Whether you regard Sunday as the beginning or end of the week, huge news broke on Sunday that President Biden would be stepping down in the presidential race and endorsed Vice-President Kamala Harris to be his successor. He has been under mounting pressure following a detrimental debate against Trump and wrongly referring to Ukraine President, Zelenskyy as “Putin”, and he now believes it is time for fresh voices to unite the nation.
The equity market rotation, which began a couple of weeks ago, continued throughout the week. The US market has been dominated by a handful of mega cap technology/artificial intelligence companies which have propelled the market, while many other stocks have lagged, particularly small caps. Over the last two weeks we have seen a big reversal, with the US small cap index rallying, while the mega cap stocks have languished. The US small cap index has outperformed the tech-heavy NASDAQ 100 index by over 15% since 10th July! The question investors are asking is whether this rotation will last, or whether normal service will be resumed and tech stocks will lead the market once more; only time will tell. There have been a range of factors driving the rotation – weaker inflation and economic data has got the market excited once more around interest rate cuts, which typically favour smaller companies. We have also seen some less than perfect earnings data from some of the “Magnificent Seven” companies, coupled with concerns around the elevated levels of investment, and whether it will be able to generate a meaningful return for investors. Tesla and Alphabet are the first of the magnificent seven to post earnings and disappointed. Tesla reported a 45% slump in Q2 profits, resulting in their shares falling 13% on the day, while Alphabet admitted they were overspending on AI infrastructure rather than advertising, but CEO Sundar Pichai, spoke about the opportunity costs – “the risk of underinvesting is dramatically greater than the risk of overinvesting”.
Alphabet (owner of Google) has been unsuccessful in the acquisition of Wiz, a cyber security firm for £18bn. This would have been Alphabet’s largest ever acquisition as they continue to rival Microsoft and Amazon in the cloud services market. Wiz decided against the deal with the target to reach $1bn annual revenue before a potential IPO.
US personal consumption expenditure (PCE) data was released this afternoon. It differs from regular core inflation data as it only measures goods and services targeted towards and consumed by individuals. Core PCE remained at 2.6% while headline PCE fell in line with market expectations to 2.5%. This will be an encouraging print for the US Fed and could encourage them to cuts rates shortly.
US GDP for Q2 rose by 2.8%, hugely surprising markets as only 2% was expected. Economic growth has remained resilient this year despite elevated interest rates. GDP is a lagging indicator however the data will make for happy reading for the US Fed as the data supports claims that the economy is heading for a soft-landing and is yet to rollover due to high interest rates. With slowing inflation, it is widely expected the US Fed will be able to cut rates in the coming weeks and months, supporting the consumer and economy further.
Netflix has recently added a number of great series and films with Baby Reindeer and Bridgerton topping the charts, however they added their fewest number of subscribers over Q2 24 following their password sharing crackdown. This hasn’t impacted earnings as they reported a 23% rise in net profit margins and their lower priced ads subscription tier appears to have aided revenues. The benefit of the plan is not expected to be long term and Netflix has stated the search for new growth drivers will continue.
The Bank of Canada (BoC) has not been afraid to diverge away from the US Fed as on Wednesday they cut interest rates for the second consecutive meeting, down to 4.5%. BoC Governor, Tiff Macklem, is aware that the economy is weak, and growth needs to pick up in order for inflation not to fall beyond target. There is optimism for a recovery in household spending as borrowing costs ease as households are currently cutting back on non-necessities in order to deleverage.
The UK equity market made the headlines this week with claims we are witnessing a “turning of tide” for the unloved market. Asset managers Blackrock and Allianz joined other fund houses in increasing exposure to UK equities. Flow data showed that since May institutional customers are now net buyers of UK equities, reversing a long-standing trend of being net sellers. Money flowing back into UK equities could be very powerful and help close the valuation gap between UK equities and the rest of the world. Relative political stability has been cited as one of the reasons investors are turning more positive on the UK.
Nathan Amaning, Investment Analyst
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