Please see below article received from Tatton Investment Management on Friday afternoon, which provides a review of markets over the past week.
AI upset challenges market dynamics
Erratic US politics versus measured central bank action failed to grab the headlines over AI, while positive UK markets should have got a mention.
What’s next for AI investment?
DeepSeek’s surprise challenge to the dominance of the US Mega Tech stocks upset the market this week, but competition should be good news for AI driven productivity.
Central banks diverge
The US Fed held interest rates and the European Central Banks cut them – what are the implications for markets as central bank divergence grows?
AI upset challenges market status quo
It has been another interesting week in markets, although for different reasons than recently. Most of the major regional stock indices have performed well, but global equities are down in aggregate. This is largely down to the underperformance of Nvidia, following the release of a low-cost, more micro-chip efficient AI model from Chinese start-up DeepSeek. It was also accompanied by mixed fourth quarter results from Apple, Meta, Microsoft and Tesla (Amazon and Alphabet report next week). While these “Magnificent 7” (Mag7) stocks performed poorly in aggregate, the overall global picture still looks decent – just with a different regional and sectoral makeup, for now. We consider that a good sign for markets going forward.
The tech sell-off could be good for markets overall.
DeepSeek’s release was labelled a “Sputnik moment” by Western media, and Donald Trump called it a wake-up call for US tech – whose leadership in AI was previously unchallenged. We discuss the impacts on tech and AI in a separate article, so will avoid too much detail here, but the important thing to bear in mind is that DeepSeek is probably a net good for the global economy. Technology becoming more cost and energy efficient (if we believe the story) is a natural part of progress – even if it is not great news for some of the big tech companies.
Investors seemed to agree with this sentiment: the Mag7’s sell-off did not spread across global markets, and many stock indices – like smaller US companies, Europe and the UK – gained through the week. This divergence is significant, because global equity prices have been so strongly driven by the Mag7 in recent times, both up and down. The concentration of capital on this small cabal has been an increasing concern in that time. This week’s moves have increased market breadth for now, which is a good sign.
Coincidentally, investor sentiment towards the Mag7 was dented by Tesla’s disappointing earnings results – which showed last quarter’s revenues down 8% from a year before. The electric carmaker’s stock shot up after November’s election, due to CEO Elon Musk’s role as Trump adviser, but was volatile this week. Tesla’s earnings miss might just be a blip, but one does have to wonder whether there is a tension between the profit interests of the electric car mogul and the “drill baby drill” president he has attached himself to. Interestingly, Tesla’s stock price moved less than one might have expected given the fact that analysts adjusted their outlook for earnings down by over 5% (according to Bloomberg’s data).
This meant that Tesla’s valuation actually rose, with the forward price-to-earnings multiple (for the next twelve months) rising from 120 to over 130. It was by far the most expensive of the Mag7 even before the election, when it traded around 80.
All this contributed to volatility in the Mag7, as some of the shine seemed to come off the world’s biggest stocks. Many would argue this was overdue.
Foreign investors feel good about Britain – even if Britons don’t.
It was non-US stocks’ time to shine this week and none shone brighter than the UK. Encouragingly, gains in the FTSE 100 (which is dominated by multinationals) were almost identical to the FTSE 250 (whose companies are more sensitive to the domestic economy), suggesting a broad improvement. This was helped by the continued fall in government bond yields, making equities more attractive by comparison. Thankfully, we seem to be over the gilt market anxiety seen a few weeks ago.
Now that bond markets have calmed down, Chancellor Rachel Reeves is continually talking up the government’s focus on pro-growth policies – such as in the discussion of a new Heathrow runway. The effects of this should not be underestimated. UK media has been consistently negative about the economy and the Labour government’s ability to manage it, but we think that the narrative was too pessimistic. No one denies that there are problems, but consistent growth-focussed policy (even if it is not the best policy) goes a long way to stabilising expectations.
Foreign investors have been generally averse to UK assets since before the Brexit referendum, which is partly why UK stocks have had consistently lower valuations than elsewhere. But lately, foreign investors are increasingly seeing Britain’s stocks and bonds as attractively priced – just perhaps in need of a jumpstart. We will have to await the follow-through, but Reeves’ growth talk might be helping, judging by this week’s rally.
UK policy clarity contrasts with US uncertainty.
The UK’s rally was similar to the uptick in European stocks, but the key difference is that the European Central Bank (ECB) cut interest rates this week, while the Bank of England (BoE) is expected to hold rates steady at its meeting next week. That means UK equity faces a slightly more challenging environment than on the continent. Nevertheless, the UK is probably also helped by ECB rate cuts, as European investors should have easier access to capital, with which they can buy competitively priced UK equities. More importantly, Britain’s economy should be helped by tentative signs of a rebound in European demand.
We discuss central bank meetings in separate article – where we note that uncertainty around Trump’s policies is forcing the Federal Reserve into a reactive, rather than proactive, role. Whatever one thinks about Trump’s politics, policy uncertainty makes it harder for people and businesses to plan ahead, which can weigh on economic sentiment.
The president seems to have adopted the “move fast and break things” mentality of his disruptor-in-chief Elon Musk. His administration certainly is moving fast – as shown by its attempt to ban all federal funding grants and then its rapid U-turn – but the problem is that it might end up breaking things. The funding ban was probably designed to be divisive (benefitting those aligned with Trump’s politics and punishing those opposed) but divisiveness does not build broad confidence.
After much anticipation – and excitement from US investors – we are now in a phase where Trump’s policies will start affecting the real economy, rather than just market sentiment. Disappointing business confidence numbers, released last week, suggest that might not be as positive as US investors believed in November. Those numbers are still open to revision, but we will have to watch the data closely from here.
Please check in again with us soon for further relevant content and market news.
Chloe
03/02/2025