- FTSE 100 opens up.
- Big tech continues its slide. US small caps, pharma, aero & defence on the rise.
- Open-AI throws its hat into search engine arena
- US GDP beats expectations. All eyes turn to US inflation numbers (PCE).
- Brent Crude bounces back to $82.5 per barrel.
- Baker Hughes raises guidance after Q2 earnings beat.
- NatWest smashes expectations.
Derren Nathan, head of equity research, Hargreaves Lansdown:
“In contrast to the big tech-weighted US indices, the FTSE 100 has held its ground this week, and has opened up this morning. That’s after big tech stocks dragged down both the S&P 500 and the Nasdaq Composite yesterday, albeit at a slower pace than the previous day’s correction. But there were some pockets of positivity.
Pharmaceutical companies were broadly in positive territory, with Eli Lilly being the notable exception. Positive data from would-be competitors in the booming area of obesity treatment hasn’t helped, but these medicines still have significant hoops to jump through before reaching pharmacy shelves. There’s likely some contagion from the slump in the market value of the Magnificent Seven as investors look to lock in some profits from the star performers of recent times, of which Lilly is one. Small-caps, regional banks, asset managers all had a good day as did aerospace & defence stocks, following upgraded guidance from Lockheed Martin and RTX.
The outlook for the broader economy has brightened after US GDP numbers for June came in at 2.8%, beating forecasts. Hopes for a September rate cut by across the pond remain high, and today’s PCE inflation numbers will be closely watched. There are other data points on the agenda for later including the University of Michigan’s Consumer Sentiment Index, as well as personal income and expenditure. If a crash in economic output is avoided, and rates can come down without letting inflation out of the bag again, then it would be hard not to give the Fed some credit for engineering a Goldilocks scenario. But there’s still some way to go to declare a fairytale.
Meanwhile, tech investors may be bracing themselves for further turbulence. But the slide in the Magnificent Seven isn’t comparable to the likes of the dot com boom. These are financially buoyant companies that dominate their category. Trying to catch a falling knife is a risky business, but putting on a long-term hat, if you were thinking about buying them last week, you can buy them cheaper this week. And while an improving economic outlook is likely to see the old economy vying for investors’ attention, it won’t do any harm for the underlying prospects of the tech giants.
Open-AI which is part owned by Microsoft has set its sites on the lucrative internet search market with the launch of an AI-powered chatbot SearchGPT, designed to make the process of hunting down information quicker and easier. Unseating the dominance of Alphabet’s Google will be quite a challenge. Google is already integrating AI into search in the US and seeing some decent early results. And its early days for SearchGPT so a watch and see approach is needed.
At around $82.5 per barrel, Brent Crude has recovered most of this week’s losses helped by the better-than-expected US output figures.
Energy services provider Baker Hughes has beaten market forecasts with second quarter earnings. Revenue climbed 13% to $7.1bn with earnings per share leaping 46% helped by both margin improvements and a lower share count after recent buybacks. Growth was driven by demand for the Group’s gas technology, but the Oilfield Services & Equipment division also enjoyed top and bottom-line growth. Order momentum recovered from the first quarter dip, including a record intake for new energy solutions. Impressive progress on all fronts giving management the confidence to raise the mid-point of guidance by 5%.[AC1] [DN2] Baker Hughes has a valuation towards the top of its peer group, but with a bias towards the growth areas of the energy sector it looks well merited.
NatWest has reported half year results. Here’s a considered view from my colleague Matt Britzman.”
Matt Britzman, senior equity analyst, Hargreaves Lansdown:
“NatWest has just delivered a knockout set of results. As with Lloyds yesterday, it’s the quarter-on-quarter numbers that investors are paying attention to. Second-quarter results have pretty much beaten expectations on every key metric, from income to margins. It’s also good to see full-year guidance on net interest income finally get the upgrade investors had been hoping to see, and now supports the numbers analysts had been pencilling in. That’s positive news and helps underpin the stock price which has been on a heater this year.
Unlike Lloyds yesterday, lower impairments weren’t the only reason for the profit beat, though that was a key factor with NatWest too. The UK economic outlook is improving, and borrowers are holding firm in the face of higher interest rates. NatWest is also seeing some improvement from margins on the deposit side and has managed to grow its net interest margin quarter-on-quarter.
NatWest didn’t manage to grow the loan book, but new mortgage activity in the second quarter was significantly higher than the first. That’s a good sign for the remainder of the year, as NatWest doesn’t have quite as big a drag from legacy mortgages as peers. The acquisition of £2.5bn worth of prime mortgages from Metro Bank suggests inorganic loan book growth is on the table too.
NatWest is poised to benefit from many of the sector’s positive trends, such as improving lending conditions, an easing of savers’ search for fixed-term accounts, and a structural hedge that offers a significant income tailwind.”
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