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.

Today, we’re looking at Musk’s legal battle with OpenAI, UK unemployment figures, and Nvidia’s latest earnings results. 

But first, our number of the week…

7.3%

That’s the growth of the Russell 2000 index in August, a popular index for small capitalisation stocks. That figure marks the best monthly performance relative to the S&P 500 in over a year.

Sidekick Takeaway: Small-cap stocks have had a challenging past few years, with the Russell 2000 still down several points from its all-time high. Historically, small caps have generally outperformed large caps, so it wouldn’t be a surprise to see the tide beginning to turn. 

Only have a minute to read? Here’s the TL;DR:

• Elon Musk's xAI filed an antitrust lawsuit against OpenAI and Apple, alleging that their partnership creates anti-competitive practices that unfairly punish other AI platforms. The case mirrors ongoing US regulatory concerns about Apple's 'walled garden' ecosystem.
• The Resolution Foundation found that UK employment rates have fallen over the past year, in contrast to official metrics. Combined with indicators of labour market weakness, the foundation suggested that the UK unemployment rate could soon hit 5%.
• While Nvidia's Q2 earnings showed 56% YoY revenue growth, this represents a slight deceleration from previous quarters. CEO Jensen Huang highlighted ongoing uncertainty around sales in China, with a proposed revenue-sharing deal with the US government yet to be finalised.

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.

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Lawfare: Musk’s Growing Legal Battle With OpenAI

Elon Musk has never been one to shy away from a legal fight.

Over the years, the billionaire entrepreneur has battled lawsuits against regulators, employees, and shareholders.

But this week, Musk launched what could turn out to be his most significant legal battle yet. 

On Monday, Musk’s AI firm xAI filed an antitrust case against OpenAI and Apple in a Texas courtroom. The suit alleges competitive violations and seeks billions in damages.

xAI’s case is stronger than it may appear

Critics have argued that xAI’s case is nothing more than an attempt to slow down a competitor. Musk has previously sued OpenAI for straying from its original mission. 

But xAI’s antitrust allegations may be stronger than they first appear:

• xAI claims that Apple’s partnership with OpenAI is an anti-competitive practice that unfairly punishes other platforms, including X and Grok. 
• This argument is similar to ones made by US regulators in an ongoing case against Apple, alleging that the company’s ‘walled garden’ approach is monopolistic.
• If xAI succeeds in the case, it could set a profound precedent for the level of collaboration allowed between device manufacturers and AI firms.

Nonetheless, xAI’s case is far from airtight.

In particular, the fact that AI app DeepSeek previously reached the #1 spot on the App Store raises questions about how unfair Apple’s practices truly are. 

Sidekick Takeaway: There can be little doubt that Musk’s strategic use of the legal system is designed to slow down AI competitors. But using that fact to write off xAI’s case ignores the mounting antitrust concerns surrounding Apple’s ecosystem.

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Up and Up: UK Unemployment Could Rise to New High

According to official metrics, the UK unemployment rate currently stands at 4.7%.

In recent months, however, these official metrics have been increasingly called into question.

Amidst funding challenges and declining response rates, government data has become less accurate and subject to larger revisions. 

As a result, private sector efforts to improve government estimates have grown. One such effort shows that the UK labour market may be weaker than official figures suggest.

Resolution Foundation: Employment rate has fallen, not risen

The independent think tank Resolution Foundation uses a range of indicators in an effort to make official economic statistics more accurate.

In their latest report, the foundation found that while the UK’s unemployment rate is broadly accurate, other labour market figures may not be: 

• Official metrics show that the UK’s employment rate, an alternate measure of labour force strength, has increased over the past year.
• But the Resolution Foundation found that after incorporating tax and payroll statistics, the employment rate actually looks to have fallen over that timeframe.
• What’s more, proprietary measures show that the UK labour market has loosened noticeably. Companies are finding it easier to hire, and employees are less likely to quit. 

Altogether, the Resolution Foundation predicts that the UK unemployment rate could soon hit 5% – the highest level since the beginning of 2021.

Sidekick Takeaway: Private sector data sources are likely to increase in importance given continuing frustration with official figures. Findings showing labour market weakness could pose an additional challenge for the BoE, especially given stubbornly high inflation levels.

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In the Balance: Nvidia Earnings Show Growth, But Risks

Few companies are as impactful to the broader market as Nvidia.

As the source of the tech industry’s most advanced chips, Nvidia is widely seen as a bellwether for AI investment.

What’s more, with a $4 trillion market cap, Nvidia alone accounts for 7.5% of the entire S&P 500.

As a result, the company’s Q2 earnings this week were closely watched by investors.

While performance was largely in line with expectations, softening guidance could raise concerns about the pace of AI growth.

Nvidia revenue accelerates, but China expansion proves challenging 

Nvidia’s overall sales grew 56% since last year to $46.7 billion, slightly over analyst estimates. That translated to a 59% jump in income.

For any other firm, that growth would be unusually impressive. But for Nvidia, it actually reflects a deceleration from 60%+ sales growth for the past eight quarters.

What’s more, the company’s leadership indicated that continuing this rapid expansion could be challenging – especially given tensions between China and the US. 

CEO Jensen Huang noted that bringing the company’s latest chips to China is a ‘real possibility,’ but ultimately depends on the blessing of US authorities.

The company also clarified that a proposed revenue-sharing deal with the US government to allow the firm to expand in China has not yet been codified.

Nvidia shares saw some volatility following earnings, but closed down only slightly on Thursday. 

Sidekick Takeaway: Given robust estimates for continued AI expansion, Nvidia’s results contained more downside risk for investors than upside. The fact that earnings were largely in line with expectations will allow the market to breathe easier for a while. 

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Notices

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