UK financial market update: A welcome return to fundamentals

In a relatively quiet week for economic data, it was therefore little wonder that investors’ attention was focused on earnings announcements from the bellwether US companies, in a welcome return to market fundamentals rather than geopolitics.

First on the starting grid was Tesla, which confirmed a sharp fall in profits in the first three months of the year. This capped a difficult period for the EV carmaker in which it has laid off more than 10% of its workforce and faced increasing competition from lower-cost rivals. Tesla shares had fallen by 43% from the beginning of the year to Monday 22 April. Boss Elon Musk announced that it would bring forward the launch of new models, a move which helped Wall Street shrug off the weak results and saw Tesla shares rebound 16% by Friday.

Shares in Facebook parent, Meta, dived more than 15% in after-hours trading on Wednesday, knocking nearly $200 billion off its stock market value. Despite delivering better-than-expected earnings, Meta said its expenses would be higher this year as it spends heavily on artificial intelligence (AI). Investors showed their concern that the surging cost of AI, which could take years to pay off, is outpacing its benefits.

Microsoft, the world's largest company, beat analyst estimates for revenue and profit in the first three months of 2024, the third quarter of its financial year. Investment in AI drove the gains. The stock has soared on its strategic partnership with ChatGPT developer OpenAI, which has helped it overtake Apple as the world’s most valuable company.

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Alphabet, Google’s parent company, also showed how hefty AI investment can pay off, as it reported results that topped Wall Street estimates for sales, profits, and advertising. The company also announced its first-ever dividend and a $70 billion share buyback. Amazon is now the only big-tech company not offering a dividend.

By the end of the week, a third of S&P 500 companies had reported their earnings and 80% had surprised on the upside. Given the surge in valuations in recent months, companies need to deliver the earnings and outlooks to justify their higher share price. So far, they appear up to the task.

Beyond corporate earnings, figures showed that US business activity cooled in April to a four-month low, with slowdowns in both manufacturing and services. It was welcome news for the US Federal Reserve as it looks for signs that the economy is losing enough steam to bring inflation down further.

Preliminary figures released on Thursday suggested the Fed’s monetary policy had worked its magic. The US economy expanded at an annualised rate of 1.6% in the first three months of the year, far below expectations and a big drop from the 3.4% growth seen in the final quarter of 2023.

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But figures from the US Department of Commerce revealed that inflation gathered pace over the same period, increasing by 3.4% compared to 1.8% on the previous quarter, and putting the Fed somewhere between a rock and a hard place. Faced with persistent inflation, there is growing concern over the Fed’s ability to cut interest rates deeply without further stoking consumer prices.

Markets are now expecting a small decrease in interest rates for 2024, only 35 basis points, compared to the larger decrease of 150 points that was expected at the start of the year.

The week began with the UK’s FTSE 100 Index (‘Footsie’) closing at a new record high, surpassing the level it reached in February last year. Easing tensions in the Middle East and a weaker pound drove the fresh all-time high. Many of the UK’s biggest international companies earn their revenue in US dollars but report their profits in sterling, which hit its lowest point against the US currency in five months.

The Footsie’s good run continued through to Friday when it hit fresh highs, buoyed by the positive news from the US tech giants, to register its best weekly gain in seven months. The biggest stock story of the week in the UK came as mining company BHP pitched a £31.1 billion bid to acquire rival miner Anglo American, which the London-listed giant rejected on the grounds that it significantly undervalued the company.

Adrian Frost of Artemis Investment Management agreed, suggesting, “If I was a BHP shareholder and I was still capable of doing cartwheels, I’d do two if I got it at this price.”

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There was encouraging news in the eurozone, as overall business activity in April expanded at its fastest pace in nearly a year, driven by a strong recovery in the area’s dominant service industry. At a country level, Germany unexpectedly returned to growth after months of contraction. Although manufacturing remained sluggish, the rate of decline in factory production eased and confidence amongst goods producers reached its highest for a year.

Although an interest rate cut by the European Central Bank (ECB) looks nailed on for June, Mark Dowding of RWC BlueBay Asset Management believes Fed inaction would limit the scope for others to deliver further cuts. “We think that were the Fed to stay on hold, then the ECB is unlikely to cut by more than 50 basis points this year. In the UK, the most policy easing that the Bank of England seems able to deliver would be 25 basis points, if any rate cuts at all.”

Ben Stark is a chartered financial planner with over a decade of experience advising businesses and families. He is partnered with St. James's Place Wealth Management.