What the latest market moves are telling us

It’s been a particularly busy week in markets. We’ve had earnings reports from tech companies, interest rate policy decisions from central banks, a Budget announcement in the UK and the latest GDP figures in the US and Europe. We’ll have a brief chance to digest all of this over the weekend, before the US midterm elections next week and the possibility of a further re-escalation of the conflict in the Middle East. Before that, we wanted to take stock of where we are.

Starting with tech earnings, from the likes of Alphabet (Google) and Amazon. We think the results have been strong in absolute terms but have left investors wanting a bit more. The challenge has come not from the cloud /Artificial Intelligence (AI) part of these businesses, which we think saw very strong growth, but rather from the core businesses – advertising for Alphabet and retail for Amazon. 

We think this might tell us more about the health of the consumer (and disruption from AI in the world of advertising) than it does about AI adoption. But hyperscalers are using the cashflow from their core businesses to finance the AI build out. Consistently weaker cashflows could mean more debt or equity issuance to spend on capital investment – which remains high. 

On the policy side, both the Federal Reserve and the European Central Bank left rates unchanged this week, even though inflation remains above target. It’s reasonable to ask why Central Banks didn’t raise rates again. Part of the answer could be that financial conditions have tightened already (with higher bond yields) and so they can afford to be patient. It’s also possible that the geopolitical uncertainty, and the potential for further energy shocks, justifies a cautious approach. 

Finally, with the US midterms next week, Fed governors might have wanted to avoid any appearance of political engagement. Regardless of the precise timing, we think that the direction of travel is for higher policy rates over the coming months – potentially with another hike in December. 

The latest GDP figures pointed to decent growth, despite the impact of higher oil prices. These numbers are preliminary and do get revised. They show that the Eurozone grew 1.3% year on year in the 3rd quarter, even though France saw a slight contraction. On the same basis, the US economy grew around 2.1% in 3Q¹. The impact of AI spending was pretty clear in the numbers. Non-residential investment spending in the US was particularly strong, growing over 8% year on year.

So, where does this get us? 

In terms of growth, the overall performance of the global economy has been better than we might have feared. Growth has actually been accelerating over the past few months. That said, if high oil prices persist even longer, we’d expect to see some impact in terms of slower growth, particularly around consumer spending. 

On the equity side, we’ve seen some weakness in tech names relative to high expectations, but overall earnings growth remains robust. As we’ve noted before, UK equities have been a useful counter-balance recently. We’d also highlight that the correlations within the Mag 7 have been falling over the past few months. The large tech businesses don’t all move in lockstep. Recently we’ve seen Apple, in particular, perform quite differently from the likes of Amazon and Alphabet. 

We remain constructive on these tech businesses for now, given the strong growth we’re seeing. That said, we’re focused on keeping our portfolios well-diversified. We have kept our allocations largely unchanged recently, but we’re on the lookout for any opportunities that the recent market volatility could provide.

1. For the statisticians, the US Bureau of Economic Analysis usually reports growth as quarter-on-quarter seasonally adjusted annualised figures. That came in at 3.4% in 3Q, but we’ve used the year-on-year figure for the sake of comparison.
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