Head of Equity Strategy
Summary: This week was more dramatic than what most investors would think. There was considerable unwinding of technology mega caps vs US small caps in a sign that some big funds are repositioning themselves in the market. One explanation could be that the US debt ceiling resolution has improved the economic outlook and that technology valuations have become too excessive. In today's equity note we also discuss Tesla's big win in EV charging and Adobe's earnings release next week.
This week was rather dramatic as we have highlighted in several of our equity notes with the VIX Index plunging to new lows for the pandemic cycle and the VIX forward curve signaling calm and expectations of extended momentum. But underneath the surface of equity indices the long tail of stocks are underperforming mega caps overlapping with previous periods of significant tipping points.
Since the US debt ceiling was resolved the Russell 2000 has been on a tear as small caps are the most sensitive stocks to changing economic conditions. As we came into this week both small caps and technology stocks rallied together but starting Tuesday and accelerating into Wednesday before petering out by Thursday, US small cap stocks rallied hard while technology stocks declined. Measured over a 2-day period ending on Wednesday, Russell 2000 stocks rallied 4.5% while Nasdaq 100 stocks declined 1.7%, which is a pretty significant move when looking over the past five years (see chart below). One possible explanation is that some bigger funds engaged in an unwinding of positions leading to selling mega caps and covering shorts in small caps, maybe due to the US debt ceiling solution improving economic conditions.
Tesla shares rose 4.6% yesterday and are indicated up another 4.5% adding close to $70bn in market value after the announcement that GM is following Ford in adapting its EVs to Tesla’s Superchargers making them effectively the US standard for EV charging. The move will put pressure on the entire car industry to adopt Tesla’s charging standard as the global standard. This will of course means higher utilisation of Tesla’s charging network adding more cash flow for Tesla shareholders. For GM the deal means $400mn in annual savings. The initial phase will include adapters for GM EVs and from 2025 new EVs will have the Tesla charging port as a production standard. Tesla CEO Elon Musk says that Tesla cars will not be prioritized at the supercharger stations.
Adobe is our key earnings focus next week reporting FY23 Q2 (ending 31 May) earnings on Thursday after the US market close with analysts expecting revenue growth of 9% y/y and EBITDA of $2.36bn up from $1.74bn a year ago. Adobe has increased its profitability focus following the 2022 slowdown and blow to equity valuations following the rising interest rates.
Investors will focus on the Figma acquisition which could still hit a roadblock from regulators over competition concerns. While investors and the equity market would likely celebrate of the deal falls through longer-term it could negatively impact revenue growth. Adobe has recently be riding some of the AI hype and recent product updates have incorporated several AI-related functionalities exciting the content creation industry. It will be interesting to see if this excitement carries into the outlook.
The most important earnings releases next are listed below:
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
