Cracks Emerge

By Matthew Gutierrez, Shawn O'Malley , and Weronika Pycek · September 27, 2023

*LinkedIn newsletter is posted at a one-day delay.

Sign up for the email version to stay most up-to-date: https://westudymarkets.beehiiv.com/subscribe

How low can we go? The S&P 500 and Nasdaq have fallen to their lowest levels in three months despite unemployment near record lows and persistent but falling inflation.

Still, investors fear the Fed’s “higher for longer” interest rate forecast, and consumer confidence is tapering off.

?? There’s always uncertainty in financial markets. Could a year-end rally be in store? More on this in today’s top news story.

— Weronika, Shawn, and Matthew

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• Can tech stocks continue to power the market higher?
• Inside Binance’s sprawling problems
• OpenAI seeks $90 billion valuation

All this, and more, in just 5 minutes to read.

POP QUIZ

Relative to its size, which state launches the most new businesses? (The answer is at the bottom of this newsletter!)

CHART OF THE DAY

IN THE NEWS

??Can Tech Stocks Continue to Power Markets Higher?

If you’ve been under a rock this year, two things have underpinned the stock market’s recovery in 2023 after an ugly 2022: Optimism about AI and a resilient U.S. consumer.

And the beneficiaries of both trends have been tech stocks, which powered markets higher. But tech dominance is wobbling as the S&P 500 drops to its lowest level since June, led lower by the Information Technology sector — down?10% from its peak in July.

How we got here: While higher interest rates aiming to slow economic growth have been a headwind for stocks all year, Americans kept swiping their credit cards, and advances in AI caused analysts to revise their projections for economic growth and corporate profits upward in the coming years.

• So, a stronger-than-expected economy today, combined with greater optimism about how AI would make our future economy more productive, took the sting out of rising interest rates.
• But as some AI hype has faded, and the Federal Reserve doubles down on its commitment to keeping interest rates above 5% into next year, economic reality has seemingly snuffed out stocks’ momentum.

One market strategist noted, “The worry about rising (interest rates) hasn’t dissipated — it’s become more severe, and even though tech stocks have been able to hang on, you’re starting to see cracks.”

• Tech stocks are now in a “correction” — Wall Street jargon for when prices fall by over 10%.

Why it matters:

A few big names in markets haven’t exactly helped with sentiment. One leader at the Federal Reserve, Neel Kashkari (famous for his role in the 2008 financial system bailouts), said he supports another rate hike this year.

And JPMorgan’s iconic CEO, Jamie Dimon, recently warned that in a worst-case scenario, the Fed could raise interest rates to 7% if inflation proves unmanageable.

• Another market veteran commented, “It has finally sunk in that rates are indeed going to stay higher for longer, (investors are) quickly becoming worried about…big-cap tech stocks.”

Still, the tech sector is up about 32% this year, even after the recent drop. The question on investors’ minds, though, is whether these companies can regain that momentum.

• If the S&P 500 is going to close out the year higher from here, the tech stock correction will likely have to at least pause.

Read more

About where do you think the S&P 500 will end the year?

The S&P 500 currently sits at a value of roughly 4,270

• Below 4,000 — down 6.3% or more from here
• 4,000-4,200
• 4,201-4,500
• Over 4,500 — up 5.4% or more from here

KEY CONCEPTS WITHOUT THE FLUFF

Unlock a world of insights with Shortform!

Have a shelf full of unread books? Shortform can help you learn (and retain) the world's best ideas in a fraction of the time with detailed book guides. From business to self-improvement, Shortform has you covered.

• Comprehensive coverage - not just a 1-pager
• Detailed book guides, including audio versions
• AI browser extension that summarizes anything on the internet

Don’t just skim the surface — get Shortform today for the price of one book per month.

Ready to embark on the journey?

GET A FREE TRIAL AND 20% OFF!

??Binance, World’s Biggest Crypto Firm, Melts Down

Believe it or not, it’s been nearly a year since FTX crashed. That led many to believe Binance would eat up market share.

Not so fast.

Binance is the latest cryptocurrency exchange under distress. It handles about half of all crypto trades, down from about 70% at the start of 2023. Binance also faces sprawling legal problems that aren’t going away anytime soon.

• Over a dozen Binance executives have left in the past month, and 1,500 employees have been laid off this year amid cost-cutting efforts. Anytime that kind of upheaval occurs in short time frames, it’s worth paying attention.
• Binance’s co-founder and chief marketing officer sent a rather urgent message to staff in August, saying: “Every battle is a do-or-die situation, and the only thing that can defeat us is ourselves.”

