Head of Equity Strategy
Summary: US technology stocks were off as much as 4% from yesterday's highs to today's lows as the FOMC failed to bolster sentiment and the rebound. The Fed committed itself to very low interest rates until 2023 and as thus the prevailing trends of investors favouring growth stocks, which are long duration assets, should continue and thus we remain positive on the equity market. The US IPO market is getting red hot evidenced by Snowflake shares jumping 112% above the IPO price and exhibiting crazy intraday volatility.
Nasdaq 100 futures are 3.7% lower from yesterday’s highs as the FOMC clearly disappointed market participants. It was an event where investors expected something outside average inflation targeting but the only thing that they got was a pre-commitment to keep interest rates low until the US economy has hit full employment again. The Fed’s forecast is low interest rates until 2023 where the US economy is back at full employment and only 2% inflation. In other words, the Fed has cornered itself and made itself fully predictable in its policy which from a policymaker perspective is seen as the ideal communication. But the less random you are the less potent you are and thus we now have a Fed that will be a lame duck for years until the market potentially forces them to act.
But why the steep selloff? As we allude to in our Saxo Market Call podcast it became a good excuse as the FOMC event was cleared. Nothing has changed, and the main question remains whether corporate earnings will rebound to the extend that is discounted in current equity valuations (see chart below). The answer to that question we will get in the second half of October when US Q3 earnings are released. One big implication of the Fed’s policy is that it will negatively affect financials and likely extend the underperformance of value stocks as the low interest rates cause investors to favour growth stocks (high duration assets) over value stocks (low duration assets).
Snowflake is one the craziest IPOs the past 10 years
We wrote about the Snowflake IPO three days ago and highlighted that the $105 mid-price at that point was already beginning to be a stretch relative to underlying fundamentals unless the high growth rate could sustain itself for a lot longer normal for high growth companies. The IPO was eventually priced at $120 as institutional demand continued to increase.
Yesterday was first day of trading and the order volume from retail investors and other market participants that were not part of the IPO was so massive that NYSE chose to open the shares at $245 a 104% jump from the IPO price. The stock immediately jumped 15% and was halted and when trading resumed the stock spiked to $319 before collapsing to $231 in less than an hour before being stabilised by market makers and ending the day at $255.
At yesterday’s closing price Snowflake is valued at $70.4bn for a company expected to generate around $588mn in revenue in 2020 and could make around $1bn in revenue if revenue momentum sustain itself. Even under these optimistic lenses, the company is at best valued on FY21 forward price-to-sales of 70x. Just for perspective, Zoom is valued at FY21 forward price-to-sales of 37x and that is on expected revenue of $3.1bn and $1bn in free cash flow generation whereas Snowflake by choice is not free cash flow positive.
The price action around Snowflake but also another IPO such as JFrog suggests that the US IPO market for technology stocks is red hot. Next major technology IPO is Unity Software, a gaming development platform, which will price its shares today and start trading tomorrow. We have an IPO analysis out on Unity Software later today.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
