket trading Friday after coming under pressure Thursday. The market is looking to Federal Reserve Chair Jerome Powell’s speech in Jackson Hole, Wyoming, at 10:05 a.m. ET. Investors expect Powell to argue interest rates will need to stay higher for longer in order to stamp out sticky inflation.

2. The Chinese government on Friday moves to ease its mortgage policies in order to boost China’s struggling property market, but it isn’t enough to generate a rally in Asian markets. The Shanghai Composite Index lost 0.6%, while Hong Kong’s Hang Seng Index fell 1.4%.

3. Chipmaker Marvell Technology (MRVL) delivers a quarter and guidance in line with Wall Street’s expectations, as strength in artificial-intelligence applications is offset by continued weakness in some of its legacy businesses like storage. The stock fell more than 3% in premarket trading Friday. The company increases its outlook for AI, with the expectation to exit the year at a $200 million quarterly run rate, or $800 million annualized. That may not be enough upside for today given the tepid reaction to Club name Nvidia‘s (NVDA) huge upside guide Wednesday, but still a good long-term story.

4. Elsewhere in the the world of AI, Baird says next week’s Google Cloud Next conference could show how Club holding Alphabet (GOOGL) is leveraging AI capabilities. Meanwhile, Oppenheimer reiterates its thesis that Club name Microsoft (MSFT) will be the “operating system for AI.”

5. Retailer Nordstrom (JWN) beats on earnings but reiterates a cautious full-year outlook. The company also notes losses from theft are at a historical high. Shares fell over 4% in extended trading Thursday. More broadly, retail earnings this season have showed that American consumers are spending with value top of mind.

6. Loop Capital on Friday upgrades Netflix (NFLX) to buy, from hold, while raising its price target to $500 a share, up from $425. The firm cites improving fundamentals, while noting the shares have corrected 15% from Netflix stock’s recent gains. Upgrading at this juncture is the right way to look at a sell-off in a high-quality company.

7. More ESPN partnerships on the way? Club holding Amazon (AMZN) is reportedly in talks with fellow Club name Walt Disney (DIS) about developing an ESPN streaming service, according to The Information. Disney currently owns 80% of the sports network.

8. Realty Income Corp (O) on Friday announces a $950 million investment in the real-estate assets of The Bellagio Las Vegas, acquiring a 21.9% indirect interest from Blackstone Real Estate Income Trust (BREIT) that values the property at $5.1 billion.

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Top Wall Street analysts are banking on these stocks for solid returns

The Spotify logo on the New York Stock Exchange, April 3, 2018.

Lucas Jackson | Reuters

With markets facing pressure at least in the short term, investors should try to build a portfolio of stocks that can weather the storm and offer long-term growth potential.

Here are five stocks chosen by Wall Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performance.

Domino’s Pizza

Domino’s Pizza (DPZ) reported mixed results for the second quarter, with the company blaming a decline in its market-basket pricing to stores and lower order volumes for the shortfall in its revenue compared to analysts’ expectations.

Nonetheless, BTIG analyst Peter Saleh reiterated a buy rating on Domino’s with a price target of $465 and said that the stock remains his top pick. (See Domino’s Financial Statements on TipRanks) 

In particular, Saleh expects the company’s Uber Eats partnership, changes in the rewards program, and the launch of its pepperoni Stuffed Cheesy Bread to boost the top line in the fourth quarter and into 2024.

The analyst noted that the pizza chain’s entire menu will become available to Uber Eats customers at regular menu prices, without any deals or coupons. Interestingly, the company is targeting the higher-income customers on Uber Eats and reserving the discounts and other benefits for its own ordering channels.

“We expect the improvement in delivery sales, coupled with declining commodities, to translate to healthier unit economics and accelerated domestic development next year and beyond,” said Saleh.

Saleh ranks No. 331 out of more than 8,500 analysts tracked on TipRanks. Also, 64% percent of his ratings have been profitable, with an average return of 12.9%.  

Meta Platforms

Next up is Meta Platforms (META). The social media platform recently delivered upbeat second-quarter results and issued better-than-anticipated guidance for the third quarter, signaling improved conditions in the digital ad market.

Following the print, Monness analyst Brian White raised his price target for Meta to $370 from $275 and maintained a buy rating, saying that the company’s second-quarter results reflected strong execution and its massive cost-improvement measures.

