After a brief consolidation phase, and the clearance of pivotal tech earnings, the rally which started this week is likely to continue. Both US Dollar and Treasury yields look to be turning back lower which is good for equities. Technology was tested this week with earnings reported. The sector as a whole was at support levels, and the Alphabet and Microsoft earnings data arguably should set the stage for higher prices, which should help the market start to push higher. Given the strong market performance to start 2024, equity markets were clearly in overbought territory, as the 14-day relative strength index (RSI) floated above 70% several times throughout January and February. However, the RSI approached oversold levels last week on Friday – down to the 30% level – which was its lowest reading since the market low in October 2023. In addition to the cleaning up of market technicals, sentiment has contracted sharply, which from a contrarian standpoint, is bullish. Recent AAII data now shows a greater percentage of Bearish investors at 33.9%, with Bullish investors at 31%, the first time in recent months that this sentiment poll has switched polarity. The act of having converged back to “largely neutral” territory with slightly more Bears than Bulls is seen as positive for risk assets. In my Gravitas comment last week, I argued that we would remain committed to our pro-equity stance. And for now, at least, that view remains the same.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Alphabet (GOOGL-US) said its first-quarter revenue increased 15% year-over-year to $80.539 billion, beating the consensus estimate of $78.594 billion. The company reported quarterly earnings of $1.89 per share, beating analyst estimates of $1.51 per share. Alphabet has now beat analyst estimates on both the top and bottom lines in five consecutive quarters. Google Search revenue was $46.156 billion in the quarter, YouTube advertising revenue came in at $8.09 billion and Google Cloud revenue totaled $9.574 billion. Google is well under way with their Gemini era and there's great momentum across the company. The board authorized an additional share repurchase program of up to $70 billion and the company also announced its first-ever quarterly dividend. Alphabet's board declared a cash dividend of 20 cents per share to be paid on June 17 to shareholders of record as of June 10 with quarterly cash dividends moving forward. Owned in Core, ESG+ and US Portfolios.

(~) Canadian National Railway Company (CNR-T) delivered an in-line quarter relative to street expectations. The company also reiterated its FY24 guidance, which was largely viewed as too optimistic due to CNR’s mid-single digit volume growth target. Long story short, volumes have been stronger than expected and the focus now turns towards margins. An improvement in the operating ratio should translate to an upside in CNR’s 10% earnings growth guidance. All-in, we believe both Canadian rails can be owned for long-term accounts but would acknowledge that valuations are rich in our opinion. CP remains our preferred pick due to its acquisition of KSC and the upward momentum in its earnings power. Owned in Core and Cash Flow Portfolios.

(-) Canadian Pacific Kansas City Limited (CP-T) Shares reacted negatively on earnings day. One might think this was a terrible quarter and wonder if we should be selling the name. Despite severe weather challenges and various customer outages, CPKC still delivered a solid quarter with volumes slightly ahead of internal expectations, and revenues and adjusted EPS in line with consensus. Over the near-term, macro volatility and the potential for labor disruption by running-trades employees could weigh on operations. However, the company's combined network and diverse revenue base continues to demonstrate resiliency and positions CPKC for volume growth this year and beyond. In addition, we are starting to see evidence of operational improvements taking hold to improve network performance (margin benefit) and create capacity (revenue growth benefit), at a low cost (capital efficiency benefit). CP’s Operating metrics were solid as well (train speed up 13%; dwell improved 10%; locomotive productivity up 8%) and we think this sets them up for strong operating leverage for the remainder of the year. Owned in Core and ESG+ Portfolios.

(-) Caterpillar (CAT-US) Shares dropped after the company came up a bit short on first-quarter revenue as sales volumes declined. The company reported profit of $2.86 billion, or $5.75 a share, compared with net income of $1.94 billion, or $3.74 a share, in the year-before period. Revenue came in at $15.80 billion versus $15.86 billion a year earlier. Analysts were modeling $16.00 billion. The company saw the construction industry's total sales fall 5% to $6.42 billion; a decline fueled by lower sales of equipment. Resource Industries sales dropped 7% to $3.19 billion, also driven by lower equipment sales. Caterpillar recognized a 7% boost in energy and transportation sales, as volumes increased. Owned in US Portfolio.

