Market Update 6th November 2023

The apple of your eye

This year has been all about pairs, two sets of pairs in particular – inflation and interest rates, and AI and the Magnificent 7. Today we focus on the latter pair. AI has been a hyped theme and will inevitably do great things for our society when it is used properly. We just have to get through some ups and downs first.

Lets use Gartner’s Hype Cycle, which attaches descriptions to the evolution of technology. This theory says we need to navigate past the peak of inflated expectations through the ‘trough of disillusionment’ to the destination which is the ‘plateau of productivity’ (which is when mainstream adoption takes off). Where we are on that journey with AI is up for debate, but it feels as though we could soon be going past the hysteria of peak expectations and start approaching the dreaded trough.

However, the success of the Magnificent 7 companies this year shows they have had a fair wind behind them. In fact, they account for most of the growth of the S&P and the MSCI World. The mag-7 is made up of Microsoft, Amazon, Meta (Facebook), Apple, Alphabet, Nvidia, and Tesla. With a combined market cap of more than $10trillion, they represent just under 30% of the S&P and close to 20% of the MSCI World.

Before third quarter reporting had started in October, a lot of emphasis was put on what the Magnificent 7 would report. Now with 6 out of the 7 having reported, how has it affected the wider market?

Microsoft reported strong growth in the three lines of its business. Amazon was also good, it reported revenue and profit both exceeding consensus. Meta (Facebook) reported strong growth in earnings, however its shares dropped just over 3% on the back of disruption to the advertising outlook. Apple results were mixed, with revenue slightly ahead of expectations but iPad and Mac divisions delivered a slightly underwhelming performance globally. Alphabet had another mixed set, it reported revenue ahead of consensus but the 22.5% growth of the cloud business was lower than analysts had anticipated. Tesla’s stock also fell as the company missed on both revenue and earnings expectations. Nvidia is due to report towards the end of November.

Interestingly, although Apple reported strong iPhone sales numbers during the quarter, there has been some controversy around the radiation problem with the iPhone 12 and an overheating issue with the iPhone 15. France actually halted sales of the iPhone 12 recently due to the product failing their radiation test. Apple has contested the results. As for the iPhone 15, a big selling point is the case. It is mainly aluminium with a thin titanium layer, some think the layer of titanium might actually be contributing to the overheating problem. Overheating doesn’t sound like a big issue, but the more your phone overheats the more work the battery has to do, and you end up with a degraded battery. Not such a great selling point.

Global growth has been dominated by the US in 2023, and US growth has been dominated by the Magnificent 7. The S&P market cap weighted index is up around 13% since the beginning of the year, but the S&P equal weighted index is only up 0.1%. There has never been such a narrowness in the market, and this leaves room for growth uncertainty if these companies cannot keep generating the previous numbers. Markets hate uncertainty.

US unemployment data was weaker than expected in October, in fact unemployment has increased by 15% in the last 6 months.  Last week the Fed strongly hinted that it wasn’t planning any more interest rate increases, US manufacturing in October showed the largest monthly decline in over a year, and the US Treasury reduced the amount of long-term bonds it was planning to auction. The combination of the mag-7 concentration, and the inflation and interest rates pair could end up being a perfect storm for a hard landing in the US, which could impact global markets. On a positive note, history tells us when the stock market falls, it is an excellent investment opportunity.

Emily Cave – Trainee Research Analyst

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