Wall Street Brunch: ‘It’s Glowtime’ For Apple

Summary:

• Apple is expected to launch the iPhone 16 family, new Apple Watch models, and potentially new AirPods at its event, with a focus on AI features.
• Analysts predict Apple’s AI platform, Apple Intelligence, will drive the development of generative AI-driven apps, marking a significant step in consumer AI adoption.
• The Fed’s upcoming rate cut decision hinges on the Consumer Price Index.
• Retail investors are keen on GameStop’s upcoming earnings report, with elevated options trading volume.

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Apple’s iPhone 16 event will be closely watched for AI features. (0:17) The August CPI will likely determine how much the Fed cuts. (3:41) GameStop sees elevated options activity ahead of earnings. (5:48)

The following is an abridged transcript:

The trading week starts with a bang – or a rather a glow – as Apple (NASDAQ:AAPL) hosts its iPhone event at 1 p.m. ET Monday.

The company is expected to announce at least four new iPhones and possibly new color options at the “It’s Glowtime” event.

Morgan Stanley expects the event will feature the launch of the iPhone 16 family, new Apple Watch models (Series X and Ultra 3), and potentially new AirPods.

Pre-orders for the iPhone 16, 16 Plus, and 16 Pro/Pro Max are expected to start on September 13th, with in-store availability/shipping to start on September 20.

But the big focus will be its AI platform Apple Intelligence. Wedbush Securities analyst Dan Ives and his team expect developers over the next 6 to 12 months will build hundreds of generative AI-driven apps as part of a technology stack that creates the core building blocks of the consumer AI tidal wave they see coming, starting with iPhone 16.

Alex King, the founder of Cestrian Capital Research who runs Seeking Alpha’s Growth Investor Pro group, discussed what could be a first step in Apple putting AI in your hands:

“It’s not a coincidence, I think, that it was Apple that made the dream of mobile data a reality.

So, back in the late ‘90s – 1999/2000 – cellular carriers everywhere were paying big for data licenses that really hardly generated any value for them over the subsequent five or six years because handsets at the time didn’t have the apps, websites at the time couldn’t handle mobile connections with any sort of rich content and consumers weren’t used to using mobile devices for anything meaningful. And the iPhone changed all that.

Now, I don’t suggest for a second that the next generation of iPhone is going to have a similar aha moment for AI, but I think it will be a step along the way. So, I think this notion that Apple is going to be giving most people their on-ramp to AI is probably going to prove correct.

So, the AI features the new phone is slated to include, while I’m sure they’ll be limited and they’ll look pretty pedestrian in ten years time, I think that’ll be important to start to cement the reality of AI in the mind of the consumer and also in the mind of the investor. So, that to me is the most important, if you like, product or tech cycle part of the event.”

Citi recently named Apple its top artificial intelligence-related stock pick going into 2025, ahead of Nvidia (NVDA) and Arista Networks (ANET).

Analysts at the firm said early developer feedback on iOS 18 beta AI features has been positive, including the recently launched feature to remove unwanted objects with AI, which should provide consumers with a “compelling” reason to upgrade their iPhones.

For investors, the short-term question is (to paraphrase Professor Hubert J. Farnsworth) “Will said glow bring the dough.”

Historically, the iPhone launch has been a sell-the-news event, with Apple slightly underperforming the market on the day.

SA analyst Hunting Alpha says Apple’s valuation is at a slight, but deserved, premium to the longer-term averages

Apple currently trades around a 1-yr fwd PE of 31.5x, which corresponds to 26% premium over the longer-term average of 25x.

That premium is deserved due to the improved business quality of the company and Hunting Alpha is comfortable having a bullish slant.

Looking to the economy, the Fed will get its last big data point before it meets on the 18^th.

The August Consumer Price Index hits before the bell on Wednesday. Both headline and core CPI are expected to rise 0.2%. That would put the headline CPI annual rate at 2.6%, which would be the lowest level since March 2021. Core CPI would stay at 3.2%.

Wells Fargo economists say that “While the center of gravity has shifted toward the labor market, inflation’s bumpy descent to the Federal Reserve’s 2% objective is ongoing.”

For the core rate they “suspect firmer goods prices and stronger growth in non-housing services to underpin the pickup. Used vehicle prices, which have provided a sizable drag to core goods inflation in recent months, are likely to be a neutral force. Meantime, prices for medical services and air travel are ripe for monthly increases, while primary shelter cost growth is poised to slow.”

