This edition of Market Factors starts with two ways investors can benefit from resurgent nuclear power and, specifically, small reactors. We then move on to the signs of a Magnificent Seven slowdown and its significant implications for index investors. The diversion covers how AI has become a wrecking ball for high school educations and as always we look ahead to important data releases.
Miner operates a scoop tram by remote control to collect ore at Cameco's McArthur River operationHandout
Nuclear power
Small reactors and uranium miners to benefit from power demand
There was record attendance at the recent World Nuclear Symposium in London, according to BMO analyst Alexander Pearce, and the occasion was marked by another increase in uranium demand forecasts between now and 2040. Demand is now expected to increase by a compound annual growth rate of 5.3 per cent, up from 4.1 per cent previously. From an investment standpoint, it’s not difficult to identify the winners.
Cameco Corp. (CCO-T) is an ongoing beneficiary of rising nuclear power projections. The stock was C$14.31 five years ago and now it’s about C$105. Mr. Pearce projects it will hit C$120 in the next 12 months.
The symposium just ended Friday and I would not be surprised if analysts are busily raising their price targets for Cameco as we speak. The stock is not cheap at 88 times trailing earnings and 70 times forward earnings.
BofA Securities analyst Dimple Gosai is pounding the table on another winner in California-based small modular reactor (SMR) maker Oklo Inc. (OKLO-N). Mr. Gosai sees firm demand for Oklo reactors with data centre-related power demand set to increase by 260 per cent before the end of 2027 (to 500 terawatts annually). Power shortages currently threaten 40 per cent of data centre sites according to BofA’s most recent report.
The SMR industry is competitive with 50 companies competing for sales. Oklo, however, has the biggest customer pipeline that amounts to 30 per cent of the global pipeline. Oklo has partnered with Liberty Energy, so the latter can provide short-term power with natural gas while Oklo reactors are installed.
Mr. Gosai believes Okla is attractively valued at 6.6 times 2032 EV/EBITDA (a valuation timeframe that oddly appears to be standard in the industry despite being seven years out) when datacenter peers average 14.2 times. The analyst has a US$92 price target, which is roughly 30 per cent above current levels near US$70.
Equities
Lagging Magnificent Seven?
Scotiabank director of portfolio and quantitative strategy Hugo Ste-Marie identified signs that the Magnificent Seven leadership of U.S. markets may be losing momentum and this has important ramifications for index investors.
The Magnificent Seven stocks have jumped 52.5 per cent from the April lows, well above the S&P 500’s 31.1 per cent. Mr. Ste-Marie sees early signs this trend might be exhausted using the chart below. The relative performance of the Magnificent Seven is retesting previous peaks, and failure to break above them could signal a stalled rally.
The chart tracks the relative performance of the Roundhill Magnificent Seven ETF and the Invesco S&P 500 Equal Weight ETF. (In the latter case, returns on the equal weighted benchmark are not dominated by large cap tech like the conventional market cap-weighted S&P 500, so the equal-weighted version limits the problem of dividing the Magnificent Seven stock performance by itself).
The ratio in the chart is currently hovering near the highs hit at the end of 2024. This implies that Magnificent Seven returns relative to the rest of the S&P 500 are at extremes. Mr. Ste-Marie is watching the chart closely for signs the line is about to head south, which would suggest that the non-tech sectors in the U.S. index are outperforming, and perhaps for an extended period.
Returns for S&P 500 index investors are dependent on Magnificent Seven and megacap tech returns because they dominate the benchmark and drive returns. Weakness in the sector would lead to poor relative returns for the widely followed cap-weighted index.
Diversions
AI ruining high school
The Atlantic published a disturbing column warning of the destructive power of AI for high school education. Written by actual high school student Ashanty Rosario, the story details the widespread use of AI as a shortcut to getting exercises done. I would have done the same thing - I’m not being judgy here - but the ease and speed with which students can use AI to summarize assigned reading or full-on complete math problems is clearly getting in the way of learning.
Ms. Rosario also described how classmates use “humanizer” tools to adapt AI-generated essays to sidestep plagiarism detection software. AI can be useful, she concedes, but it can’t do open heart surgery and “many of us are so accustomed to outsourcing that we’re dulling the very instincts that we need to prevail in life.”
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
Norman Rothery on stretched market valuations and why investors close to retirement are facing precarious times
Ian McGugan points out how a market frenzy tends to occur every 25 years - and the aftermath is rarely pretty
David Berman says extraordinary factors drove this year’s gold rally - but things are going to get a bit more boring from here
Jamie McGeever notes the historic, yet under-the-radar, developments in the ultra-short U.S. Treasury market of the past few months
What’s up next
Relevant domestic data in the coming week starts with manufacturing sales for July next Monday although there’s no economist estimates posted on Bloomberg. CPI for August will be released next Tuesday.
The U.S. economic calendar features producer prices for August on Tuesday – economists expect a 0.3 per cent month-over-month gain. CPI for August is out Wednesday when economists expect a month-over-month 0.3 per cent increase for both top line and ex-food and energy. Advanced retail sales for August will be released on the 16th (no estimate available) along with industrial production for August when the average economist guess indicates a flat reading month-over-month.
U.S. earnings reports of note include Oracle Corp. ($1.48 per share expected) on Tuesday and Adobe Inc. ($5.179) on Thursday.
See our full earnings and economic calendar here