Tech stocks back on the front foot

With the S&P 500 and Nasdaq hitting new all-time highs again last week, technology is back in focus. The spotlight will shine on the Magnificent Seven this week, with most of them delivering earnings reports. But the giant hyper-scalers are only part of the AI story driving markets once more.

Accelerating earnings

This week’s results will focus on tech, with Amazon, Alphabet, Apple, Meta and Microsoft all expected to deliver earnings updates.

The numbers will build on a first quarter results round that is safely beating expectations once again. Having started earnings season with low double-digit growth expectations overall, the talk now is of a 20% year-on-year growth for both the quarter and the year as a whole.

So far, nearly 140 of the US’s 500 biggest companies have reported first quarter earnings. Around 80% of them have beaten estimates by an average of over 10 percentage points.

Strong profit growth has compensated for the retrenchment in valuations during the Middle East conflict, keeping the March correction to a modest 10% or so and fuelling April’s powerful rally.

With the capitalisation-weighted S&P 500 outpacing the equal weighted version again, it is tempting to think this is just a return to the Magnificent Seven growth story. But there’s more going on than just this.

Although the S&P 500 has risen by nearly 10% this month, it’s the semiconductor and computer network equipment companies, rather than the hyper-scalers, that are attracting all the interest.

The S&P 500 and Nasdaq both hit new highs on Friday, mainly on the back of a blow-out sales forecast from Intel. It’s the companies providing the nuts and bolts of the data centres rather than the companies building the AI models that are fuelling the rally.

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Central banks in focus

Alongside the flood of earnings reports, central banks will enjoy a week in the spotlight too. The Fed, Bank of England, ECB and Bank of Japan are all due to announce interest rate decisions this week.

The decision by the Department of Justice to drop its investigation into Fed chair Jerome Powell, means this week’s meeting will probably be his last as head of the US central bank.

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He is expected to announce no change in rates, highlighting the resilience of the US economy as a reason to stay on hold. And once Kevin Warsh, Donald Trump’s nominee for the top job, takes over from Powell a further period of no change is expected before a possible return to rate cuts later in the year or early next.

On this side of the pond, it will almost certainly be no change in Europe and the UK as well. Christine Lagarde, ECB president, has said it is too early to judge the impact of the Guld conflict on inflation and growth in Europe. Before Thursday’s decision, though, we will get to see data on both measures. These are likely to show a move towards stagflation - the worst backdrop for policy makers to navigate.

Here in the UK, a rate rise is possible, but Bank governor Andrew Bailey has also said he is minded to watch and wait. Inflation rose to 3.3% last month but wage growth is declining, so again the central bank is grappling with mixed messages.

Finally, the Bank of Japan will also probably sit on its hands given the uncertainty. Unlike the other central banks, it wants to raise rates but given the unresolved Gulf situation it will most likely pause.

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