The two dominant forces in global stock markets remain centre stage this week as better than expected tech results keep the Magnificent Seven in focus despite the US Federal Reserve (Fed)’s warning that investors are too optimistic about interest rate cuts.
Powell’s cold shower
Jerome Powell has never wavered from his cautious assessment of the outlook for US interest rates. The chairman of the Fed simply confirmed this week what he has been saying since December - that US rates have probably peaked but will only come down slowly as inflation moves back towards target.
What’s constantly changing is the market’s willingness to listen to what the Fed chair has to say. For a couple of months now investors have chosen to believe that a slowing economy will force the central bank’s hand and they have priced in not the Fed’s suggested three quarter-point rate cuts but five or six of them.
This optimistic view of a quick return to less restrictive interest rate policy has been severely tested this week by the Fed chair. He left US rates unchanged last week and said that nothing had happened to change his view that 75 basis points of rate cuts was all that investors should expect.
Tech continues to surge
That more sober assessment of the outlook for rates would normally be expected to dampen sentiment in the stock market. But the S&P 500 continues to hit new highs as the so-called Magnificent Seven tech stocks continue to shrug off rate fears and deliver better than forecast results.
Last week’s stand-out on this front was Facebook-owner Meta which saw its shares rise by 20% on Friday - for the biggest ever one-day rise in the value of a single company. Amazon also delivered better than expected numbers and the combination of the two results announcements was enough to see the Mag 7 group as a whole rise in value by 5% on the day.
In reality the big tech companies are very different from each other. It makes little sense to talk about them as one homogenous group other than in the way they seem to share some kind of special sauce that enables them to deliver consistently better than expected results. Network effects, economies of scale - whatever it is, investors are betting that continued strong growth will justify increasingly bullish valuations.
No bulls in the China shop
It could hardly be a more different story in the world’s biggest emerging market and its most unpopular stock market. The authorities in Beijing are falling over themselves to promise strong action to support the country’s sagging stock markets. But investors are voting with their feet.
At a Goldman Sachs conference in Hong Kong this week, 40% of delegates described the Chinese stock market as ‘uninvestable’. Chinese shares have fallen by 60% from their 2021 peak. What is unclear is whether this is a massive contrarian buying opportunity or a justified assessment of a country that has failed to emerge with any vigour from Covid, that is languishing under the weight of a deflating property bubble and is struggling to deal with unhelpful regulation from the government and unfavourable geo-political tensions, particularly over Taiwan.
Chinese shares trade on around nine times earnings. That’s half the price of the typical US share and cheaper than even deeply unpopular stock markets like the UK.