Goldman Sachs says AI isn't profitable. Is the sector set for a correction?

The Week in Review

Weekly Market Recap: U.S. and Canada

This week in the stock markets had a bit of everything. Most notably, the Nasdaq took a legitimate hit, down nearly 4%, ending a six-week run of gains, mainly due to some of the big tech stocks stumbling for the second week in a row. The S&P 500 didn't fare much better, slipping around 2%, but the Dow Jones managed to edge up by almost 1%. In Canada, the TSX eked out a tiny gain, up 0.11% at the close of trading Friday.

S&P 500 Returns | Week At-a-Glance

TSX Returns | Week At-a-Glance

COMMENTARY

This week’s economic news centered around inflation in Canada and retail sales figures in both Canada and the United States. In Canada, inflation eased more than expected, while retail sales continued to decline, raising the possibility of further interest rate cuts. In the U.S., retail sales stalled in June, showing no growth from May.

📉 Canada's Inflation Rate Eases to 2.7% in June

Canada's annual inflation rate saw a welcome decline in June, easing to 2.7% from May's 2.9%. This drop no doubt came as a surprise to many who had predicted it would stay at the 2.9% mark.

Let’ have a quick look at some of the key points:

📉 BoC Forecasts: The result aligns broadly with the Bank of Canada's forecasts, which anticipated CPI inflation to hover near 3% in the first half of the year. I’ll say that 2.7% is ‘close enough’ to 3% to qualify.

• Inflation for transportation dropped to 2% from 3.5% in May, thanks in part to a sharp slowdown in gasoline prices (0.4% vs 5.6%).

• Inflation for shelter remained elevated but eased slightly (6.4% vs 6.2%), influenced by the recent rate cut by the BoC and lower bond yields, which helped reduce mortgage rates and rental competition.

• Food prices were up again, rising to 2.8% from 2.4%.

• The significant role of gasoline prices in the overall disinflation kept the trimmed mean core inflation rate unchanged at 2.9%.

📉 Canadian Retail Sales Drop, Widening Door to Further Rate Cuts

• Canadian retail sales have taken a pretty big hit recently, which will in theory at least increase the probability of more interest rate cuts from the Bank of Canada.

Here are my main takeaways:

• May Sales Drop: Retail sales fell by 0.8% in May, the largest drop in over a year.

• June Trend: Early data suggests a further 0.3% decline in June.

• Core Sales: Excluding motor vehicles and gas, core retail sales were down 1.4% month-over-month.

• Volume Adjusted: Price-adjusted sales saw a 0.7% decrease from April, the biggest fall since February of last year.

The report keeps the spotlight on the continuing financial strain on Canadian consumers, who are grappling with high borrowing costs and inflation. We’re seeing more and more evidence that the average family is struggling, and this data just goes to reinforce that view.

Other key points include:

• Consumer Behavior: Many Canadians are cutting expenses due to high interest rates.

• Sector Impact: Sales fell in most major retail categories, especially food, beverages, and discretionary items like furniture and electronics.

• Economic Impact: This downturn in retail is affecting the broader economy, with factory sales growth slowing and wholesaler sales dropping.

📊 US Retail Sales Flat, Not Great but Outpacing Canada

For our neighbours to the south, (the U.S. for those who are geographically challenged 🙂) retail sales stalled in June 2024, showing no growth from May.

Let’s take a closer look at the details; starting with the drops:

• Gasoline Stations: Sales dropped by 3%.

• Auto Sales: Down by 2.3%.

• Sporting Goods, Hobby, Musical Instruments, and Book Stores: Sales fell by 0.1%.

There were some bright spots:

• Building Materials and Garden Equipment: Up by 1.4%. (Full Disclosure; My wife single-handedly propped up the Garden Equipment sector. 😁 *Anecdotal evidence only)

• Health and Personal Care Stores: Rose by 0.9%.

• Clothing: Up by 0.6%.

• Furniture: Increased by 0.6%.

• Electronics and Appliances: Rose by 0.4%.

When you exclude gasoline, sales rose by 0.2%, which follows a 0.5% increase in May.

🌰 Overall Impact, in a Nutshell

Some of the key takeaways from this week’s economic reports:

• This week's economic news paints a mixed picture for the overall economy. In Canada, the easing of inflation to 2.7% in June reflects a positive trend in controlling consumer prices. However, the decline in retail sales highlights ongoing financial strain on Canadian consumers, suggesting that the Bank of Canada (BoC) may consider additional interest rate cuts to stimulate economic activity. We’ll know more on this later this week.

• For the Federal Reserve, the stalling of U.S. retail sales in June presents a challenge. While some sectors did see increases, the overall lack of growth may prompt a cautious approach from the Fed, which is charged with balancing supporting economic activity and managing inflationary pressures.

• Overall, the easing inflation in Canada suggests some success in monetary policy, but the drop in retail sales underscores persistent economic challenges. In the U.S., the mixed retail sales data point to a fragile recovery, potentially influencing the Fed's future decisions on interest rates.

