Market review

Market review

Weekly review 26 February 2024: AI delivers on investors’ expectations

The US equity markets surged in the latter part of the week, driven especially by the better-than-expected earnings posted by tech company Nvidia. European equity indices also rose, although economic data from Germany was weaker than expected.

After reporting earnings more than 10 per cent above expectations, Nvidia saw its stock price hit a record high, substantially contributing to the S&P 500 index’s overall performance. Commenting on the earnings, the company’s CEO says he believes that AI has hit the tipping point after which AI capital expenditure will grow significantly.

At the same time, the S&P 500 index will continue concentrating on fewer and fewer large caps. Nvidia alone accounts for up to 25 per cent of the index’s gain during the current year, and five of the top-performing companies for a whopping 60 per cent. Concentration in the US equity market has continued, and the weight of the top ten companies has not been this high since the 1970s.

The US and European equity markets have been neck and neck for the past few months, although economic growth in the USA has been in a class of its own. Without the exceptionally strong performance of the largest tech companies, European equities would even outperform their US peers. This just goes to show that market and economic developments do not always go hand in hand, at least not in the short term. A similar phenomenon has been observed in Japan, where the economy is in a recession but stocks are on the rise. In the emerging markets, in turn, the pick-up in Chinese equities sent the whole index higher last week.

Room for improvement in PMIs and earnings in Europe

PMIs (Purchasing Managers’ Indices) measure companies’ production, order intake, employment level and other essential indicators based on a survey conducted among purchasing managers. The indices provide broad insight into the economic outlook, and their different sub-components shed light on, for example, short-term price, employment and growth prospects.

The combined PMI figures for Europe published last week were slightly up from the previous month. While moving in the right direction, the figures still suggest dwindling growth. The figures out of France were better than expected for both services and manufacturing, but Germany was a major letdown with its manufacturing PMIs that were considerably weaker than expected.

The earnings season in Europe has also been sluggish, and companies’ earnings have contracted by an average of more than ten per cent. In particular, energy and raw material companies’ earnings have fallen, as expected. Overall, however, the companies that have reported their earnings to date have slightly exceeded expectations, and consumer companies in particular have even registered good earnings growth. Nevertheless, the earnings season has been far from rosy.

Fewer interest rate hikes expected from central banks

The European Central Bank is currently expected to lower its policy rate four times during the current year, starting in June. What counts for investors, however, is why, rather than when, the decision to lower interest rates will eventually be made. If the reason is that inflation has been brought to the two per cent target level in a sustainable manner, a decrease in interest rates would be more likely to lift the markets than if interest rates were cut because the economy suffered too much from them, with inflation still remaining above the target level.

In the USA, inflationary pressure has remained high due to strong economic growth, and it is still possible that the Fed’s next decision will be to hike rather than cut interest rates. The Fed is currently expected to lower its interest rate level three times in 2024, against the previously expected four cuts.

Next week, the markets are looking forward to the inflation figures from Europe and the PCE or Personal Consumption Expenditures price index figures from the USA. In addition, Wednesday will see the publication of the adjusted US GDP growth figures for the fourth quarter of last year.

Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.