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Market Pulse
Friday, April 26, 2024

Growth shock in the US, Europe needs more risk takers and diverging earnings trends in Big Tech

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our three stories this week:

  1. US growth and inflation shock
  2. Europe needs more risk takers
  3. Big Tech Earnings: Diverging AI Fortunes

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) US growth and inflation shock

The combination of a sharp downshift in US economic growth and indications of rising inflation sent shockwaves through the global stock market this week. US GDP grew only 1.6% in the first quarter, far below the 2.5% economists expected. This was the biggest negative US economic growth surprise since 2021[1].

While US consumer spending on services remained strong, it’s the decline in spending on goods that caught our attention. Over the last quarter US consumers spent more on necessities like healthcare but a lot less on things like new cars or going to restaurants. This suggests US consumers might be tightening their belts on discretionary spending.

Economists estimate it takes higher interest rates anywhere between 12 and 24 months to filter through to the ‘real’ economy. The last interest rate hike in the US was in July 2023, almost nine months ago. If economists are right, the US economy will really start to feel the full impact of 5%+ interest rates over the next year.

While the combination of slowing economic growth and rising inflation in the world's biggest economy is worrying, it’s important not to read too much into a single quarter of weaker economic growth. The US labour market remains strong and this is something we are watching very closely. A trend of rising unemployment along with slowing growth and high inflation would be real reasons for concern.

2) Europe needs more risk takers

Over the last decade US stocks returned more than 15% per year, more than double the 7% European stocks managed to eke out. According to the head of one of the biggest institutional investors in the world, this performance gap between the US and Europe might only get wider in the future.

According to Nicolai Tangen, CEO of Norges Bank, who oversees Norway's Sovereign Wealth Fund, Europeans are less hard working, less ambitious, more regulated and more risk-averse than Americans[2]. According to him, this dangerous cocktail is part of the reason why the US is far outpacing Europe in some areas of innovation and technology. The data seems to support his views that Europeans don’t put in the hours. An OECD study found Americans work almost 3 months more per year than their German counterparts[3].

His views are important because the Norway Fund owns, on average, 1.5% of every listed company on earth, and over 2.5% of every listed European company. Over the last decade their US holdings have increased from 30% to over 50% of their total portfolio, while their holdings in European and UK companies have fallen dramatically.

Tangen said there was a common thread in recent discussions with US CEOs. Many complained about the difficulty doing business in Europe due to tough regulations and excessive ‘red tape’. He pointed out that in America there is a lot of AI innovation and light touch regulation, whereas in Europe there is a lot of regulation and not a lot of AI.

Nicolai’s views here reminds us of something said by British MP, Bim Afolami, not so long ago. He warned British regulators that while safety is important, so too is attracting investment and boosting competitiveness. Speaking at a recent Banking Summit, Afolami said to regulators they “need to realise that if you’re regulating a market, in any area, there’s no point having the safest graveyard”.

With rapid advances in AI and robotics we might be heading towards a post-work era, where humans spend most of their time on creative or leisure pursuits. We think what Nicolai is trying to say to his fellow Europeans is, ‘We’re not quite there yet’.

3) Big Tech Earnings: Diverging AI Fortunes

This week saw some of the largest tech companies in the world report earnings results. Expectations, especially around AI, are sky high after a 50% rally in the “Magnificent 7” since October last year. This potentially set the stage for a very volatile earnings season.

Of the big AI players, Meta went first with earnings. The Meta share price rallied close to 50% so far in 2024 suggesting to us investors had high expectations going into earnings. Too high it seems. Their earnings report, and comments from CEO Mark Zuckerberg, disappointed investors who sent the Meta share price hurtling down well over 10%.

The combination of rapidly rising spending on AI and weak revenue guidance for the next quarter raised some serious questions about the near-term return on investment on AI investments. CEO Mark Zuckerberg said he didn’t expect AI services at Meta to be profitable for years to come[4].

The Meta results sent shockwaves through the stock market and dragged down other AI players like Microsoft and Alphabet. But it seems like the fortunes at Big Tech companies might be diverging. Microsoft and Alphabet both reported earnings that beat analyst expectations.

Microsoft sales for the quarter came in close to $62bn, $1bn higher than analyst expectations. Revenue in their cloud business, Azure, grew 31% year-over-year, with 7% of that driven by AI. At Microsoft, the contribution to growth from AI has been steadily rising over the last few quarters and the market rewarded this trend by pushing the shares 6% higher after the earnings report[5].

But it's the Alphabet earnings that really stand out this week. Their quarterly sales came in at close to $80.5bn, $1.5bn higher than analysts expected. Overall advertising revenues rose 13% compared to last year with Youtube ad revenues growing much faster at 21%. With a potential TikTok ban looming in the US, the market is paying close attention to trends at Youtube. Google’s cloud business grew revenues at a healthy 28% year-over-year and posted profits that far exceeded analyst expectations[6].

Alphabet also announced they will start paying a quarterly dividend, worth about $2.5bn, to shareholders and buy back up to $70bn of its own stock. All the good news sent the Alphabet shares up well over 10% with its valuation surging past $2trn, joining the likes of Apple, Nvidia and Microsoft in a very exclusive club.

Note: We hold Meta, Microsoft and Alphabet in Flagship.


[1] https://www.wsj.com/economy/central-banking/us-gdp-economy-first-quarter-2024-1675df05?mod=Searchresults_pos9&page=1 

[2] https://www.ft.com/content/58fe78bb-1077-4d32-b048-7d69f9d18809 

[3] https://data.oecd.org/emp/hours-worked.htm 

[4] https://www.ft.com/content/6f00608a-8392-4062-b1f2-fb63910ac2dd 

[5] https://www.ft.com/content/ec683341-5765-454d-97f7-76a2502ad66e 

[6] https://www.ft.com/content/23b4b384-5971-4f91-a9c9-8a779d10b6bc


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