(+) Chipotle Mexican Grill (CMG-US) The burrito chain said that faster service, along with reviving limited-time offerings like Chicken al Pastor in March, helped boost revenue and margins last quarter. A 13.9% increase in total revenue was driven by higher comparable restaurant sales attributable to transaction growth of 5.4% and an increase in average check of 1.6%. Digital sales represented 36.5% of total food and beverage revenue. The fast-casual restaurant operator reported comparable sales increased 7.0%. Shares surged on the terrific report. Owned in US Portfolio.

(+) Choice Properties Real Estate Investment Trust (CHP.UN-T) reported a steady quarter. Fundamentals remain in good shape, with net operating income (NOI) coming in slightly ahead of RBCCM expectations, and same property NOI +2.4% Y/Y from higher rents and higher capital recoveries. Occupancy remains stable at 97.9% and guidance continues to call for +2.5-3% SP NOI, stable occupancy, and leverage slightly below 7.5x. While CHP.UN trades at a premium to peers, it is still discounted to its own average and we believe this premium is warranted at this time given its defensive, grocery anchored retail presence, healthy balance sheet, and reasonable development pipeline. Shares yield 5.82%. Owned in Cash Flow Portfolio.

(+) First Quantum Minerals (FM-US) reported a mixed quarter with solid operating performance and a reiterated guidance, while financial results came in as a miss. The focus remains on the upcoming Panama election on May 5th with current poles pointing to a Jose Mulino win at this time, which would be incrementally positive for FM. While this is likely already priced into the stock, if he does win, there is still lots of work to be done to get both Cobre Panama restarted and rebuild the public trust in the government. All in all, while positives did shine through this quarter, but there is still plenty of uncertainty in the name. FM is a copper and gold play. Owned in the Core Portfolio.

(sold) IBM (IBM-US) Not what I was hoping for. Shares dropped as much as 8% following mixed Q1 performance and confirming its acquisition of HashiCorp for $35 per share in cash. The company's results fell short of top-line expectations, driven by disappointing revenue in the Consulting and Infrastructure segments. Sold in Cash Flow Portfolio.

(+) Microsoft (MSFT-US) shares rose after reporting better-than-expected Q3 earnings on the back of AI-driven cloud growth. Revenue rose 17% to $61.9 billion from a year ago and profit was $2.94 a share. As it builds infrastructure to host AI demand, Microsoft’s capital expenditures grew to $14 billion from $11.5 billion the preceding quarter. Cash flow from operations increased 31% to $31.9 billion. Some analysts believe that Microsoft’s Copilot AI assistants could eventually contribute billions to its revenue. Microsoft isn’t only a leader in AI, they’re really the only ones that can put their finger on actual AI revenue. Owned in Core, ESG+, Cash Flow and US Portfolios.

(+) Nvidia (NVDA-US) The chipmaker’s shares sat within 30 dollars of the $1,000 milestone a month ago, and since then it has lost 11.8%. Fear not, says a team of equity strategists at Bank of America: a sell-off for the semiconductor sector is typical in April, things tend to get better in May, and Nvidia is now trading around a “trough valuation.” They recognize that sentiment has been hit of late by a variety of factors, including stagflation risk, rising interest rates, geopolitical worries, AI fatigue, and uninspiring near-term outlooks from industry barometers Taiwan Semiconductor Manufacturing and ASML. In addition, demand trends in consumer (PC, phones), enterprise and autos are lukewarm. However, cyclical factors should also support the semiconductor sector. Inventories are normalizing and sales could grow year-on-year through to the middle of 2026. BofA’s top buy continues to be Nvidia. It is trading around 25x its forecast price/earnings ratio for calendar year 2025, which is near the levels the stock troughed in December 2023, June 2022 and September 2019, BofA notes. Owned in Core, ESG+, Cash Flow, US and Opportunity Portfolios.

(-) Roper Technologies (ROP-US) reported financial results for the first quarter. Revenue increased 14% to $1.68 billion and organic revenue increased 8%. Adjusted EBITDA increased 16% to $676 million. Operating cash flow increased 14% to $531 million. Roper is a diversified technology company, which engages in the provision of engineered products and solutions for global niche markets. Owned in Core, ESG+ and US Portfolios.