The analyst noted that management’s commentary during the earnings call reflected positive vibes, backed by an improving digital ad market and a compelling product roadmap. He highlighted the momentum in Meta’s short-video feature Reels, which is growing at a more than $10 billion annual revenue run rate across apps. He also mentioned the better-than-expected traction in Threads and the company’s significant investments in artificial intelligence.        

White cautioned investors about regulatory risks and internal headwinds. However, he said that in the long run, “Meta will benefit from the digital ad trend, innovate with AI, and participate in the build-out of the metaverse.”

White holds the 27th position among more than 8,500 analysts on TipRanks. His ratings have been profitable 67% of the time, with each rating delivering an average return of 20.7%. (See Meta Platforms Stock Chart on TipRanks)

Spotify

White is also bullish on audio streaming company Spotify (SPOT). While Spotify’s second-quarter revenue and Q3 2023 guidance missed analysts’ expectations, the analyst contended that results were “respectable” with meaningful year-over-year growth of 27% in monthly active users (MAU) to 551 million.

Commenting on Spotify’s decision to increase the price of its subscription offerings, White noted that the price hikes will impact most subscribers beginning September, thus having a small impact on the third quarter but contributing meaningfully to the fourth-quarter performance.

While the analyst acknowledges an intense competitive backdrop, he said that “Spotify is riding a favorable long-term trend, enhancing its platform, tapping into a large digital ad market, expanding its audio offerings, and improving its cost structure.”

White raised his 2024 estimates and reiterated a buy rating while increasing the price target for SPOT stock to $175 from $160. (See Spotify Blogger Opinions & Sentiment on TipRanks)  

Microsoft

Another tech giant in the week’s list is Microsoft (MSFT), which has been making headlines this year due to its generative AI advancements. The company’s fiscal fourth-quarter results topped Wall Street’s estimates. That said, the revenue outlook for the first quarter of fiscal 2024 fell short of expectations.

Nonetheless, Goldman Sachs analyst Kash Rangan, who ranks 459th among more than 8,500 analysts tracked on TipRanks, remains bullish on MSFT stock. (See Microsoft Hedge Fund Trading Activity on TipRanks)           

The analyst thinks that in the short term, there might be concerns about when the company’s ramped-up capital investments will pay off. However, he observed that historically, whenever Microsoft increased its capital expenditure in the cloud market, Azure growth rate shot up meaningfully and margins rebounded, driving the stock price higher. 

With a strong presence across all layers of the cloud stack, Rangan said that Microsoft is well positioned to capture opportunities in several long-term secular trends, including public cloud and SaaS adoption, digital transformation, generative AI and machine learning, analytics and DevOps.

In line with his bullish stance, Rangan reiterated a buy rating with a price target of $400. He has a success rate of 59% and each of his ratings has returned 10% on average.

General Motors

We now drive toward legacy automaker General Motors (GM), which impressed investors with robust growth in its second-quarter revenue and earnings. Additionally, the company raised its full-year outlook for the second time this year.

Recently, Tigress Financial Partners analyst Ivan Feinseth reaffirmed a buy rating on the stock with a price target of $86, noting the company’s strong execution and the ramp-up of new electric vehicle launches and production.

The analyst highlighted that the company continues to witness robust demand for its full-size SUVs and pickups, which is driving its revenue and cash flow higher and funding the transition and expansion of its EV production.

Feinseth called GM’s Ultium platform and supply chain for EV battery production its significant competitive advantage. The analyst is also positive about the company’s recent initiatives to expand its charging network.

“In addition to the ramp-up of EV production, GM’s ramp-up of high-value software and services as it plans to double company revenue to $275-315 billion by 2030 should drive significant increases in Return on Capital (ROC) and Economic Profit,” the analyst said.     

Feinseth holds the 215th position among more than 8,500 analysts on TipRanks. His ratings have been successful 61% of the time, with each rating delivering an average return of 12.9%. (See General Motors Insider Trading Activity on TipRanks)

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Here are our top 4 stocks and worst 4 stocks to start the second half of 2023

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 12, 2023. 

Brendan McDermid | Reuters

Two weeks into the second half of the year, we put together a quick look at the top four performers and the bottom four in Jim Cramer’s Charitable Trust, the stock portfolio we use for the Investing Club.

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