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“The next two days will test investor sentiment thanks to the publication of financial results from two of the biggest names on the global stock market and the Federal Reserve’s next interest rate decision,” says Russ Mould, Investment Director at AJ Bell.
“Microsoft and Alphabet release numbers after the US market close tonight and investors will be hoping for some stellar results to help sustain positive momentum among equities. The S&P 500 and Nasdaq have been on a roll since early January and a successful showing from these two tech giants could easily keep the market rally going. However, positive results are not a given, and multiple stocks in the so-called Magnificent Seven group of mega-cap tech names have shown cracks in recent months.
“Microsoft is seen as an unstoppable beast and investors will be hoping for proof that AI investments are now translating into financial gains. The focus for Alphabet will be on the pace of growth in its cloud computing arm and how much advertising income it is generating from Google and YouTube. Alphabet’s cloud division disappointed last time round, so a repeat of this situation would go down like a lead balloon.
“The Fed is expected to keep rates unchanged at 5.5% so as long as there are no shocks in the accompanying commentary, markets could easily treat the status quo as a winner.
“Wall Street had a decent showing last night and that positivity extended to Europe on Tuesday, including a 0.5% rise in the FTSE 100 which got a lift from pharmaceuticals and consumer goods companies.
“The Stoxx Europe 600 index hit levels not seen since November 2021, extending a decent run for European equities since last October. Investors are convinced that rate cuts from the ECB are only around the corner, stirring up greater interest to put more money into equities from this part of the world.”
Diageo
“Persistent problems with too much inventory in Latin America have prolonged the hangover for Diageo. So much for the idea this was a short-lived issue.
“Drinkers in Brazil have been switching from spirits to beer, which is traditionally a much lower margin product for the manufacturer. Furthermore, sales through the cash and carry channel have been weaker which has put Diageo in a difficult position. Distributors and retailers are sitting on too much unsold stock which has a negative knock-on effect for future orders from Diageo until that overhang works its way through the system.
“Perhaps drinks cabinets at home were well-stocked during the pandemic and people still have plenty of spirits left over, so there is no need to keep buying more for a while?
“To make matters worse, Diageo says its prized Casamigos tequila brand is losing market share. Acquired from actor George Clooney and associates in 2017 in a deal worth up to $1 billion, the purchase of Casamigos raised a few eyebrows at the time given the high price tag. While it was subsequently a positive contributor to the new owner, Diageo now needs to rekindle the magic.
“The group seems confident the premiumisation trend for drinks is intact despite some customers trading down to cheaper alternatives.
“We’ve already seen in other parts of the luxury market that the wealthy are not immune from a higher cost of living and higher interest rates. Therefore, Diageo needs to be more creative with how it convinces consumers to buy its products. Plans to offer smaller pack sizes of Casamigos, for example, don’t seem innovative enough.
“Work needs to be done in the marketing department to get everyone talking about certain brands, just like it did in 1999 with the iconic surfers and horses advert for Guinness.”
Pets At Home
“Britons may be devoted to their pets but a profit warning from Pets at Home shows there are limits on what they will spend on them.
“The company is seeing slowing demand in its retail business. While households are likely to prioritise spending on the basics for their animal companions, spending on little extras is an unnecessary luxury when times are tough.
“In this respect a slowdown in this category should not come as a surprise and perhaps Pets at Home was wrong to peg profit guidance at a level where it needed to achieve a decent level of discretionary purchases.
“What would be more worrying is a sign it was losing sales on core items to the non-specialists, notably the supermarkets. This does not appear to be the case with the company growing share and winning volumes in food.
“The policy of offering everything under one roof – including veterinary and grooming services – continues to be a winner for the company. Its vet arm is performing well and it is increasingly carrying out more complex procedures.
“The issue clouding the outlook is a probe by the competition authorities into the vet sector. Pets at Home has been quite clear that it doesn’t engage in the sort of practices which the CMA is looking to stamp out but until the review is done – an update should be forthcoming based on the published timeline – investors may well remain wary.”
WPP
“Advertising agency WPP’s move to upgrade medium-term financial targets is encouraging but is based on achieving cost cutting not on improved momentum in the business.
“Built on acquisitions under its founder Sir Martin Sorrell, before his acrimonious split from the company in 2018, it would not be surprising if there remained some inefficiencies which could be ironed out.
“Bringing its marketing, advertising and PR agencies under six different roofs is a logical move. As well as reducing back-office costs it could also lead to a more joined-up strategy for what has proved in the past a pretty disparate business. Though naturally there will be an upfront cost to this restructuring process.
“The other immediate question is whether the company might take more drastic action to slimline the business – with the sale of its 40% stake in market research outfit Kantar still being mulled.
“The company, which has been playing catch-up on digital advertising over the last decade or so is looking to get ahead of the AI trend by investing in its capabilities. AI is seen as a threat to some of the functions around the creation, planning and purchase of advertisements.
“WPP’s CEO Mark Read seems confident machines will be more sorcerer’s apprentice than capable of producing the marketing magic themselves.”
These articles are for information purposes only and are not a personal recommendation or advice.