Gloom-man Sachs

Good morning.

A rival studio made the movie "Groundhog Day" about a cynical weatherman who has to live the same day over and over again — Disney wants to avoid a similar fate when it picks its next boss. 

On Monday, the House of Mouse announced a major update on its long-gestating CEO succession plan, saying that it would name a replacement to reigning king Bob Iger in… early 2026. It's been about four years since Iger first departed from the job, and roughly two years since he returned to it. Here's hoping whoever replaces him this time has better luck than ousted understudy Bob Chapek. At least they'll have over a year to prepare for the gig. Unless, of course, it's Groundhog Day. 

The green transition is still much too much about green shoots for the likes of hedge funds.

A Bloomberg analysis of roughly 500 hedge funds published Monday found that patience for ESG stocks related to the energy transition has run out, and some are shorting them. There are notable exceptions — wind energy and grid infrastructure — but that's only because of energy-hungry tech companies.

Why the Long Face?

Bloomberg's analysis found that on average, hedge funds are adopting short positions on sectors including solar power and electric vehicles. Hedge fund managers told Bloomberg that in the solar industry, China's overwhelming dominance makes life tough for would-be investors in the US and Europe. China doesn't overshadow the EV market in quite the same way, but the sector has shifted down into first gear as it looks to bring a truly mass-market vehicle onto the scene, and for hedge funds the industry's moving too slowly. One manager told Bloomberg he thinks it's "two to three years before we can see an inflection point" in EVs.

Meanwhile, the same hedge funds are betting on fossil fuels; jitters about next month's US presidential election aren't doing renewables any favors. Two sectors that still have hedge fund managers seeing green are wind energy and grid infrastructure:

• The wind energy sector is only just emerging from its first fully-fledged financial crisis, but hedge fund managers told Bloomberg they're optimistic, with one foreseeing a "recovery story." Another said that they're "cautiously optimistic that we've seen a bottom," so it seems for hedge funds that wind has nowhere to go but up.
• Grid infrastructure is not an entirely ESG investment — both clean and dirty fuels use the same ones, after all — but exploding demand from tech companies whose data centers and AI ambitions require ever-more power has kept hedge funds comfortable maintaining exposure to some green energy projects.

"It's no coincidence that two green investment bright spots, wind and energy grids, are sectors Western governments have indicated they will back heavily," John Diklev, CEO at green energy-tech company Flower, told The Daily Upside, adding: "Investors ought to think about energy technology from a whole-system perspective. When the wind is not blowing, our systems would be well-complemented by solar energy and battery storage if deployment can be scaled up. As energy demand grows from data centers, we are currently seeing a boon for nuclear projects, but there is no reason why a blend of renewables can't meet that need, with the right backing."

The Nuclear Option: Last week, two Big Tech companies announced major nuclear projects to help fuel their AI dreams. Both Google and Amazon struck deals to buy power from yet-to-be-built small nuclear reactors (SMRs). They're both following the footsteps of Microsoft, which has been bullish on nuclear power deals for a while now — founder Bill Gates also founded a nuclear power company called TerraPower. The news of Google and Amazon's investments into the sector sent nuclear stocks up to record highs, the Financial Times reported Saturday.

Written by Isobel Asher Hamilton

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High-flying AI startup Perplexity is looking for a few hundred million more dollars to scale its burgeoning business — oh, and maybe cover some pesky legal fees, too.

According to a Wall Street Journal report, the company, which has launched an artificial intelligence-powered search engine, is in talks for a massive new funding round that could double its multibillion-dollar valuation. But on Monday, WSJ parent organization Dow Jones and the New York Post — all properties in Rupert Murdoch's News Corp empire — filed a lawsuit against Perplexity alleging widespread copyright infringement.

Copy That

Perplexity's AI-powered search engine (which one reporter from The Verge characterized as an "answer engine") has developed a bad reputation for generating responses to user prompts that appear concerningly familiar to publishers, who are worried that the AI's allegedly copied-and-pasted text is siphoning important click-traffic. Forbes accused it of plagiarism in June; Condé Nast sent a cease-and-desist letter in July, as did The New York Times earlier this month. 

A Wired investigation this summer found that Perplexity is ignoring widely-accepted web standards to bypass paywalls and hoover up data from websites that were designed to avoid bots' scraping. Both Amazon and Reddit have also accused the company of scraping abuse. News Corp's lawsuit cites instances of Perplexity generating verbatim plagiarism before veering off into so-called AI hallucinations.

But all that bad press — yes, often from the very press it's allegedly wronged — hasn't stopped Perplexity, which has roughly 10 million monthly users, from riding the AI hype wave:

• Perplexity has told investors it is looking to raise $500 million in its latest round, sources told the WSJ, at a whopping valuation of $8 billion.
• The company has already raised three funding rounds in the past year: in January at a $520 million valuation, in April at a $1 billion valuation, and in August at a $3 billion valuation. Its annualized revenue, mostly from selling premium subscriptions, is around $50 million, sources told the WSJ.

Special Agent: Microsoft also announced Monday that next month it will launch new no-code tools to allow organizations to build their own specialized AI agents, which can do things like sift through and draft emails. The move comes after Salesforce launched similar tools in September. The takeaway: Everyone hates managing their emails.

Written by Brian Boyle

Hey, Goldman Sachs, in case you haven't noticed, that raging mammal made of bronze down the street from you is not a bear. 

The financial giant's equity strategy team forecasts that America's blue chip S&P 500 index will bring in infinitesimal returns for the next decade, at least compared to the bull run that has paraded up and down Wall Street for much of the last 10 years.

The Boring Twenties

The latest S&P 500 rally, following a near-correction in early August, has brought week after week of record highs — six weeks, in fact, culminating in Friday's 47th record high for the index this year. The Federal Reserve's jumbo interest rate cut last month, along with the promise of future cuts, has naturally fueled the surge. But Goldman, in an Oct. 18 note, predicted the next decade of S&P 500 returns will look more like The Boring Twenties than the Roaring decade a century ago.

One reason is the high concentration of value in just a handful of stocks — notably the so-called Magnificent Seven, headlined by Nvidia, Amazon, Microsoft, and Alphabet, which have driven this year's 23% index rise. Concentration matters for long-term returns, Goldman's analysts wrote, because "it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time." The gloomy note doesn't stop there:

• Goldman estimates the S&P 500's annualized nominal total return will be just 3% for the next 10 years. That would rank in the seventh percentile of 10-year returns since 1930 — the last decade has seen a 13% average, and the long-term average is 11%.
• The bank's analysts also say there is a 72% chance the S&P 500 lags behind Treasury bonds and a one-third chance that the stocks will lag behind inflation through 2034.

Goldman also flagged sky-high equity valuations as a "key reason" for its forecast. The cyclically adjusted price-to-earnings (CAPE) ratio — a company's stock price divided by the average of 10 years of earnings and adjusted for inflation — is 38, or in the 97th percentile. Generally, the higher the starting CAPE ratio, the lower the future returns.

A Little Less Gloomy: JPMorgan is not quite as pessimistic, though it too is pretty dour. Last month, the bank said its models expect 5.7% calendar year returns for the next decade. If you want optimism, look to UBS, which says there's a 50% chance of a booming economic cycle on the horizon, likening it to a second Roaring '20s. We're hoping JPMorgan's right, and that this Roaring '20s won't be followed by you-know-what.

Written by Sean Craig

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