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

Most Overbought Stocks

The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold. A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell. Always perform your own due diligence.

Most Oversold Stocks

A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

TECHNOLOGY & ARTIFICIAL INTELLIGENCE
Does AI Actually Make Money? Goldman Sachs Has Doubts

AI is all the rage in business circles these days, but is it truly profitable? A recent Goldman Sachs report suggests not so much. Here’s the breakdown:

🚀 AI’s Promises and Investments

AI has been touted as transformative, from creating art to revolutionizing customer service and medical data analysis. Billions have been poured into AI, turning companies like Nvidia into tech giants. PriceWaterhouseCoopers even predicted AI could add up to $15.7 trillion to the global economy by 2030. All those rainbows and lollipops considered, skepticism remains about AI’s ability to generate profit.

📉 Goldman Sachs’ Take

Weighing in with their take on the whole AI situation, Goldman Sachs recently questioned the financial benefits of AI in their report "Gen AI: Too Much Spend, Too Little Benefit?"

Jim Covello, the bank's head of global equity research, pointed out that AI’s high costs and Nvidia’s processor monopoly hinder financial gains. He noted, "18 months after the introduction of generative AI to the world, not one truly transformative application has been found."

Zitron says this report is a "serious" rebuke of the AI narrative, emphasizing that when major investors express doubt, it's a bad sign.

🌐 Hype vs. Reality

AI has been around for decades, but ChatGPT's release in 2022 captured public imagination. OpenAI CEO Sam Altman envisions AI discovering new physics or running companies, but many business leaders have taken these promises at face value without seeing immediate returns.

💼 ROI Concerns

Despite massive investments from Amazon, Google, Microsoft, and others, there's little evidence that AI is boosting profits. Divya Goyal, an equity research analyst at Scotiabank, stated, "I cannot name one specific [AI] tool that will generate significant ROI." She believes the key lies in integrating multiple technologies for customer engagement and operational efficiency.

🔍 Skepticism and Future Prospects

The tech industry is eager for another "hypergrowth" market, akin to smartphones or cloud computing. Yet, AI might follow the path of overhyped technologies like 3D printing and the metaverse, which haven't delivered on their promises.

Grant concludes, "Technology always has a great potential to do wonderful things. But people are not seeking technology — they're seeking outcomes that are beneficial to them and that they're willing to pay for."

So, while AI continues to fascinate and attract investment, its true profitability remains uncertain. I won’t say there’s a direction comparison, but as an advisor who was along for the ride when every ‘dot com’ company was set to change the world, I certainly do at least ‘feel’ some similarities to what’s happening today. I hope my feelings are wrong.

SPONSORED CONTENT
High Yielding ETF Strategies Require Investor Due Diligence

The popularity of income investing, and covered call strategies, has exploded. There are now hundreds of ETFs listed in Canada which offer options strategies in the form of income focused ETFs.

Investors should conduct their due diligence before jumping into these types of investments to ensure they will satisfy their investment objectives.

Sacrificing Growth for Income: A Fine Balance

High yielding ETFs will usually sacrifice tomorrow’s portfolio growth for cash flow earned today.

Because of this growth and cash flow trade-off, when you consider historical returns, ETFs with covered call overlays usually underperform long only strategies over time. For the investor that needed the monthly cash flows, this trade-off would make sense for their investment objectives. However, for an investor who was more focused on growth, they may be better off in the long only version.

Moneyness Matters: Understanding the Call Option Process

When you’re investing in an ETF with an options strategy, you should understand how the call options are being written. Out-of-the-money (OTM) call options set strike prices above current market prices, which means the stocks must grow to a certain threshold before being called away (sold). The further OTM the options are written; the more potential growth is available to the investor. At-the-money (ATM) call options set strike prices very close to the current market price which gives little opportunity for growth to the investor. Understanding the underlying options strategy of the ETF will ensure you know what your outcome will look like when it comes to growth potential and income.

BMO ETFs has over ten years of proficiency enhancing income with the first covered call ETF launch in 2011, ZWB. They are the largest Covered Call ETF Provider in Canada by AUM and in terms of number of products¹. With a wide range of dividend-based solutions built to balance growth and income, such as the BMO Canadian High Dividend Covered Call ETF (ZWC) and sector focused covered call ETFs (like our BMO Covered Call Utilities ETF (ZWU) they have the tools an investor needs to enhance the annualized distribution yields on their portfolio.

¹Source: Bloomberg, Feb 29, 2024 
Disclaimers:
This content is sponsored by BMO Exchange Traded Funds.
This content is intended for information purposes only. Beavis Wealth is compensated under this arrangement by BMO Exchange Traded Funds.
Click here for full disclaimer¹

IMMIGRATION & THE ECONOMY
Population Growth ‘Masks’ Canada’s Economic Woes: RBC Report

Canada's economy may not be technically in a recession, but to many, it sure feels like one. Here's why:

📉 Economic Contraction and Population Boom

Though Canada has dodged the technical definition of a recession, high population growth has obscured a troubling economic landscape.

