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No-one likes a party pooper, especially when they’re standing in front of the punch bowl. That’s the role taken on by Jay Powell, who poured cold water on the prospect of a December rate cut. That’s put markets on the back foot when it looked like the music was just about to ramp up.
The Fed did announce an interest rate cut, but short-term Treasury yields jumped up on the back of the hawkish tone, and Jay Powell’s comments might well have elicited a hoot of derision from somewhere in the White House. The Fed chair likened the central bank’s current situation to driving in the fog, because the US government shutdown has prevented the release of key economic data.
Welcome to the club, might be the response of Andrew Bailey, as concerns over the accuracy of ONS data have for some time now been called into question as the basis for interest rate decisions.
Gilt yields jumped up in the UK too, as Powell’s comments reverberated across the Atlantic, highlighting just how sensitive our own government’s borrowing costs are to Federal Reserve policy. With a Budget being written as we speak, these movements will have real world implications for taxpayers across the country.
Mag Seven / AI
It’s earnings season, and with some great expectations baked into Mag Seven prices, all eyes are on the technology sector to see if it can deliver the goods. So far, the AI trade got a bit of a reality check as the market took fright at Meta’s burgeoning spending plans, sending the shares down sharply.
Microsoft also took a hit despite beating profit forecasts. But investors gave the thumbs up to Alphabet’s numbers, as it posted a nice jump in Gemini users and a healthy increase in core advertising revenues, assuaging fears that Google might succumb to newer ways of scouring the internet, powered by generative AI.
These latest results highlight the business models of the big technology firms are becoming more capital intensive, as they build out their AI capabilities. That’s all well and good, if AI delivers the revenue streams the big tech CEOs are betting on. And of course, if the pie is big enough for everyone to get a satisfactory slice. However if that proves not to be the case, either at an aggregate sector or individual company level, the effect on share prices could be brutal.
Mark Zuckerberg says that it makes sense to aggressively front load building capacity for AI infrastructure, and if there proves to be excess data centre space, this could simply be used for Meta’s core services. That doesn’t sound like an entirely convincing business pitch for spending tens of billions of pounds on something which might not ultimately deliver. But as Alphabet’s chief executive Sundar Pichai said last year, the risk of not investing in AI is significantly higher than investing for big tech. He’s not wrong, because obsolescence beckons for technology firms that stand still.
The big tech leaders might be influential enough to wangle a front row seat at a Presidential inauguration, but they are still firmly tied to the AI mast, and heading wherever the digital winds blow. And most of us are hitched a bit lower down, given how much of the nation’s pensions and investments are held in tech stocks through tracker funds.
Talks of an AI bubble are now part of the furniture, but only time will tell if future earnings can justify current share prices. There is some consolation in the fact that there have been mixed reactions to big tech earnings so far. That shows at least that the market still has some powers of discrimination.
TT Electronics
The UK stock market looks set to say ta-ta to TT, after its larger Swiss rival launched a compelling bid for the electronics manufacturer. TT is no stranger to corporate activity, having undertaken eight acquisitions itself since 2016, but now it finds itself on the other end of a take-over.
A rising share price from both companies shows the market likes this deal, even though Cicor paid a 64% premium to TT shareholders. And with TT trading at just 8 times forward earnings, well below its long-term average, this looks like an opportunistic time to pick up a competitor on the cheap.
WPP
It’s rare to see a trading statement where the CEO calls out performance as unacceptable, but that’s perhaps the luxury afforded a new boss who can say it didn’t happen on their watch, and wants to grasp the opportunity to set out a new strategic direction.
Cindy Rose pulled no punches in her assessment of WPP’s numbers, and tried to guide the market towards a strategic review and the potential for a rosier future. The market’s verdict concurred the figures were unacceptable and promptly marked the share price down by 10%, taking it to a place where it has fallen by 60% this year, putting WPP in real danger of losing its spot in the FTSE 100.
The previous CEO Mark Read failed to reposition WPP in the face of structural changes to the advertising industry. The rise of artificial intelligence and social media networks have meant that big clients have less of a need to use agencies such as WPP. The firm’s culture is rooted in traditional advertising and the world has gone digital, leaving the company scrambling to play catch-up. Cindy Rose has a big job on her hands, but it looks like investors aren’t prepared to play wait and see any more.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
