Andrew Pyle
April 26, 2024
Back to magnificent - Almost
April was beginning to look like a dismal month for the group that led last year’s market rally and the so-called “magnificent 7” appeared a little insipid. With the first three weeks of the quarter under our belt, only one member of this group is up and that is Alphabet with a gain of just over 14% as of Friday morning. The darling of the set – Nvidia Corp – has shed more than 7% since the start of April while Meta, which was also in the green before Thursday, is now down close to 9%. The rest of the pack have delivered more modest retracement (Tesla and Microsoft off 3%, Amazon down 2% and Apple slightly in the red).
The performance this month masks the real story and that is that most of these large cap growth stocks continue to buttress the market in 2024. Even with the decline this month, Nvidia is up 66% year-to-date. Meta’s stock took it on the chin after Wednesday’s earnings report, but it is still up close to 24% for the year. The laggard of the group, if you can call it that, is Microsoft, with a gain of 6%.
There are outliers and we might have to come up with a new and narrower name – perhaps the “famous five” (recalling back to the Enid Blyton series I read in my younger years). Tesla and Apple have gone their divergent ways, losing 32% and 12%, respectively since the start of the year. Both of them share a couple of things in common that sets them apart of from the rest of the pack. First, each of them is struggling with sales and revenues shortfalls. Second, neither of them are really a direct artificial intelligence (AI) play.
In the case of Tesla, its ability to ramp up production and deliveries has run smack into electric vehicle demand that looks fatigued. Early adoption of its models was focused more on high-income individuals, who could afford prices that were generally higher than traditional vehicles. Consumers not in that segment are not only balking at these prices, but are also feeling the pain of higher interest rates on car loans. I should note that isn’t just isolated to Tesla, as evidenced in the weak first quarter spending on vehicles in the U.S. However, other carmakers have been better able to weather this demand softening by having relatively more cars in the lower price category.
Apple’s revenue woes have been more focused in China, where it saw a 19% decline in sales last quarter, which knocked its market share in the country down four points to 15.7%. Globally, the company saw a 10% decline as competition ramps up at a time when replacement demand for the new iPhone hasn’t softened.
The AI issue is more pervasive though. Where the euphoria over this new technology had the effect of raising most ships in the tech arena last year, market participants are become more selective these days. Money is now being placed in those companies that have a direct exposure to AI, whether it be in terms of equipment, software, cloud or a combination. This group would clearly include Nvidia, Microsoft, Alphabett and Amazon. This week, we saw blowout results for both Microsoft and Alphabet, mainly as a result of cloud revenue and improved margins. Apple is trying to build out its AI integration and is expected to unveil revamped products on May 7th that incorporate AI into its chipsets. For now, however, the market is playing a wait-and-see game.
Investors are also looking for companies that have strategies in place to utilize AI in their products and operations and achieving tangible results. That said, a number of firms that are ahead on implementation are not enjoying any fruits for their labour, at least in terms of share performance. Salesforce, the largest customer relationship management (CRM) software provider, has lost 9% this month, which has trimmed its year-to-date gain to only 4%. Adobe, which is a creativity and publication software company, has shed 6% this month and is down by 20% from the beginning of the year. In the case of Meta, it did announce some hefty capital expenditure plans in this week’s call – aimed at reinforcing its AI intentions, but the market is looking for more walk and less talk.
So, does this mean the AI boom is over? I would say no and would categorize this no differently than what we saw last summer, when market mania diminished after a surge in the second quarter. The economic integration of AI is still in its infancy from a longer-term perspective, but investors need to reset expectations over the near-term. Instead of a top-down approach like last year, they need to be more security-specific and look at it from the bottom up.
That doesn’t mean that macro fundamentals aren’t also at play this month. Thursday’s advance Q1 GDP report for the U.S. did show a softening in growth from the pace at the end of last year, but this was driven by an increase in imports and a drawdown in inventories. If we exclude both, domestic financial sales growth came in north of 3% and that is not indicative of an economy that is cooling off. The resilience in economic activity is maintaining upward pressure on inflation which, in turn, has kept the pressure on bonds.
The above chart shows the U.S. treasury yield curve today, compared to where it was back in December. This elevation in yields is having a negative effect on valuations for long-duration securities, including tech stocks. Again, we view this impact as being transitory, but for now the high-growth segment of the market is going to have to contend that headwind as well as a more scrutinizing investing public when it comes to revenues and earnings.
On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.
Andrew Pyle
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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. Andrew and his clients may own securities mentioned in this column. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.
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