Markets Weekly podcast – 18 November 2024
18 Nov 2024
Q2 earnings and AI latest
29 July 2024
Join host Julien Lafargue for fresh insights on the health of the global economy and financial markets. This week’s topics include the second-quarter earnings season, the fortunes of the AI sector, and upcoming central bank announcements, including a key decision from the Bank of England.
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Julien Lafargue: Welcome to a new edition of Barclays’ Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host this week.
Quite a lot to cover, and it was a fairly difficult week for equity markets, especially large-cap tech in the US. A bit better for smaller companies, and we’ll touch on that in a second.
But last week was the first week in 344 trading sessions that we saw the S&P 500 drop more than 2%, so something we haven’t seen for a while. People may have forgotten that this can actually happen. What was the trigger behind this rather, at least by recent historical standards, large move in the S&P?
Well, it really started after Alphabet, the parent of Google, and Tesla reported earnings. So, that is what is being used as an excuse. I don't know if it’s really why the sell-off started. Markets are often looking for any kind of excuses, but, clearly, it happened at the same time.
And the results for both companies were, I would say, not that bad, maybe a bit worse in the case of Tesla, but Alphabet’s results were relatively OK. I think one number that spooked the market was the fact that this company has spent, the last quarter alone, $13 billion in investment for infrastructure and other capex, as we call it.
Most of it is probably related to AI, but this is $1 billion more than what analysts had expected and it started to, or helped, fuel that narrative that AI is a great thing, artificial intelligence is a great thing, but to this point we don’t know exactly how it’s going to be monetised and how much money is going to be made after all those investments are actually done.
So, what we saw was a broad-based profit taking, in particular, in the segment of the market that has been the most popular recently, and that is large-cap technology names in particular.
What had done slightly better is small cap, which, to us, is a bit of an oddity. If you think about it, smaller companies tend to be more domestic in nature. They also tend to be much more cyclical, ie they need a strong economy to perform, or at least historically that has been the case. And the data is not really showing us that the US economy is accelerating. So, we’re questioning a bit this move, this rotation.
We don’t necessarily think investors should be chasing performance. It’s always good to be diversified, and having some small-cap exposure for the right type of investor may make sense, but we don’t think necessarily that this rotation is something that investors should pursue at this particular time, unless it's on a very tactical basis.
So, the market seems to be focusing on this view that the US economy is accelerating, and to base that view on what we consider to be backward-looking data. In particular, last week, we did get the US GDP figure for the second quarter, which came in stronger than expected at 2.8%. The consensus was looking at 2%, that is quarter-over-quarter annualised. So, it looks like the US economy is actually growing quite nicely.
And, at the same time, we also got the Fed’s preferred inflation measure in the form of personal consumer expenditure, or PCE. And, again, rather encouraging signs coming from that datapoint, with inflation around the 2.5% mark, coming down very gradually, but nicely, towards the Fed’s target. And all that seems to suggest that we are in this ‘Goldilocks’ scenario, where growth is strong and inflation is starting, or continuing, to come down.
The problem we have with those two datapoints is that they are, as I said, backward-looking data, in particular GDP growth. And if we focus more on the forward-looking datapoints, such as the purchasing manager indices, or PMIs, we can see that the US economy isn’t accelerating.
In fact, according to those PMIs, the manufacturing activity in the US this month contracted. Clearly, not a great sign. Equally, if you, and we are in the middle of earnings season, if you listen to what companies have to say about the future, very few of them are talking very positively about the outlook.
At best, they are keeping their guidance unchanged, but we’ve seen some high-profile misses in terms of whether it was actual earnings, or whether it was companies downgrading their guidance for the full year. The consumer side of things seems to be the one where there is clear divergence from one company to the other in terms of the momentum that those companies are experiencing.
So, looking forward, the data is suggesting that growth is slowing down. I want to be clear, growth is not falling off a cliff, but growth is not accelerating as the backward-looking data might suggest or, again, one reason why we think this procyclical small-cap rotation is not necessarily something that people want to chase at this point.
Now, I wanted to spend some time on the week ahead. Why? Because this is probably going to be the busiest week of the summer in terms of potential catalysts.
On the macroeconomic front, we will get the US jobs report for June, that’s on Tuesday, the Chinese PMI for July on Wednesday, the eurozone CPI for July, also on Wednesday, as well as the US employment cost index for the second quarter.
On Thursday, we’re going to get the US manufacturing ISM, and the US jobs report to finish off the week on Friday. So, very, very busy on the macro side.
We’re also going to hear from three different central banks, the Bank of Japan first. We’re also going to hear from the Fed in the US, as well as in the UK, the Bank of England. That is on Thursday.
And, on top of that, we also get one of the busiest weeks in terms of earnings reports. It looks like every company wants to report this week so that they can enjoy well-deserved holidays in August.
But in terms of major earnings in the US, AMD and Microsoft report on Tuesday, Meta and Qualcomm on Wednesday, Apple and Amazon on Thursday. And in Europe, we’re going to hear from the likes of BP, Glencore, Standard Chartered, L’Oreal, that’s all on Tuesday, Danone, GSK, HSBC on Wednesday. And Barclays is actually going to report on Thursday alongside BMW, Volkswagen, Rolls-Royce and Shell. So, a very, very, very busy week in terms of earnings reports.
But, if I had to single out two key events among all those potential catalysts, for me it would be first the Bank of England. I think that the Federal Reserve is a given, or nearly a given, that it will not hike this week. The market instead is pricing more than a 100% chance of a hike in September. So, it looks like what the Fed is going to do is just to tell us to come back, after the holiday, in September for the first cut.
Where things are not so clear cut is in the UK, where the market is pricing a 50/50 probability around a potential cut this week. Our own investment bank here at Barclays expects the Bank of England to cut interest rates. Granted, it’s a very close call and if the BoE does cut interest rates it will be done in a rather hawkish fashion, trying to message that cut as this is not a one off. But it’s clearly not something that people should expect to be necessarily repeated every other meeting, or even every meeting, as the central bank is likely to maintain its data-dependency narrative.
So, clearly, we could see things move around gilts and around the pound, as the market hasn’t really priced in fully either scenario when it comes to the BoE this week. So, the BoE is clearly one to watch.
The other one to watch will be Microsoft. Microsoft, why? Because this is the poster child of artificial intelligence, and we discussed earlier how this particular area of the market, alongside everything that is technology related, has been under some pressure recently.
And as this leading force within artificial intelligence, Microsoft has the opportunity to help reshape that narrative a bit and maybe help to improve sentiment around this particular area of the market. Now, that might go the other way, in which case this rotation into smaller cap may last a bit longer, but I would pay very, very close attention to Microsoft as well.
So, it’s definitely going to be a very, very busy week, a lot to pore through next week when we are back on the podcast, but, in the meantime, as always, we wish you the very best for the trading week ahead.
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