The Info Tech Sector Heads South!
Weekly Market Snapshot
- The Information Technology sector hit a rough patch in both the S&P 500 and FTSE Eurotop 100.
Behind the Headlines: What happened?
Large-cap stocks in the United States wrapped up the previous trading week on a disappointing note, with a negative return of -0.12%, and a month-to-date return of -1.20% as of September 15, 2023. This fell short of last week’s positive return of the FTSE Eurotop 100 of 1.28%, and MTD return of -0.42%. The European large-cap stock index wrapped up last week on a high note, pulling off a spectacular show with a jaw-dropping performance of 1.28%. Talking about turning the tables, this impressive surge in value was like a phoenix rising from the ashes compared to the previous week’s dip of -1.29%. This stellar showing can be chalked up to growth sprouting like wildflowers across the majority of countries in the index.
S&P 500 Top Gainers (11/9/2023 through 15/9/2023)
Source: Factset
On sectoral performance, the Information Technology sector in both indices hit a rough patch, with the FTSE Eurotop 100 dropping like a lead balloon at -3.48%, and the S&P 500 following suit with a loss of -2.23%. This sectoral decline from the US can be attributed to Apple’s new product reveal, where the company hiked the prices of their top-notch iPhone 15 models. Furthermore, the reviews for these gadgets were a bit of a mixed bag, which appeared to put a damper on the technology sector’s spirits. Also, tech-heavy companies such as Adobe and ASML Holding NV contributed to the decline, as Adobe’s shares fell following the release of its fiscal third-quarter financial results.
The Inside Scoop:
Electric vehicle company Tesla Inc led the top performance contributors on the S&P 500 at the close of last week, with an impressive double-digit return of 10.42%. Other notable names on the gainers chart included Qualcomm Inc (6.60%), JP Morgan Chase (3.46%), Amazon (1.56%), and Berkshire Hathaway (1.30%). Tesla’s race to the top last week came off the announcement that Saudi Arabia is in early talks with the electric automaker to establish a manufacturing facility in the country. This comes after Turkish President Tayyip Erdogan requested Tesla CEO Elon Musk to build a vehicle factory in Turkey. It is safe to say that the EV maker has continued to capture the attention of advanced economies, even as Musk asserted in May 2023 the company’s likelihood to choose a location for a new factory by the end of this year.
Surprisingly, blue-chip companies Netflix, Nvidia Corporation, and Apple were present on the loser’s chart of the S&P 500 at the close of last week, with negative returns of -10.36%, -3.67%, and -1.78% respectively. Netflix shares plummeted last week following comments from CFO Spencer Neumann that threw investors into sell mode following the company’s disappointing forward-looking guidance on operating margins, which management expects to fall below estimate at the end of this year. Furthermore, Neumann highlighted the ongoing Hollywood strikes, as no breakthrough in offer talks between the writer’s guild and studios.
Connecting the Dots:
In Europe, HSBC Holdings Plc rose to the pinnacle, seizing the crown as the top dog in the index last week with a remarkable 6.91% gain. After launching a crypto ETF for Hong Kong customers, this development came hot on the heels of its partnership with Fireblocks. Also, the bank experienced a remarkable uptick in its H1 revenue, driven by a surge in net interest income across its global operations.
FTSE Eurotop 100 Top Performance Contributors to Return as of 15/09/2023
Source: Factset
On the downside, ASML Holding NV retained its position as the top loser at -4.68%. The drop occurred following a subtle hint from Taiwan Semiconductor Manufacturing, a significant ASML customer, suggesting a possible decrease in demand.
The Bottom Line:
Taking a sneak peek at the market fundamentals, the operating margin of stocks within the S&P 500 has witnessed a weekly average print of 24.00x, since the start of the year through to September 15th, 2023. Our reflection of the margins showed that equities within the index have remained mixed amid the rising interest rate and inflation worries in the US, which has tampered with the mood of forthcoming corporate earnings for Q3 2023. The operating margin of stocks within the index at the close of last week was 23.96x, marginally lower than this year’s average, indicating concerns on the efficiency of the operations of companies within the index at converting sales into profits.
The trajectory of the FTSE Eurotop 100 Price/Cash Flow multiple indicates that stocks within the index are reasonably priced. This metric is a common yardstick for gauging stock valuations and assessing a company’s market value concerning its operating cash flow. The market posted a Price/Cash Flow ratio of 7.12x, revealing that European Large-cap stocks are trading at approximately 7.12 times its operating cash flow per share. The general rule of thumb for this ratio can vary by industry and market conditions, but a lower ratio is often considered more favorable, indicating that a company’s stock may be undervalued. A ratio higher than the norm suggests that the stock might be relatively overvalued. So, in this case, a ratio of 7.12x might be considered appropriate when compared to the rule of thumb of 10x.
FTSE Eurotop Price/Cash Flow (11/8/23 through 15/9/23)
Source: Factset
With last week’s glowing performance of the European large-cap stock index, it feels like optimism is riding high on a cloud of hope for this week’s performance. However, we will be keeping our ears to the ground, as the index might dance to the tune of the Euro Area inflation rate and the UK’s inflation rate expected this week.
In the US, last week’s inflation data for August 2023 came rather disappointing as the assumed trend of prices trickling at the start of the year seemed to have halted. Consumer prices in the world’s largest economy grew 3.7% last month, higher than the 3.2% in July, exceeding market expectations of 3.6%. Similarly, core inflation, which excludes volatile items, witnessed a month-on-month increase of 0.3% that exceeded forecasts, rising for the first time since February 2023. As we look forward to the highly anticipated Federal Reserve meeting this Wednesday on its interest rate decision, the latest hike in prices may be sufficient evidence that another 25 basis point (0.25%) hike might be on the cards, as inflation continues to hover above the apex bank’s preferred 2% target rate.
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