29 August 2024
If you are covering the latest news in financial markets, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
"Results overnight from Nvidia are likely to see the recent broadening of US equity market performance continuing, as market expectations for the stock’s earnings mean analysts are no longer playing catch up.
"Whilst there is no question that the appetite for the company’s product range remains strong, ahead of the delayed shipments of the latest chip design in Q4, expectations will change little following this release, likely taking a little hot air out of the stock as a result. However, with earnings set to more than double in this fiscal year and the valuation not excessive in light of this growth, there is something for both the stock bulls and the bears to sink their teeth into. Meanwhile, with interest rate cuts in the US looking imminent, better performance from overlooked parts of the stock market also seems likely, meaning active fund managers can breathe a sigh of relief after a long period of dominance by the Magnificent Seven, which may now be coming to an end.
"Since AI caught the world’s attention with the launch of ChatGPT in November 2022, the performance of US equities have been dominated by the Magnificent Seven. This trend has stuttered since early July, when investors began to up their expectations for US rate cuts amidst signs of both weakening inflation and a slowing labour market, which together with a mixed bag of Q2 earnings releases and an unexpected rate hike in Japan led to the spike in volatility seen in early August. Whilst the Magnificent Seven stocks have by and large returned close their earlier highs, since the start of July the MSCI USA Equal Weighted index, an index created by weighting each stock in the MSCI USA index equally, has outperformed the MSCI USA index by just over two percentage points, having underperformed it by around twenty percentage points since the start of 2023. Whilst this reversal is unlikely to fully unwind, given the vastly different growth profiles been the mega cap names and ‘the rest’, lower interest rates will disproportionately benefit smaller companies, who are typically more reliant on corporate debt. This could well be the start of a changing backdrop in corporate America, although with an election bearing down on us, where investors must weigh the likelihood of Democrats raising corporate taxes versus Republican expediting tariffs and trade wars, a degree of caution is likely to prevail."
