When $2.5 trillion of value is lost from one of the major US stock market indices in a day, it’s understandable that investors are feeling on edge. The Nasdaq Composite tumbled as investor sentiment switched from fear to panic.
The rout in the US extended to Europe and parts of Asia on Friday, but futures prices imply that Wall Street is desperately trying to find the power to get off its knees when US markets open. It’s a fluid situation with Nasdaq 100 and S&P 500 futures pointing towards a rebound, but the Dow in negative territory.
The FTSE 100 fell 1.6% in early trading on Friday with broad-based selling. Only eight stocks were in positive territory, led by Coca-Cola HBC which was clawing back some of the ground lost yesterday on speculation around its Russian operations. At the bottom of the pile was Antofagasta which suggests investors are worried about either weaker copper demand if the AI infrastructure craze slows down, or in a worst-case scenario a weaker outlook for the global economy. Copper is an economic bellwether.
The slump in the Nasdaq on Thursday suggests we have just seen mass capitulation where people were no longer discerning with tech-related investment decisions. They’ve sold tech indiscriminately, most likely to lock in any profits they’ve made in recent years given the sector’s previous superior wealth generating capabilities.
Others might have had no choice but to sell if they’ve borrowed to buy shares. Margin calls can require leveraged investors to put up more cash or sell some of their holdings, with that forced selling adding to downward pressure on the market.
Only 17 stocks managed to deliver a positive performance on the Nasdaq 100 on Thursday, including PepsiCo, Keurig Dr Pepper and Costco. When the stock market is seemingly going to hell in a handcart, investors often seek solace in companies that could still be in demand no matter what’s happening in the world.
But it’s not just about Thursday’s eyewatering losses. The tech sell-off has been in motion since early October. The SOX semiconductor index was already down 22% in the month before Thursday’s faceplant when it fell 12% in a day. A total of $5.8 trillion has been wiped off the Nasdaq Composite since 6 October.
Investors are worried about large amounts of money being spent on AI infrastructure and no clear idea of when, or whether, there will be payback.
The midterm election result muddied the waters as the Democrats now have more influence and could slow down the pace of data centre rollouts and look at new ways to regulate the sector.
The AI story has all been about speed, and now there is a danger of it moving to a lower gear, and some of the wheels falling off.
International Consolidated Airlines
Shares in British Airways owner IAG gained some altitude after its results revealed resilient demand on its core transatlantic routes.
IAG has had to contend with significant turbulence. Inevitably, the company is facing significant pressure on profit as fuel costs soar in the wake of the Iran war, air traffic control outages haven’t helped, and full-year capacity guidance has been trimmed.
Some of the reduction in capacity is down to the suspension of flights to the Middle East but some of it reflects a strategic cut in flights offered in Europe to protect prices – a disciplined move which will likely be welcomed by investors.
The ability to maintain margin guidance is impressive in the circumstances and is supported by the company’s healthy contingent of premium and corporate travellers.
These customers tend to be less price sensitive, and demand is further underpinned by customer loyalty schemes which are helping to make revenue more visible and reliable.
This was hardly an unblemished update but given the sector headwinds, the market will be encouraged to see IAG finding a flight path through the turmoil.
Rightmove
The property market may be struggling but Rightmove’s latest update was relatively robust. The property listings site is seeing steady demand from estate agents but housebuilders, an increasing source of revenue in recent years, are spending less.
Being the market leader creates a virtuous circle for Rightmove. Its site has the most listings and is therefore the one which prospective property buyers will go to when looking for their next home.
This reinforces its position as a must-have product for estate and letting agencies and housing developers, providing it with significant pricing power when it comes to securing subscriptions.
However, as slowing growth in the average revenue per advertiser metric for the quarter shows, this pricing power is not unlimited.
Rightmove’s decision to invest heavily in AI, announced a year ago, was greeted with some scepticism but the company lauded the benefits in terms of productivity and the insights it can offer clients, and it looks set to remain an important part of the strategy.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...