Chief Investment Strategist
This week will be remembered for its big rally on Wednesday catapulting Nvidia to become the second largest stock in the S&P 500 and taking the US equity market to a new all-time high. As the our performance overview shows, all regions have gained this week and all sectors except for materials and energy have gained.
An interest rate sensitive sector such as real estate also had a good week as US bond yields headed lower on mixed US economic data points. In our view there is a lot of noise in the economic data points right now, but using the Dallas Fed Weekly Economic Indicators Index then the US economic growth has strengthened over the past 1-2 months.
The strong gains in equities came especially in semiconductor stocks and the S&P 500 Index concentration rose yet again to unprecedented levels with Microsoft, Nvidia, and Apple now accounting for 20% of the index and the 10 largest stocks have a combined weight of 35%. The US equity market has not been this concentrated in at least 50 years and it has consequences. First, it means that passively investing in US equities is now more than ever a bet on technology and a narrow set of stocks, Secondly, it means we are getting close to a pivot point in markets where active equity selection and stocks outside the mega caps will be the field of alpha in the future, in other words, we think investors should begin looking for small cap stocks. Historically, high index concentration has been followed by bursts of volatility so when the index concentration peaks investors should be prepared for higher volatility.
On Wednesday, CrowdStrike reported better than expected earnings results on both revenue and EPS, but more importantly the cyber security company raised its fiscal year guidance on revenue. The company’s single-platform strategy continues to be a competitive advantage for the company taking market share and capitalizing on an industry that is seeking alternatives to what Microsoft offers on cyber security and especially given a recent government report criticizing Microsoft’s cyber security culture. CrowdStrike shares rose 12% on the back of its earnings results.
Is ECB playing with fire?
The ECB delivered yesterday the most well-telegraphed interest rate cut in recent history, but it was not the beginning of the interest rate cut party that many had expected. We have argued multiple times that the ECB should have waited as the Eurozone economy was already rebounding. What was interesting was the rate cut seemed like something that the ECB had to do because of their forward guidance, but because of the recent data points it would probably have not done it. This is also why the ECB did not hint at any rate hike and instead referred to being data dependent. The market is still pricing that the ECB will cut again in October. As we have been saying for a while it seems odd that the ECB is so confident in its econometric forecasts on inflation when the Fed has been completely wrong on inflation. Our thinking is that the ECB is playing with fire. If they keep cutting the interest rate they might ease financial conditions for some parts of the economy but they risk increasing longer term inflation expectations.
Previous weekly equity market updates
Chinese setback, AI woes, and ECB decision (31 May 2024)
Nvidia earnings, electrification boom, and bubbles (24 May 2024)
New all-time high on speculative stocks comeback (17 May 2024)
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
