There’s Gold in Them There Hills
During the California gold rush, the news of gold brought approximately 300,000 people from the rest of the U.S. and abroad to California, and helped to fuel the growth of San Francisco. The gold rush peaked a year later in 1849 (the “49ers”), although some say the sudden influx of gold into the money supply helped invigorate the American economy. Also, the sudden population increase allowed California to grow rapidly into statehood in 1850, and the effects are still being felt today.
While many gold prospectors in California failed to find gold, the gold rush resulted in economic growth overall and significant wealth creation for suppliers. Every miner needed equipment, creating a lucrative market for suppliers of picks, shovels, pans, food and lodging to gold miners. We all know that Levi Strauss built a fortune by selling durable denim work pants to miners. In its latest incarnation, the artificial intelligence gold rush is on, with spending on semiconductors, computer servers, and related data center equipment and software continuing to ramp up. Massive wealth has been created by the AI suppliers to the industry. However, many companies on the other side of the robust AI capital spending equation are still hoping for a return on their investment.
One “picks and shovels” provider, Oracle#, reported a dramatic increase in its backlog this week, driving a 36% gain in the stock yesterday. Oracle is a major player in cloud computing software and hardware for AI training and inferencing. The company noted a $317 billion increase in its backlog due to a number of AI contracts that were signed recently. As a result, Oracle meaningfully increased its cloud infrastructure estimates out to 2030 with a pipeline of additional large deals that could push its backlog toward $500 billion. Broadcom# also recently reported significant growth in its AI equipment and software business serving the AI ecosystem. Broadcom’s AI-related semiconductor business grew 63% over the prior year as its hyperscaler customers continue to invest large sums of capital. The rush is on to spend, for now, although the after effects will be far reaching.
Producer and Consumer Price Reports Are Mixed
The producer price index (PPI), a gauge of costs at the wholesale level in the U.S. economy, posted an unexpected 0.1% decline in August. For the third time this year, the PPI showed outright deflation in what is generally considered a measure of pipeline price pressures. Economists had been looking for a 0.3% increase. The core PPI, which strips out food and energy, also fell 0.1%.
The services sector, which drives about 80% of GDP, saw outright deflation, falling 0.2%. Even goods prices, which are much more heavily impacted by tariffs, rose just 0.1%.
The PPI report provided good news on inflation fundamentals, although today’s CPI reading will get more attention. Consumer prices were reported this morning up 2.9% in August from a year earlier, according to the Labor Department, hotter than July’s gain of 2.7%, but in line with expectations. Prices excluding food and energy categories, the core measure, rose 3.1% over the past 12 months, also matching forecasts. About four-fifths of the CPI and PPI numbers feed into the Fed’s preferred inflation gauge, the personal consumption expenditures price index. The CPI is the final big data point before the Fed’s rate decision next week. The 10-year Treasury yield is now down to around 4% in response while stock futures are indicated slightly higher on the in-line inflation report.
Don’t Fumble The Ball
Corporate earnings reports have been good in the aggregate so far this quarter. Looking ahead, earnings for S&P 500 companies are expected to increase about 11% this year and 14% in 2026. The second half of this year could be a bit weaker than the 10% earnings growth of the second quarter as companies are still managing through tariff changes. If earnings are the gold nuggets that drive market valuations, interest rates and money supply fan the campfire flames. The Federal Reserve holds its next meeting September 16-17 where it will have the opportunity to lower interest rates further. The labor market has clearly weakened, which is the other side of the Fed’s dual mandate. The inflation data, along with a large downward revision in jobs created over the past year and this morning’s report on jobless claims ticking up, will provide cover for the Federal Reserve to lower interest rates gradually.
It is interesting that for the 2025 football season, NFL teams will allocate an average of 54% of salaries to the offensive side of the ball compared to 46% for defense. 24% of salaries on offense are allocated to quarterbacks compared to just 7% for running backs. Wide receivers and tight ends account for 32% of offensive salaries, while the offensive line earns 36%. In the field of investing, it pays to focus offensively on investment opportunities, but also to have a healthy defense to weather the euphoria in the market when the gold rush of AI spending slows down.
Actress Taraji P. Henson turns 55, actor/rapper Ludacris turns 48, and singer Harry Connick Jr. turns 58. Hopefully the San Francisco 49ers have a better season this year than last.
Christopher Crooks, CFA®, CFP® 610-260-2219