Weekly Market Update: what happened to the Mag 7?

The latest economic news and market highlights from the UK and abroad.

This week's headlines: 

• FTSE 100 hits a record high – the FTSE 100 reached a new all-time high on Wednesday. UK blue-chip stocks have held up well as other indices worldwide have fallen over the last few weeks in the AI-driven sell off.
  
  
• Burnham’s burden – the National Institute of Economic and Social Research has said the Prime Minister faces very difficult trade-offs in the Autumn Budget if oil prices and inflation remain high. The think tank said the Chancellor’s headroom in the budget is nearer £3bn, meaning tax changes may be needed to fund policy announcements like the VAT cut on electricity, £2 bus fares, and business rates changes.
  
  
• US holds rates – the US Federal Reserve (Fed) keep interest rates unchanged at 3.5% to 3.75%. However, there was an unusual level of uncertainty, with the Fed Chair Warsh keeping his cards close to his chest about the appropriate rate path ahead of the announcement.
  
  
• UK also holds rates – the Bank of England (BoE) also held interest rates at 3.75% for the fifth time.  While rates remain unchanged, lenders have increased their rates on mortgages. The average rate on a new two-year fixed deal is now at 5.62%.
  
  
• Big tech earnings continue to worry investors – Apple, Amazon, Microsoft, and Meta announced earnings earlier this week. Meta’s shares fell sharply after reporting its weakest cash flow in five years. Microsoft, on the other hand, one of the biggest investors in OpenAI released results that showed less capital expenditure planned, $175bn for the next year, down from $190bn spent this year to June. Their profits were up 31% at $25.8bn. Apple and Amazon both beat market expectations, helping calm concerns over AI-related expenditure. Amazon did report lower free cash flow, though, as it continues to invest heavily in AI. Microsoft, Apple and Amazon shares rose in response.

We found love in a hopeless place

The UK is often described as an unloved market. But the FTSE 100’s composition has been in its favour. Other markets have been hit by the AI-driven sell off, but the FTSE 100 is mainly composed of oil and financials, which have held up better.

It’s a reminder that the leading markets change over time. Losers become winners and vice versa. A diversified portfolio allows you to worry less about picking winners, knowing that you’ve got them already.

Hold the rates

Both the UK and the US held rates this week. Both central banks based their decisions around global uncertainty over the impact of the ongoing US-Iran conflict and growing prices.

Fed Chair Warsh is becoming known for saying relatively little. And this time he did just that, barely changing the official statement with the rates changes, and ducked questions on future intentions. Three members of the committee dissented against the decision to hold, an unusually high number. But Warsh said nothing to address this. Markets responded with the sharpest steepening of the yield curve in a year and sending equities lower.

For both countries, a rate rise could be on the cards this year as inflation remains above target for both countries.

Hey big AI spender… part two

The spotlight remains firmly on AI investment.

Continuing from last week, we’ve seen capital expenditure on AI by the hyperscalers under scrutiny. It’s overshadowed everything else. While Meta’s results were chastised by the markets, Microsoft’s and Amazon’s show that expenditure can be acceptable if it’s tied to clear financial returns.

Companies related to AI have seen a tough few weeks in the markets. Fears seem quelled for now, but the debate is still on whether markets still view big companies spending on AI as acceptable.

Chart of the week

The chart above shows news mentions of both the Magnificent 7 and their predecessors, the FAANGs.

A few years ago, everyone referred to the FANGs: Facebook, Amazon, Netflix, and Google. Which became FAANGs when Apple was included. It was a name that created a narrative that followed some of the biggest companies in the S&P 500. It aimed to include companies that had dominated their corners of the internet.

After COVID, we stopped talking about FAANGs and the Magnificent 7 rode into town. A new story for the markets to follow. This was when ChatGPT exploded. Enter the Magnificent 7: Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla. Their share prices continued to grow, but really, it was a very similar set of companies with a few added names.

Just as the FAANGs became long in the tooth, we can see that mentions of the Magnificent 7 have died off. Has the band broken up?

While these stocks are quite far ahead of the rest of the S&P 500 since COVID, over the last couple of years as a group, they’ve largely matched the rest of the market. And the companies are doing their own things. Apple for example didn’t really go all in on AI like the other companies, and it’s now the biggest company in the world.

Markets and the media love a narrative, and people can get hooked on them. They make things easy to understand and follow. But narratives rarely last forever.

The FAANGs gave way to the Magnificent 7, and eventually that label may fade too. The companies themselves haven't disappeared, but investors are beginning to focus less on the group and more on the strengths, challenges and opportunities of each business individually.

Narratives can help explain what's happening today, but long-term returns are usually driven by fundamentals, diversification and patience. The story may change, but the principles of investing tend to stay the same.

UK: UK equities moved higher as the FTSE 100 was seen as an alternative market for those looking to diversify away from big tech names.

US: A choppy week for the NASDAQ and S&P 500 as tech results and interest rate decisions affected share prices. 

Europe (ex UK): Stronger than expected European economic growth data and robust corporate earnings helped European stocks climb higher, looking past geopolitics and central bank announcements. 

Japan: A volatile week due to the global technology sell off and currency movements. However, losses were clawed back as reassuring tech forecasts improved confidence. 

Asia Pacific ex Japan: The region saw an aggressive rally towards the end of the week fuelled by a rebound in tech.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.