Investors have realized that the American Federal Reserve will not ensure any further records on the stock market for the time being. This makes them cling even more strongly to other sources of hope.
Stock exchangers are strange creatures. For months they clung to the exaggerated expectation that the US Federal Reserve would cut the key interest rate up to six or seven times in 2024. The US stock market reached new record levels, although inflation in the USA was well above the target value of 2 percent.
The Fed is waiting, interest rates are rising
Only after March inflation was higher than expected and Federal Reserve Chairman Jerome Powell clearly rejected any interest rate cuts in the near future did it become clear that interest rates would remain high for longer. Two thirds of market participants now expect only one or two reductions of 0.25 percentage points each for 2024. One in six even expects the key interest rate band to remain at the current level of 5.25 to 5.5 percent.
As a result, interest rates on US government bonds have risen noticeably again. This has consequences: The USA has to pay more to service its debt, and the American housing market is in danger of freezing up again because the very high mortgage interest rates – more than 7 percent interest is due again for thirty-year loans – deter potential buyers.
However, disappointment on the stock markets is limited and the price correction is moderate. The S&P 500, the most important American stock market index, is still up more than 5 percent since the beginning of the year. Investors usually react more violently when interest rate cuts they thought were certain are withheld. Why not this time?
AI, the second source of confidence
The main reason is simple: the American economy is doing better than expected at the beginning of the year. Björn Eberhardt, Head of the Investment Office at Luzerner Kantonalbank, points to the good results of American companies – towards the end of 2023 and so far in the first quarter of 2024. “The hype about artificial intelligence also supported the stock market at a time when yields on bonds were rising have already increased.”
The markets will no longer have this support from now on, on the contrary. Investors are increasingly expecting, says Eberhardt, that the 2023 announcements will soon be followed by real profits. The focus is on the “Magnificent Seven”, the seven large tech companies that were largely responsible for the American stock market’s recent record high. Nvidia, for example, is of interest; The chip manufacturer will not present its quarterly figures for four weeks.
The deals made by other tech giants from the “magnificent seven” this week made it clear how much the hope of billions in profits thanks to AI is shaping the financial markets. The conclusion remains ambivalent.
Meta disappoints, Alphabet delivers
Mark Zuckerberg’s Meta Group, which operates the social networks Instagram and Facebook, surprised positively in terms of sales and profits on Wednesday; The online advertising markets bring a lot of money into the till. But Zuckerberg shocked investors by admitting that Meta will have to invest much more than expected in its AI plans before profits emerge. The stock immediately fell by 15 percent.
The history explains this sharp reaction: 18 months ago, the Meta share was still languishing at less than $100. At that time it became apparent that Zuckerberg’s bet on the “metaverse” would fail. Consumers had no desire to kill time and spend money in Meta’s virtual parallel world.
From the end of 2022, the AI boom hit the markets with the launch of Chat-GPT, which suited Zuckerberg perfectly. Meta was now turning into an AI company, and investors believed the story. Meta’s stock price shot up to over $500 in just over a year. And those who fly high can also fall low.
But there were also signs this week that there is more to the AI hype than just high expectations. Two other tech heavyweights performed significantly better than Meta: Alphabet and Microsoft significantly exceeded profit expectations after trading on Thursday. They have seen progress in their cloud business and their AI plans appear to be on track. On Friday, the alphabet stocks in particular rose significantly. Investors were pleased that the Google parent company wanted to pay a dividend for the first time.
Americans’ wallets are emptying
But the pressure on the “Magnificent Seven” remains great, simply because their ratings are so high. Anastassios Frangulidis, Head of Swiss Multi Asset at Pictet Asset Management, expects that the balance between the “Magnificent Seven” and the rest will be readjusted. These additional companies could have overcome the period of stagnant profits in 2023. The current development of the S&P 500 is based on a broader foundation than before, which should be seen as positive.
The Achilles heel of this new narrative is the American consumer. He is currently keeping the country’s economy going. Americans demand an enormous amount of services and thus support the economy and company profits; but also ensure that inflation continues to rise. The whole world is wondering what will happen if Americans stop taking out their credit cards in restaurants.
So far, they’re not holding back: On Thursday, the Department of Commerce reported that the American economy grew by 1.6 percent in the first quarter. 2.4 percent was expected. But Anastassios Frangulidis says private consumer spending, the most important component, has remained strong.
Nevertheless, the consumer frenzy could soon end. Frangulidis points out that the savings rate in the USA is currently only 3.6 percent – “that is the second lowest value in history”. Americans are currently using up their savings, so consumption momentum is likely to slow down soon – and with it inflationary pressure on service prices in the medium term.
First the Fed and Amazon, then Apple
Speaking of inflation: The markets’ attention is already turning to the Fed, which will present its next interest rate decision on May 1st. It is a given that the interest rate band will be kept at 5.25 to 5.5 percent. But we are eagerly awaiting signals as to how sharp his departure from the easing policy that has been announced for months will be.
“Jerome Powell is in a difficult situation,” says Frangulidis, “after he made a U-turn twice in the last few months.” Last December he made optimistic statements about the markets’ prospects of sharp interest rate cuts in 2024, and last week he revised this position.
The Fed wants to avoid another surge in inflation like in 2021 at all costs. The outlook for the coming months seems clear: Jerome Powell will not keep the markets happy. If consumers soon begin to weaken, Mark Zuckerberg and the other tech bosses will have to deliver even more. Next week will provide further evidence as to whether they live up to these expectations. Then Amazon (on Tuesday) and Apple (on Thursday) present their quarterly figures.