The numbers will be crucial in determining how much the FOMC is likely to cut rates as it kicks off its easing cycle. Friday’s August payrolls report missed expectations, but the jobless rate remained steady and pendulum swung further to a quarter-point cut, with odds rising to 70%.

Goldman Sachs said speeches by Federal Reserve Governor Christopher Waller and New York Fed President John Williams suggest the central bank’s leadership considers a rate cut sized at 25 basis points at the base case for their upcoming September meeting.

Goldman economists noted that Waller said he expected that “cuts will be done carefully,” and that the Federal Open Market Committee can act “quickly and forcefully” if “subsequent data show a significant deterioration in the labor market.”

Williams in part said that “the stance of monetary policy can be moved to a more neutral setting over time.”

But Renaissance Macro says: “If you listen to most Fed speakers, you lean to 25, but if you think about Powell’s JH speech, he went a bit beyond most of his colleagues. I don’t buy the whole build a consensus story. If Powell wants to lay the case out for 50, he will find enough people to go along with him.”

Also on the calendar, the Producer Price Index is due Thursday, with economists also looking for a 0.2% gain on PPI and core PPI. The University of Michigan’s preliminary measure of September consumer sentiment is out Friday.

On the earnings calendar, excitement is building among retail investors in anticipation of GameStop (GME) reporting on Tuesday. Options trading volume is elevated ahead of the report.

Shares have jumped 20% from a four-month low in late August after the company announced that it was opening or restyling of several “retro” locations that sell old consoles and hardware, as well as software discs. The retailer’s retro website includes games for NES, SNES, Game Boy, Game Boy Advance, N64, DS, GameCube, Wii, Wii U, PS1, PS2, PS3, PS Vita, Xbox, Xbox 360, Sega Dreamcast, Sega Saturn and Sega Genesis.

Also on the calendar, Oracle (ORCL) and Rubrik (RBRK) report Monday.

Academy Sports and Outdoors (ASO) and Dave & Buster’s (PLAY) join GameStop on Tuesday.

On Wednesday, Manchester United (MANU), Oxford Industries (OXM) and Designer Brands (DBI) weigh in.

Adobe (ADBE), Kroger (KR), RH (RH), and Signet Jewelers (SIG) are set for Thursday.

In the news this weekend, Boeing (BA) said it reached a deal with union leaders, potentially averting a strike that would halt major parts of its factory operations. The union said the agreement includes substantial raises and job security for workers who assemble commercial planes in Puget Sound and Portland in the Pacific Northwest.

Management and the union reached a deal after a lengthy bargaining session. A strike vote is pending on Sept. 12 for a contract that expires at midnight. It’s still too early to know if workers represented by the union, the International Association of Machinists and Aerospace Workers, will support the agreement.

Elon Musk’s artificial-intelligence startup xAI discussed an agreement to receive revenue from Tesla (TSLA) in exchange for providing technology and resources to the maker of electric cars, The Wall Street Journal reported, citing people familiar with the matter.

An agreement would be one of the most recent examples of greater interconnections among Musk’s businesses. As described to investors, the deal would allow Tesla to use xAI’s models to help train the carmaker’s driver-assistance software. In return, Tesla would share some of the revenue with xAI, the Journal said.

In addition, xAI would help to develop other features for Tesla, such as a voice-activated assistant inside its electric cars and software to power its humanoid robot Optimus.

Musk denied the Journal’s report and suddenly announced flights to Mars in two years.

And in the Wall Street Research Corner, Stifel analysts are picking stocks for a bull steepening Treasury yield curve. That’s when Treasuries are bought, but near term yields fall more than longer yields.

Analyst Thomas R. Carroll says with the 2s-10s (US2Y) (US10Y) curve un-inverting for the first time since 2022, “we have our doubts about the currently widespread belief that ‘Fed cuts = Buy stocks.’

Economic slowdowns were always followed by bottoming 10-year-2-year bull steepening yield curves, and that these yield curves have historically led to the weakest stock markets, Carroll said.

He added that his view for the second half of 2024 is a continued bull steepening yield curve, and recommended industries that outperformed during these scenarios. Those include stocks with defensive value such as pharmaceuticals, biotech and life sciences, household goods and products, food, beverage and tobacco and healthcare equipment and services.

Among the 50 stocks surfaced were Costco (COST), Altria (MO), Becton Dickinson (BDX), Jazz Pharma (JAZZ), Booz Allen (BAH) and J.M. Smucker (SJM).

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