Binance’s fate could have an industry-wide impact. Co-founder Changpeng Zhao is one of the biggest faces in crypto — sorry, SBF — but the U.S. Justice Department has investigated Binance and Zhao for criminal charges. That could lead to billions in fines and end Binance’s future, at least in the U.S.

If that weren’t enough, Binance also faces an SEC lawsuit that alleges the company and Zhao operated illegally in the U.S. and — drumroll, please — misused customers’ funds (sounds familiar? Looking at you, FTX.)

• The company says it’s compliant and customers’ money is safe, but many regulators beg to differ. And, internally, some employees have called for Zhao to step down.

Zoom out: Binance launched in China in 2017. Two bitcoin bull markets have since ensued, but a bear market over the past ~20 months has driven upheaval throughout the industry. Binance’s revenue has fallen 70% year-to-date, although bitcoin’s price has jumped nearly 60% this year.

Why it matters:

A year ago, who were the big names in crypto? You might have said FTX, Binance, and Coinbase. Soon, only Coinbase could remain.

• Said one partner at a fund that invests in growth companies: “You just can’t quantify what would happen to the industry if Binance disappeared, given it has been responsible for fostering a huge amount of innovation and growth.”

Other exchanges would fill the void if Binance is the next exchange to collapse. But at least in the short term, the price of tokens like bitcoin could fall sharply.

Read more

MORE HEADLINES

?? The FTC and 17 states launch antitrust lawsuit against Amazon, alleging inflated prices

?? Target closing nine stores due to "theft and organized retail crime"

?? Worsening crisis at Evergrande, the world's most indebted property developer

??? Musk's X disabled feature for reporting electoral misinformation

?? Copper is critical to an energy transition, but the world is falling behind in producing it

??OpenAI Seeks $90 Billion Valuation In Possible Share Sale

Have you talked to ChatGPT yet? Now, you can.

Since its groundbreaking launch last November, OpenAI's ChatGPT has been rapidly evolving, expanding from basic prompts to incorporating voice and image functionalities.

Payday: The success pushes OpenAI to new territories as it discusses selling ownership stakes in its business, aiming for a valuation of $80 billion to $90 billion — about three times its estimated value early this year.

• The anticipated deal would enable employees to sell their existing shares without issuing new stock to raise extra money.
• Microsoft holds a 49% stake in the startup and expects OpenAI to generate several billion in sales in 2024.

ChatGPT’s business model: The company earns revenue by offering an advanced, paid version of ChatGPT to individuals and by licensing the AI’s technology to businesses. Still, the app's basic version is free and boasts over 100 million users.

Why it matters:

A valuation exceeding $80 billion would place OpenAI among the highest-valued global startups, trailing only SpaceX and ByteDance (TikTok's owner.)

The transaction would yield substantial paper profit for Microsoft. The tech giant invested $10 billion in January to fund the considerable computing costs required to train advanced AI models.

• At the time, OpenAI was valued at just under $30 billion.

Read More

RECOMMENDED READING

There’s a reason why over 30,000 people follow the Weekly S&P500 ChartStorm – it provides a balanced and unbiased check-in on the market.

Each week they pull together 10 charts that capture the key drivers of risk and return…helping you identify opportunities in the short term as well as offering unique perspectives on longer-term trends.

Their expert commentary ties it all together to help you make sense of the bigger picture.

Get charts, gain perspective.

SUBSCRIBE NOW!

TRIVIA ANSWER

According to U.S. News , Nevada has the highest business creation rate in the country, followed by Idaho and Utah. Iowa and Ohio ranked last.

SEE YOU NEXT TIME!

That's it for today on?We Study Markets !?

Enjoy reading this newsletter??Forward it to a friend.

All the best,

P.S The Investor's Podcast Network is excited to launch a?subreddit ?devoted to our fans in discussing financial markets, stock picks, questions for our hosts, and much more! Join our subreddit?r/TheInvestorsPodcast ?today!

? The Investor's Podcast Network content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Contact a professional and certified financial advisor before making any financial decisions. No one at The Investor's Podcast Network are professional money managers or financial advisors. The Investor’s Podcast Network and parent companies that own The Investor’s Podcast Network are not responsible for financial decisions made from using the materials provided in this email or on the website.