New all-time high on speculative stocks comeback New all-time high on speculative stocks comeback New all-time high on speculative stocks comeback

New all-time high on speculative stocks comeback

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Key points

  • US Equities reach new highs: US stocks hit new all-time highs, buoyed by lower-than-expected April CPI figures, leading to expectations of Fed rate cuts. The information technology, real estate, and utilities sectors saw notable gains due to their sensitivity to interest rate changes.

  • Japanese and emerging markets update: Japanese equities underperformed due to a stronger yen and anticipated policy rate changes. Despite a recent rebound driven by China's pro-cyclical policies, the outlook for emerging markets remains cautious, with a preference for countries like Mexico, Brazil, India, Vietnam, and Indonesia.

  • Speculative stocks surge and earnings highlights: Speculative biotech and "bubble stocks" gained traction, indicating strong market sentiment. Key earnings reports included positive surprises from Tencent, Baidu, JD.com, and Commerzbank, while Nvidia’s upcoming earnings are highly anticipated due to its significant growth in the semiconductor sector driven by AI technology.

 

Back to new all-time highs

US equities are back to a new all-time high this week erasing the unease in April when US equities tumbled 5.5% intra-month as investors got nervous about inflation and the risks of the “high for longer” narrative on policy rates. The US April CPI figures on Wednesday surprised to the downside causing the market to immediately price in two Fed rate cuts by December from 1.5 cuts before the CPI report. The apparent victory lap on inflation reverberated through equity markets pulling especially the information technology, real estate, and utilities sectors higher as these three sectors have the highest sensitivity to changing interest rates.

Japanese equities are the worst performing geography over the past week driven by a stronger JPY as the market continues to price a narrowing policy rate gap between the US and Europe against Japan. The market is now pricing Bank of Japan to increase the policy rate by 20 bps by the 31 October meeting while the Fed is expected to lower the policy rate by 50 bps by the December meeting narrowing the gap by 70 bps. The reason why the Japanese currency is so instrumental for the direction of Japanese equities is due to the largest stocks in the Japanese equity index are getting the majority of their cash flows from markets outside Japan.

The strong performance in emerging market is driven by the rebound in Chinese equities which has been stimulated by multiple government pro-cyclical policies including backstops to the real estate market. Despite the rebound in emerging markets going against our tactical and strategic negative view presented in our Q2 Quarterly Outlook, we maintain a negative stance on emerging markets due to its large weight on Chinese equities. Our view is that investors should be selective on country level in emerging markets and we prefer countries with positive demographic tailwinds and compounding dynamics in the middle class. As a result, we like emerging market countries such as Mexico, Brazil, India, Vietnam, and Indonesia.

The table below shows the long-term real return expectations across regions and sectors. Based on this an investor can infer to be overweight Europe, neutral on the US and Japan, and underweight emerging markets. On sectors, global investors should be overweight health care, energy, and financials, while underweight real estate, utilities, and industrials.

Speculative themes are back in vogue

This week has also seen a comeback to the more speculative parts of the equity market such as the bubble stocks theme. That this segment of the market is staging a comeback tells us that equity sentiment is getting very hot and this typically a sign of some late stage momentum cycle. The US equity market has rallied 29% over the past 29 weeks with very few setbacks and that is the perfect recipe for animal spirits coming back into the market.

The semiconductor theme, which is essentially driven by the sentiment on AI technology, is up 4.6% over the past week extending the strong gains in May as TSMC delivers strong capital spending guidance and Apple is close to sign a partnership agreement with OpenAI to bring generative AI capabilities into the iPhone which could accelerate demand for GPUs in datacenters even more. As we have shown in an equity note earlier this year the investment boom in the three sectors communication services, information technology, and health care is extraordinary and growing much faster than any growth rate observed in the 10 years leading up to the pandemic.

India vs MSCI World | Source: Saxo

Earnings watch: Nvidia outlook will dominate technology stocks

This week has seen positive earnings surprises from Chinese companies such as Tencent, Baidu, and JD.com, while Alibaba disappointed as the former e-commerce winner is losing out in the very competitive Chinese technology sector. In the US, we got two very different earnings reports in the retailing sector with Walmart yesterday surprising the market by boosting its fiscal year outlook while Home Depot disappointed earlier in the week on comparable revenue growth underscoring the demand weakness related to the housing market. In Europe, Siemens and Burberry were two negative surprises while Commerzbank surprised significantly to the upside underscoring the strong profitability trend in the European banking sector.

Looking ahead to next week’s earnings, Nvidia, the world’s most valuable semiconductor stock, reports FY25 Q1 earnings (ending 30 April) next Wednesday (after the market close) with analysts expecting 242% revenue growth YoY to $24.6bn and EPS of $5.53 up 533% YoY. Expectations are running very high into this earnings release, but given the signals from TSMC  on capital spending we expect Nvidia to beat and potentially even raise their outlook once again. This is the most anticipated earnings release and will be a key driver of where semiconductor stocks go from here. Analysts remain overwhelmingly positive on the stock with a consensus price target of 1,015 which is around 7% higher from the current price.

Snowflake is another AI-related stock that is also reporting next Wednesday after the market close. The data cloud company is expected to report FY25 Q1 (ending 30 April) revenue of $786mn up 25% YoY. Focus will yet again be on potential downside surprise to product sales as companies are prioritising generative AI spending instead of data warehousing.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.