AI
has
been
the
biggest
talking
point
in
equity
markets
for
some
time
now,
accounting
for
something
like
80%
of
flows
into
thematic
funds.
Investor
exuberance
has
been
duly
rewarded,
with
AI
the
best
performing
theme
for
the
last
18
months.
But
has
earnings
season
exposed
any
weaknesses
in
this
narrative?
The
short
answer
is
no.
Core
AI
plays
like
Microsoft
(MSFT)
and
Nvidia
(NVDA)
have
been
performing
well.
Although
Nvidia
has
yet
to
report
numbers,
Microsoft
delivered
revenues
up
17%
year
on
year,
with
Azure,
its
core
cloud
computing
platform,
delivering
growth
of
almost
twice
this
level.
When
valuations
and
expectations
are
sky
high,
any
bad
news
can
shake
investors’
confidence.
The
Dutch
darling
ASML
(ASML),
which
manufactures
the
machines
that
make
semiconductors
and
trades
on
a
P/E
ratio
of
close
to
50
times,
reported
slightly
weaker
orders
than
expected
recently.
This
caused
investors
to
question
the
outlook
for
chip
manufacturers.
This
in
turn
caused
a
sell-off
in
chip
names
like
Arm
Holdings
(ARM),
which
fell
by
as
much
as
20%.
Although
share
prices
have
since
recovered
at
least
some
of
these
falls,
questions
remain
around
names
like
Arm,
which
we
believe
to
be
heavily
overvalued.
Defence
Spending
Story
Can
Run
for
Years
Although
earnings
season
was
quite
mixed,
defence
firms
almost
unanimously
reported
strong
results,
particularly
those
European
firms
with
healthy
exposure
to
the
Ukraine
war.
Book-to-bill
ratios
–
a
ratio
of
orders
to
units
shipped
–
for
key
European
firms
is
now
solidly
above
1.
Some
investors
may
be
sceptical
how
long
this
strong
run
in
defence
spending
will
continue
for,
but
we
believe
it
is
a
medium-term
tailwind
at
the
very
least,
for
two
reasons:
•
European
countries
have
invested
heavily
in
backing
their
Ukrainian
allies,
depleting
their
stocks
of
munitions
in
the
process.
For
many
countries
like
Germany,
it
could
take
close
to
a
decade
to
restock,
and
that
is
not
even
accounting
for
the
likelihood
that
the
war
may
continue
for
some
years.
•
In
signing
up
to
NATO,
members
committed
to
spending
2%
of
their
annual
GDP
on
defence.
Over
half
of
NATO
members
however
have
been
serially
underspending,
including
European
powerhouses
like
France
and
Germany.
With
global
conflict
escalating
in
the
last
years,
and
presidential
hopeful
Donald
Trump
warning
that
he
will
not
support
underspending
members
in
the
event
of
an
attack,
members
have
increased
motivation
to
increase
spending.
We
believe
this
rise
will
support
strong
revenue
growth
for
defence
manufacturers
for
years
to
come.
Book-to-Bill
Ratios
for
European
Defence
Stocks
Is
the
Worst
Over
for
Consumer
Firms?
The
effects
of
high
interest
rates
and
18
months
of
elevated
inflation
are
taking
their
toll
on
businesses,
particularly
those
in
the
consumer
space
that
are
dealing
with
increasingly
cash-strapped
customers.
Staples
firms
like
Kraft-Heinz
(KHC)
and
Reckitt
Benckiser
(RKT),
owner
of
brands
such
as
Durex
and
Nurofen,
are
reporting
decent
increases
in
revenues,
but
almost
of
all
is
this
is
based
on
price
increases,
with
consumers
actually
buying
fewer
goods
year
on
year.
High
interest
rates
specifically
are
weighing
on
sales
of
large
consumer
purchases.
Motorbike
manufacturer
Harley
Davidson
recently
reported
falling
sales.
The
increased
cost
of
financing
is
one
reason,
with
consumers
cutting
back
on
purchases
like
this
once
they
see
the
cost
of
actually
financing
it.
The
travails
of
the
consumer
sector
extend
further
though,
even
to
luxury.
This
sector
has
been
held-up
in
the
past
as
pretty
much
indestructible,
given
the
price
inelastic
nature
of
luxury
goods,
owing
to
the
purchasing
power
of
the
wealthy
even
in
times
of
economic
hardship.
Luxury
consumption,
which
peaked
during
the
pandemic,
as
consumers
were
stuck
indoors
with
money
to
spend,
has
since
declined,
with
this
trend
continuing
into
2024.
This
message
has
been
reaffirmed
in
recent
earnings
reports
by
some
of
the
heavy
hitters
in
the
space
including
LVMH
(MC)
and
Burberry
(BRBY).
The
good
news
for
consumer
firms
generally
is
that
the
situation
should
improve
as
the
year
progresses.
Inflation
has
fallen
across
western
nations
from
its
2022
peaks,
so
lower
commodity
prices
reduce
the
need
to
push
up
prices
on
a
quarterly
basis.
This
should
allow
many
consumer
firms
to
focus
on
firming
up
their
operating
margins,
rather
than
worrying
about
topline
growth.
And
the
major
central
banks
are
finally
contemplating
interest
rate
cuts,
with
the
ECB
likely
to
cut
as
early
as
next
month.
Of
course,
this
will
take
time
to
filter
down
to
consumers,
but
at
least
we
are
moving
in
the
right
direction.
Michael
Field
is
European
Market
Strategist
at
Morningstar
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