Daily Brief - Green light for a rally?

TLDR: A single stock rarely tells you much about the economy. But there are exceptions. Bank of America and JPMorgan Chase can provide clues to consumer strength. Railway companies offer insights into how fast goods are moving through the economy. And so it’s not too surprising that a lot of investors welcomed strong results by Fastenal with a sigh of relief.

The industrial distribution company announced third-quarter earnings per share of 52 cents from sales of $1.9 billion this morning.

Stronger is good news. Fastenal is a fascinating company that provides the most comprehensive read on the US manufacturing complex. The company distributes tens of thousands of products to thousands of customers in dozens of industries across the country. Better results suggest US manufacturing is turning a corner.

The manufacturing economy has been mired in a very long post-Covid slump. A key gauge of manufacturing activity, the ISM index, has been below 50, the level that indicates growth, for 22 of the past 23 months. This is one of the weakest stretches on record: by comparison, the index declined for 16 out of 18 months in 2008, during the Financial Crisis.

Manufacturing isn’t exactly roaring back. Fastenal has reported EPS of 50, 51, or 52 cents in eight of the past 11 quarters. “Stabilizing” is more like it. But it’s a start and the fine print in the results gives reason for hope: 65 of the company’s top 100 national account customers were growing in the second quarter.

That might be good enough to embolden stock investors.

Market Movers: Sectors to look out for

Here is the historical 1-month response from S&P sectors, when Manufacturing PMIs are near lows:

1. S&P Consumer Discretionary: 1.86%
2. S&P Technology: 1.76%
3. S&P Materials: 1.45%
4. S&P Industrials: 1.40%
5. S&P Telecom: 1.16%
6. S&P Consumer Staples: 0.89%
7. S&P Financials: 0.86%
8. S&P Real Estate: 0.81%
9. S&P Health Care: 0.64%
10. S&P Energy: 0.09%
11. S&P Utilities: 0.03%

Earnings Spotlight: Strong AI demand for 'many years'

Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s leading producer of advanced chips for clients like Apple and Nvidia, saw its shares rise nearly 10% after reporting a 54% surge in net profit for the third quarter.

TSMC’s net income reached NT$325.3 billion ($10.1 billion), beating expectations, while net revenue grew 36% year-on-year to $23.5 billion. The company benefited from strong demand for its 3nm and 5nm technologies, driven by smartphone and AI-related markets.Looking ahead, TSMC expects fourth-quarter revenue to increase by up to 35% year-on-year, highlighting continued momentum from AI applications.

TSMC’s strong earnings were reported in the same week that Netherlands-based ASML, a key supplier of machines to the company, issued a lower-than-expected sales forecast, causing its shares to drop.