Weekly recap
What happened in markets
The Australian sharemarket gained traction last week, broadly ahead 1.8%, which represented its highest level ever recorded. Interestingly, the local ASX 200 index almost reached the 8,000 point milestone, closing Friday at 7,959. The strong performance was driven by a larger-than-expected drop in US inflation, increasing bets that the US Federal Reserve would cut interest rates sooner. Gold miners broadly rose alongside the precious metal’s price, while energy stocks suffered from lower oil prices. Notable company specific news included BHP’s (-2.2%) temporary suspension of its Western Australia nickel operations, due to high production costs and global oversupply.
In the US, sharemarkets were boosted by the aforementioned downward surprise in inflation. This news led bond yields lower and pushed asset valuations higher, which supported the Utilities sector in particular. Important company specific news included Tesla’s (-1.3%) postponement of its highly anticipated Robotaxi project, along with Block’s (4.5%) confirmation of a major data security breach which affected millions of customers.
European sharemarkets were modestly higher last week, buoyed by positive economic indicators and investor optimism, despite political and inflationary challenges. Key economic data was released in the UK, which showed GDP rose 0.4% month-on-month (versus the 0.2% expected), supported by higher industrial and manufacturing production. Meanwhile, German inflation data was as expected, which helped maintain broader market positivity.
Stock & sector movements
What caught our eye
Since the start of the year, investors have increasingly bet that the sharemarket’s recent robust performance would broaden out beyond technology stocks. Specifically, beyond the key technology names most exposed to the Artificial Intelligence (AI) hype, like NVIDIA, Microsoft, Apple, Amazon, Meta, and Alphabet, which now make up around 32% of the S&P 500.
This broadening of performance has not occurred, the opposite in fact, as big US tech companies continued to dominate and contributed more to market performance in the June 2024 quarter. According to Morningstar, the US Market Index gained 3.48% in 2Q 2024, of which the US S&P 500 Technology sector contributed 3.46%! Unsurprisingly, if we drill down into the main winners, they were NVIDIA (36.7%), Alphabet (20.6%), Apple (23.0%) and Broadcom (21.5%).
Concentration in the US sharemarket is not new, for example the top ten holding weights over the last five and ten years have averaged between 23% and 28%. However, the recent outperformance of these larger companies has been exceptional. See the chart below, which shows the total return of the US S&P 500 compared to its equal weighted version (where all holdings are equally weighted, rather than weighted by size).
The Cutcher & Neale International Shares Model has directly benefited from the relative outperformance of US technology stocks, given our investment process favours quality growth companies. In the twelve months to 30 June 2024, the Model returned 27.8%, compared to the 24.2% from the US S&P 500 and the 22.3% from the MSCI World ex Australia Index (in Australian Dollar terms).
So, where to from here? It is still entirely possible that market performance in the US broadens out in the second half of the year. Key drivers being lower inflation and interest rates, which should disproportionately benefit smaller companies. Some have also pointed out that the US S&P 500 Technology sector has become overvalued, at around 33x forward price-to-earnings ratio (compared to five and ten year averages of 27x and 22x respectively). While the sector does trade at a premium compared to history, it is important to consider today’s context, as the large tech players have ‘walked the walk’ regarding increased earnings expectations and are positioned best to benefit from AI technology for years to come.
The week ahead
This coming week in Australia June employment data will be an important development for the domestic inflation narrative, as we have not yet seen real weakness in the labour market yet, as a result of higher interest rates. It is expected that the unemployment rate will have edged up from 4.0% to 4.1% when it is released on Thursday.
Overseas, a slew of US news will help us gauge just how resilient consumers and business have been via retail sales, business inventories and industrial production data. Meanwhile, Chinese retail sales and GDP will have implications for Australian demand expectations in the near term.