(-) ServiceNow (NOW-US) reported broadly in line Q1 results last night. Overall revenues were in line, but EPS beat on stronger margins. Billings were modestly below expectations. Encouragingly, management indicated that their GenAI offerings are the fastest selling in the company’s history. Our thesis is unchanged. We continue to believe NOW is well positioned to see faster gains vs peers given it is integrating Gen AI into its core offering. Given the stock’s outperformance over the past year, we are not surprised by some profit taking. We would continue to own the stock and be buyers at the current level for long-term growth-oriented investors. ServiceNow is an enterprise IT cloud company that delivers SaaS-based applications to automate and standardize IT business processes. Owned in US and Opportunity Portfolios.

(+) Spotify Technology (SPOT-US) stock surged this week after first quarter results were largely in line with analysts' expectations. Premium Subscribers grew 14% year-over-year to 239 million, up from 236 million in the fourth quarter of 2023, and in-line with the company's guidance. Spotify noted that the performance in the first quarter reflected continued double-digit year-over-year growth across all regions, and strong performance of Family and Duo plans. Owned in Opportunity Portfolio.

(+) Tesla (TSLA-US) Shares of the beaten-down electric vehicle maker jumped over 12% after CEO Elon Musk said Tesla plans to start production of a new affordable EV model by early 2025. Tesla disappointed on first-quarter earnings, however, posting 45 cents in adjusted earnings per share on $21.3 billion in revenue. Tesla’s revenue drop — the steepest year-over-year decline since 2012 — came amid slowing EV sales growth across the industry, which has led Tesla to implement price cuts in an attempt to spur demand. Owned in ESG+ Portfolio.

(new) Vertiv (VRT-US) We invested in a new name this week. I had been watching it for some time but after they reported strong earnings and orders this week, my thesis was confirmed. Vertiv isn't directly involved in artificial intelligence. But as a maker of coolant systems for data centers, Vertiv is a de facto AI play. Vertiv earnings jumped 79% to 43 cents a share, easily beating analyst views though growth slowed for a third straight quarter. Revenue rose 8% to $1.64 billion, slightly topping estimates. Organic orders jumped 60% in constant currency. New position in Opportunity Portfolio.

(+) Visa (V-US) Shares of the payment company rose more than 2% after stronger than expected results for the second fiscal quarter. Visa earned an adjusted $2.51 per share on $8.78 billion of revenue. Analysts surveyed by LSEG had penciled in $2.44 per share on $8.63 billion of revenue. Revenue was up 10% year over year. Owned in Core, ESG+, Cash Flow and US Portfolios.

Weekend Reading

RBC MacroMemo - April 23 - May 6, 2024 Market anxieties / Why growth? / Revisiting forecasts / What happens next? / Big vs small business / U.S. immigration surge / Chinese growth / Chinese productivity / Chinese housing RBC

The Indispensability of Risk In his latest memo, Howard Marks considers what chess can teach investors about the paradox of risk-taking. Drawing on insights from a recent Wall Street Journal article by chess grandmaster Maurice Ashley, Howard explains why not taking enough risk may be one of the riskiest strategies of all. OAKTREE CAPITAL

Ten fearless forecasts for the busy domestic and geopolitical outlook Adults are in charge in Washington, economic growth will slow slightly downward to a moderate pace, and interest rates may level off. April could be a turning point on many fronts. GREG VALLIERE

Branded Books from MSCHF Heavily branded literature is still an untapped area for commercialization. BRANDED BOOKS

Middle-Income Canadian Families are Poised to Take the Wind Out of the Economy’s Deflating Sails Higher interest rates are pushing middle- and lower-income households to spend more conservatively, which means consumer spending by the top earners will play a critical role in keeping the broader economy going. TD ECONOMICS

Proof Point: A weaker Canadian dollar won’t necessarily derail BoC interest rate cuts A sharply underperforming Canadian economy argues for more urgency to start moving interest rates lower than in other countries. We expect the BoC to cut interest rates earlier and more than the Fed this year. RBC PROOF POINT