This week our Portfolio Manager Roberto Rossignoli spoke to international media on a range of topics, including US semiconductor giant Nvidia joining the ‘three trillion club’ of US tech stocks, the latest UK inflation data and the BoE opting to hold rates steady.
Welcome to the ‘$3 Trillion Club’, Nvidia
Senior Portfolio Manager Roberto Rossignoli spent some time in conversation with journalists from Italian broadsheet La Republicca last week to discuss Nvidia’s rapid growth journey to becoming the world’s most-capitalised stock. Here’s what he had to say:
Q: What phase are Microsoft, Apple, and Nvidia in? How are they doing, how were the latest quarterly reports, and what prospects does the market see for them?
Roberto: “The latest quarterly reports have confirmed the favourable status of the three companies. Profits and revenue have grown for Microsoft and Nvidia, which currently seem to benefit the most from the dominant AI theme in recent months, specifically related to the so-called Large Language Models, à la Chat GPT, and their increasingly pervasive applications in the economic world.
“Apple has faced some uncertainties related to the performance of the Chinese market and has lagged somewhat behind the other tech giants. Therefore, the latest quarterly report numbers were less impressive than competitors. However, in recent weeks, the company has announced some AI-related initiatives that seem to have been well-received by investors.
“Looking ahead, expectations remain positive, with anticipated profit growth for the “Magnificent 7” in the next 12 months just under 30%.”
Q. All AI-related stocks have seen robust growth recently. Are we at risk of a new bubble?
Roberto: “The revenue growth and profitability with which these companies remain well above any other global large-cap justify, albeit not completely, the high valuations these companies have reached. It’s also worth noting that valuations are much lower compared to the 2020-2021 levels, indicating that the recent price increases have been supported by significant fundamental growth and not just the trend of the moment.”
Q. The three companies alone today account for 20% of the S&P 500. For investors (e.g., in an S&P 500 ETF), is it riskier to have an index where so few stocks weigh so heavily?
Roberto: “Month after month, the mantra of diversification is increasingly questioned and under pressure. The concentration within the stock index can, in our view, resolve in two ways: either with a crash of the most relevant names or with an improvement in the performance of other stocks. For now, we consider the latter scenario more likely, and therefore, we do not believe there are additional risks stemming from the concentration. Of course, the usual risks associated with stock investment remain when valuations are not very convenient, but they do not seem more pronounced than in the recent past.”
Q. Who’s poised to reach the $3 trillion mark next? Amazon? Meta?
Roberto: “Both are making significant investments in AI and have business models that have withstood recent cycles well. We consider both to be excellent candidates for surpassing the $3 trillion mark.”
UK reaches the 2% inflation target set by the BoE
Next, on Wednesday, Moneyfarm CIO Richard Flax offered his thoughts on the Bank of England hitting its inflation target—the first time it has done so since July 2021.
“[Wednesday’s] inflation data revealed a fall to 2% year on year in line with consensus expectations. The result is a significant milestone, aligning with the Bank of England’s target for the first time in nearly three years.
This lower inflation rate should be a small piece of good news for Prime Minister Rishi Sunak, who has prioritised controlling inflation. With the general election looming on 4 July, this positive news comes at a crucial time. Just a year ago, annual inflation stood at 8.7%, down from a peak of over 11% in October 2022, the fastest rate in over four decades.
As the Bank of England looks poised to maintain interest rates at 5.25%, it’s clear that caution remains the watchword to avoid any reacceleration in inflation. This decision will likely be scrutinised in the coming months as the economic landscape continues to evolve.”
Bank of England’s deliberate pause
Finally, Richard capped off the week’s UK-focused news and data by giving his reaction to the BoE holding rates steady and his view on the possibility of rate cuts later in the year.
“In line with expectations, the Bank of England opted to keep interest rates at 5.25% for the seventh consecutive time, with a majority of 7-2. The voting record was unchanged compared to last month.
“Headline Inflation has reduced to 2%. There is a cautious sense of optimism with analysts predicting we are edging closer to the first cut in interest rates since the pandemic. The consensus among economists is for the first rate cut to be in August. As markets await further developments, the Bank’s cautious approach demonstrates a commitment to guiding the economy towards its long-term objectives, recognising the nuanced relationship between monetary policy and prevailing economic circumstances.”
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