RBC economists Nathan Janzen and Carrie Freestone say that some of what we’re seeing today has only historically been seen during recessionary times.

Canada's population has surged by 2.1 million since mid-2022, which has kept the GDP from shrinking outright despite falling per-person output.

📊 Declining Per-Capita GDP

The report highlights a stark reality: real per-person output has fallen for six of the past seven quarters.

In fact, per capita GDP is now 3.1% below 2019 levels. "But since the 1970s, Canada has never had a trough to peak increase in the unemployment rate of that size without the economy going through a recession," the economists noted.

The unemployment rate's recent increase, though smaller than those in major recessions, comes from historic post-pandemic lows. The economists assert that, typically, such an increase in unemployment would signal a recession, but the influx of new consumers has masked this downturn.

🔍 Future Outlook

Looking ahead, Janzen and Freestone believe that the Bank of Canada's interest rate cuts will "eventually" ease economic pressures. As household purchasing power rises, they predict per-capita growth will turn positive in the second half of 2025.

The current recession-like conditions arise from high inflation and an "aggressive" rate-hiking campaign by the Bank of Canada in 2022 and 2023. The report emphasizes that the wave of new consumers arriving from abroad has been crucial in preventing negative GDP growth.

Overall, while population growth has kept the GDP numbers in check, the underlying economic struggles paint a recession-like picture. The hope is that easing interest rates will help turn things around by late 2025.

HOUSING
Toronto Condo Market Hits 27-Year Low in New Unit Sales

Toronto's condo market has just seen its slowest pace in new unit sales in nearly three decades, despite a housing shortage. Here's some insight:

🚨 Sales Plummet

Sales of new condos in Toronto dropped by 57% from last year, with only 3,159 transactions in the first half of this year. This is the fewest sales since 1997, and it has led to a record high in unsold inventory.

Despite a rate cut by the Bank of Canada in June, the modest quarter-point decrease hasn't significantly eased housing affordability.

🏠 Price Stability Amidst Slowdown

Interestingly, even with the sales slump and increased inventory, new condo prices have only dipped by 2.6% over the past year. Developers are grappling with high construction and financing costs, along with expensive land prices, making it tough to reduce prices.

📉 Impact on New Developments

The drop in new unit sales has also led to a sharp decline in new developments. Only 727 new condo units started construction in the second quarter, the lowest in 20 years. (I had to double check these numbers to make sure I wasn’t imagining them, because the 727 didn’t seem believable.)

Obviously, this poses a real challenge for policymakers aiming to boost housing supply to counter high prices and record rents.

As Toronto deals with these market shifts, we can only hope that further interest rate cuts will make new condos more affordable and revive the market. For now, though, both developers and buyers are playing the waiting game and for many, the future isn’t all that bright.

FOOD INDUSTRY
Canada’s Major Grocers Sign on to Code of Conduct

I wasn’t sure we’d ever get here, but Canada's five largest grocers – Loblaw, Walmart, Costco, Metro, and Empire – have agreed to a new grocery code of conduct. Here’s what this means:

🚀 A Major Milestone

This commitment is a huge step towards fairer and more transparent practices in the grocery supply chain.

The code, which is designed to level the playing field for suppliers and smaller retailers, sets guidelines for fair negotiations, including penalties and fees. It’s designed to be voluntary and industry-led, avoiding the need for government enforcement. Ok, so this might be a bit of a weak link. 🤨

🔑 Unified Front

After initially hesitating, Loblaw agreed to the code, contingent on other players joining. Then, following Loblaw’s lead, Walmart and Costco also came on board, with Walmart’s spokeswoman, Stephanie Fusco, noting the code’s balance while highlighting ongoing discussions about governance and dispute resolution.

Federal agriculture minister Lawrence MacAulay said, “Now we have the five major retailers signing on, that’s good news for the whole supply chain.” However, he emphasized that the code is not meant to lower grocery prices but to improve transparency and fairness.

📊 Looking Ahead

The board overseeing the code is now focused on setting up an office and hiring an adjudicator to ensure compliance. They are also seeking government funding to support these efforts. While Minister MacAulay didn’t confirm the funding approval, he assured, “We’ll do everything to make sure that this is a success.”

The adoption of this code comes amidst rising grocery prices and public pressure on major grocers. With food prices up over 22% in four years, grocers have faced accusations of profiteering.

🏪 Impact on Consumers

Gary Sands from the Canadian Federation of Independent Grocers highlighted the consumer benefits, saying,

Overall, this new code aims to bring more predictability and fairness to Canada's grocery industry, potentially benefiting everyone involved, from suppliers to consumers. Call me skeptical, but I’m not yet 100% convinced this will result in anything more than a ‘smoke and mirrors’ effort, designed to take the pressure off the big food food companies. We’ll see.

Market Movers

Top 10 Weekly Gainers

Top 10 Weekly Losers

Visit our YouTube Channel
Sign up for Pulse (Free)
Our Website
Comments and Feedback