Week in review: Big tech, falling house prices and the triple lock

America's technology mega-caps were in the spotlight this week as the first batch of quarterly results rolled in. Whether or not you believe the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) are priced for perfection, the latest round of numbers probably needed to blow some forecasts out of the water.

They mostly didn’t, and the S&P 500 index dropped below the 4,200 mark for the first time since May. For a number of companies, disappointing cloud sales vied for the limelight with better-than-expected overall results.

For example, Amazon comfortably exceeded forecasts with a 13% rise in revenues to $143 billion for the quarter¹. However, a slight miss in terms of cloud sales growth drove a cool market response.  In a similar vein, there was a deceleration in demand growth at Alphabet’s Google cloud business, which overshadowed news of earnings rising above expectations.

Microsoft said growth in its cloud business is getting stronger and the company’s revenue estimate for the next quarter surpassed market expectations. That, however, didn’t prevent gains early in the week from evaporating latterly.

The problem with cloud sales is that they have grown to become a barometer for business confidence. Fears of a global economic slowdown may be driving some companies to limit their spending on cloud services, including state-of-the-art AI tools.

Facebook’s owner Meta surprised to the upside with a 23% increase in revenues as the digital advertising recovery continues but, again, an early positive reaction turned negative as the week wore on².

Critically for investors, the Magnificent Seven in aggregate have lived up to their name so far this year. Their outperformance means they now account for around 27% of the S&P 500 which, in turn, makes up more than 60% of world stock markets³.

Valuations, on the other hand, would offer little comfort in a downturn even accounting for AI euphoria. The NYSE Fang+ Index, which tracks these big tech names, currently trades on around 46 times historic earnings⁴.

That may not be a worry if investors expect an earnings leap over the next few quarters. Barring that, as we discussed last week, other parts of the market arguably more in-tune with the US economy now appear very inexpensive on a relative basis.

Elsewhere, the European Central Bank ensured interest rates stayed in the headlines. As guided for last month, key rates were left unchanged at 4%. The decision followed 10 consecutive rate rises.

While the Bank insisted it is premature to expect rate cuts, current fears centre on the possibility Europe may already have entered a recession under the weight of raised borrowing costs. According to revised data released a week ago, countries from the Netherlands in the west, to Poland in the east, saw their economies shrink in the second quarter⁵.

Lloyds Banking Group echoed recent industry forecasts saying it doesn’t expect the UK housing market to recover until 2025. It was, however, more optimistic than some, saying prices will drop by 4.7% this year and 2.4% next. The OBR’s March forecast was for a 10% drop in total from the high point in the last quarter of 2022⁶.

Finally, now September’s wages and inflation data is in, the triple lock means the full new State Pension will rise by the same amount as earnings next April (7.8% to 8.5% depending on the calculation). With a general election possibly on the cards as early as next May, anything less looks improbable.

The Institute for Fiscal Studies (IFS) said last month that had the value of the State Pension grown in line with either prices or earnings since 2011, it would now be around 11% lower than it is. Conversely, the government now spends an extra £11 billion per annum on state pensions as a result of the triple lock⁷. Politics and economics inextricably intertwined.

Source:

¹ Amazon.com, 26.10.23
² Meta Platforms, 25.10.23
³ iShares and MSCI, 30.09.23
⁴ Bloomberg, 27.10.23
⁵ European Commission, 19.10.23
⁶ OBR, 15.03.23
⁷ IFS, 08.09.23

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