Chief Investment Strategist
US equities are back to a new all-time high this week erasing the unease in April when US equities tumbled 5.5% intra-month as investors got nervous about inflation and the risks of the “high for longer” narrative on policy rates. The US April CPI figures on Wednesday surprised to the downside causing the market to immediately price in two Fed rate cuts by December from 1.5 cuts before the CPI report. The apparent victory lap on inflation reverberated through equity markets pulling especially the information technology, real estate, and utilities sectors higher as these three sectors have the highest sensitivity to changing interest rates.
Japanese equities are the worst performing geography over the past week driven by a stronger JPY as the market continues to price a narrowing policy rate gap between the US and Europe against Japan. The market is now pricing Bank of Japan to increase the policy rate by 20 bps by the 31 October meeting while the Fed is expected to lower the policy rate by 50 bps by the December meeting narrowing the gap by 70 bps. The reason why the Japanese currency is so instrumental for the direction of Japanese equities is due to the largest stocks in the Japanese equity index are getting the majority of their cash flows from markets outside Japan.
The strong performance in emerging market is driven by the rebound in Chinese equities which has been stimulated by multiple government pro-cyclical policies including backstops to the real estate market. Despite the rebound in emerging markets going against our tactical and strategic negative view presented in our Q2 Quarterly Outlook, we maintain a negative stance on emerging markets due to its large weight on Chinese equities. Our view is that investors should be selective on country level in emerging markets and we prefer countries with positive demographic tailwinds and compounding dynamics in the middle class. As a result, we like emerging market countries such as Mexico, Brazil, India, Vietnam, and Indonesia.
The table below shows the long-term real return expectations across regions and sectors. Based on this an investor can infer to be overweight Europe, neutral on the US and Japan, and underweight emerging markets. On sectors, global investors should be overweight health care, energy, and financials, while underweight real estate, utilities, and industrials.
This week has also seen a comeback to the more speculative parts of the equity market such as the bubble stocks theme. That this segment of the market is staging a comeback tells us that equity sentiment is getting very hot and this typically a sign of some late stage momentum cycle. The US equity market has rallied 29% over the past 29 weeks with very few setbacks and that is the perfect recipe for animal spirits coming back into the market.
The semiconductor theme, which is essentially driven by the sentiment on AI technology, is up 4.6% over the past week extending the strong gains in May as TSMC delivers strong capital spending guidance and Apple is close to sign a partnership agreement with OpenAI to bring generative AI capabilities into the iPhone which could accelerate demand for GPUs in datacenters even more. As we have shown in an equity note earlier this year the investment boom in the three sectors communication services, information technology, and health care is extraordinary and growing much faster than any growth rate observed in the 10 years leading up to the pandemic.
This week has seen positive earnings surprises from Chinese companies such as Tencent, Baidu, and JD.com, while Alibaba disappointed as the former e-commerce winner is losing out in the very competitive Chinese technology sector. In the US, we got two very different earnings reports in the retailing sector with Walmart yesterday surprising the market by boosting its fiscal year outlook while Home Depot disappointed earlier in the week on comparable revenue growth underscoring the demand weakness related to the housing market. In Europe, Siemens and Burberry were two negative surprises while Commerzbank surprised significantly to the upside underscoring the strong profitability trend in the European banking sector.
Looking ahead to next week’s earnings, Nvidia, the world’s most valuable semiconductor stock, reports FY25 Q1 earnings (ending 30 April) next Wednesday (after the market close) with analysts expecting 242% revenue growth YoY to $24.6bn and EPS of $5.53 up 533% YoY. Expectations are running very high into this earnings release, but given the signals from TSMC on capital spending we expect Nvidia to beat and potentially even raise their outlook once again. This is the most anticipated earnings release and will be a key driver of where semiconductor stocks go from here. Analysts remain overwhelmingly positive on the stock with a consensus price target of 1,015 which is around 7% higher from the current price.
Snowflake is another AI-related stock that is also reporting next Wednesday after the market close. The data cloud company is expected to report FY25 Q1 (ending 30 April) revenue of $786mn up 25% YoY. Focus will yet again be on potential downside surprise to product sales as companies are prioritising generative AI spending instead of data warehousing.
Quarterly Outlook
Global Head of Macro Strategy
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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