SOFI - Wall Street Lunch: AI Executive Order In Place

2023-10-30 12:18:00 ET

Summary

• President Joe Biden issues executive order on AI safety and security.
• G7 countries are set to agree on a voluntary code of conduct for governing AI.
• More pessimism about the U.S. economy should be a buying opportunity for stocks - GS.

Listen below or on the go on Apple Podcasts and Spotify

The executive order establishes standards for safety and security. (0:15) Will Treasury refunding overshadow the Fed. (1:50) McDonald's (MCD) tops profit and sales forecasts. (3:21)

This is an abridged transcript of the podcast.

Our top story so far

President Joe Biden issued an executive order on artificial intelligence . The order establishes new standards for AI safety and security, aims to protect privacy, advance equity and civil rights, stand up for consumers and workers, and promote innovation and competition, according to the White House.

The move builds on previous actions the U.S. has taken, including voluntary commitments from 15 companies to drive safe and trustworthy development of AI.

In July, tech giants including Amazon (AMZN), Alphabet ( GOOG ) (GOOGL), Meta Platforms)(META), and Microsoft ( MSFT ) made voluntary commitments to the White House to implement certain measures for the safe use of AI.

The Executive Order requires developers of AI systems to share their safety test results and other critical information with the U.S. government.

In addition, the G7 will agree to a code of conduct for companies building advanced AI systems . That’s according to Reuters, which cited a G7 document.

The voluntary code of conduct will establish a measure for how major countries govern the technology.

The 11-point code "aims to promote safe, secure, and trustworthy AI worldwide and will provide voluntary guidance for actions by organizations developing the most advanced AI systems, including the most advanced foundation models and generative AI systems," the document said.

In today’s trading

Stocks are up to start the week, with the broader market looking a little oversold. The S&P ( SP500 ) is up +0.5% after it fell into correction territory last week.

Rates are ticking up ahead of Wednesday’s FOMC decision . The 10-year yield ( US10Y ) is around 4.9%.

The market is pricing in a near-certainty that the Fed will keep rates steady.

While the Fed will grab the spotlight as usual on Wednesday, traders will also be looking at the U.S. refunding announcement on the same day.

Supply and demand will be in focus given the recent volatility in the Treasury market. Will longer-term debt sales be ramped up to fund a widening federal deficit, or will there be a greater reliance on short-term bills due to the recent surge in yields?

On the demand side, Treasuries remain one of the safest plays, but the auctions have become increasingly reliant on hedge, pension, and mutual funds to scoop up large quantities of bonds as foreign governments and U.S. banks reduce their purchases, including the Fed.

J.P. Morgan strategists say, “As it stands, ( THE ) Treasury’s current auction schedule is insufficient to meet its prospective financing needs.”

“Near term, T-bills will continue to bridge this gap, as they did in FY23, though this isn’t sustainable, as the T-bill share of debt is expected to rise towards 22% by FY23 and, as projected, financing needs remain large in FY24 and beyond. As such, while T-bills should account for nearly two-thirds of this year’s net issuance, our Treasury strategists expect they’ll account for less than 10% of total net borrowing as we move into next year.”

Deutsche Bank’s Jim Reid says the refunding “will be important given how much the early August equivalent spooked the market given the extra supply that it heralded."

"There is some hope that the Treasury may pause its coupon increases it flagged back in August,” Reid says. But the DB strategists “think this is unlikely.”

"Remember, the August refunding announcement has arguably proved to be the most important macro event of the last 3 months,” he adds.

Among the morning’s big earnings reports

McDonald's ( MCD ) beat on the top and bottom lines thanks to growth in worldwide sales. Year over year, systemwide sales increased 11%. In the U.S. alone, that figure was 8.1%. Revenue of ~$7 billion was 14% higher than in Q3 2022.

SoFi Technologies ( SOFI ) climbed after the lender posted stronger-than-expected Q3 results and increased its 2023 guidance for revenue and EBITDA. The company continued to gain new customers and attract deposits. It expects 2023 adjusted net revenue of $2.045 billion—$2.065 billion vs. $2.03 billion consensus.

And ON Semiconductor ( ON ) tumbled after forecasts missed estimates . For the fourth quarter, the company forecast sales of $1.95 billion to $2.05 billion, compared to the average analyst estimate of $2.18 billion. EPS was forecast at $1.13 to $1.27, compared to the consensus of $1.37.

In other news of note

Realty Income ( O ) agreed to acquire Spirit Realty Capital ( SRC ) in an all-stock deal with an enterprise value of ~$9.3 billion.

The move is expected to diversify Realty Income's portfolio, add more than 2.5% to annualized adjusted FFO per share, and be leverage-neutral.

Under the terms of the deal, Spirit shareholders will get 0.762 newly issued Realty Income common share for each SRC common share they own. That values each SRC share at ~$37.34, or a 15% premium to Friday’s close.

And in the Wall Street Research Corner

More pessimism about the U.S. economy should be a buying opportunity for stocks , according to the Goldman Sachs equity research team.

Strategist David Kostin says, "The impact of rising yields on stocks depends on the interplay between economic growth expectations, discount rates, and corporate balance sheets."

"Although we expect headwinds to discount rates and balance sheets to persist, we would view a substantial further downgrade to the growth outlook as a buying opportunity."

"'Higher for longer' means that highly levered stocks will continue to face cash flow headwinds and that equity valuations are unlikely to expand meaningfully from current levels," Kostin adds.

The team screened for stocks "in cyclical industries with healthy balance sheets and high equity yields but have declined by at least 10% in the past few weeks."

Among the names are PVH (PVH), FedEx (FDX), First Solar (FSLR), and Ralph Lauren (RL). Check out all 34 stocks in the story on Seeking Alpha. The link will be at the top of Show Notes.

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