Monday Digest
Posted 14 October 2024
Buy the rumour, sell the fact
Despite competing market narratives, stock markets were generally stable last week. China was the only exception; it managed to fit a boom-bust cycle into the space of a few days. There are plenty of uncertainties, but we’re still confident about the long-term outlook.
Bond yields climbed after US September inflation refused to come down as much as expected. Markets’ implied path for US interest rates flattened; the expected trough in rates (early 2026) is now half a percentage point higher than what markets predicted in early October – as we said might happen. But this isn’t about the Fed turning hawkish. Inflation-linked bond yields rose quicker than nominals, meaning higher inflation expectations. The summer soft patch for US growth is over, but risk markets are still pretty happy about the growth-rates balance. The hurricane damage might strangely boost near-term growth, because of rebuilding efforts.
Higher US yields and a stronger dollar hurt UK bonds, which in turn bruised UK stocks. That is a problem for the government heading into a tough autumn budget. The treasury’s mixed messages haven’t helped. Chancellor Reeves warned about tax rises one day then backed off the next. Foreign investor flows need more certainty, which will only come after the budget.
China’s government is still the biggest flip-flopper, though. Investors were excited about ‘bazooka’ stimulus, but a much anticipated conference last week promised a measly amount of spending. Chinese stocks lost 13% from Tuesday to Friday, as investors worried that Beijing’s was just a paper bazooka. Incredibly, stocks were still up overall last week – showing just how wild China’s swings have been.
The biggest shock risk is still the Israel-Iran conflict, but there were signs of possible de-escalation last week. Iran’s leadership appeared to be backing off or at least indecisive, and gulf states are pressuring the US to prevent an Israeli strike on Iranian oil fields. Oil prices fell in the early part of the week, and only rebounded after US growth and inflation data. The threat remains, but the underlying global growth picture is strong despite disturbances.
What to expect this earnings season
Markets await the US’ third quarter corporate earnings season. US earnings get more attention than other regions – partly because its equity market dominates global market cap, but also because American companies have to report every quarter. Profit results always move markets, but they are particularly important in an uncertain US economic outlook. Markets want a ‘soft landing’ (interest rate cuts without recession) which would need resilient earnings. The good news is that analysts expect a fifth straight quarter of profit growth from S&P 500 companies. There will inevitably be ‘surprises’ through the season, but reporting tends to follow a pattern.
With Q3 only just over, we are getting a drip feed of results and will see the bulk of reports in late October and early November. Cyclically-sensitive financials tend to report first, since they always need up to date books. Tech companies tend to report later. Since these are such a huge part of the stock market, the biggest earnings reactions can also come later. This is epitomised by ‘Nvidia day’; the chipmaker’s reports have become massive market-moving events in recent years. The ‘surprises’ (how results fare against projections) are key, but companies have become adept at managing expectations so they can ‘beat’ them and get a share price bump.
S&P earnings growth is projected between 4-5%, but company forecasts always get strategically weakened heading into the season, so the actual figure will probably be higher. The only concern is that earnings forecasts have been revised down more than usual this time – which could just be more companies getting wise to the ‘beat’ strategy or a sign of actual decline. We think an actual earnings growth disappointment is unlikely, but this is a warning sign. It’s a risk which could mean volatility into the year end.
A new kind of antitrust
The US Department of Justice (DoJ) wants to break up Google, according to last week’s court filing. It comes after a US judge ruled the company a “monopolist” in August, for practices like paying to be the default search engine and charging rent on in-app purchases. A breakup could be even bigger for markets than Microsoft’s ordered breakup (which was overturned) 24 years ago. Parent company Alphabet is worth $2tn, and global market cap is much more concentrated on tech giants these days. But Alphabet’s shares barely moved on the news. Investors seem to think the actual result (after appeals) will be kicked down the road and ultimately diluted.
This might be overconfidence, based on old assumptions about antitrust law. The Biden administration has made clear it’s focussed on potential structural harms rather than the classic price gouging issues that antitrust regimes were originally built to tackle. The political understanding of monopoly has shifted to think that big is bad, even if there’s no direct evidence of consumer harm. Federal Trade Commission (FTC) head Lina Khan is the symbol of this approach. While the FTC isn’t involved in the Google case, it has brought many tech-busting cases during Khan’s tenure.
Khan is an interesting point for the future of US antitrust law. She was hired to reinvigorate antitrust regulation, but few of her high-profile cases have succeeded. She might not be reappointed under the next administration even if Kamala Harris wins, considering Harris donors dislike her aggressive approach. But whether that would mean a softer approach is harder to say. Donald Trump is assumed to be softer on tech, but his voter base dislikes big tech. Harris is assumed to be tougher, but her corporate donations far exceed Trump’s. Google’s outlook is uncertain, but investors might be complacent in thinking the problem will go away.