I am writing in the week that many of the major Big Tech stocks report their Q1 earnings – with Microsoft, Alphabet, Amazon and Meta all announcing on the same day.
Just a handful of companies, but between them they make up an extraordinary 14% of the entire S&P 500. What happens to these companies matters to global markets. And despite all sitting in the same sector, with similarities between their value drivers and revenue streams, these have been a set of results that has divided the pack – the market has voted and company values have diverged.
This article isn’t personal advice. If you’re not sure if an investment’s right for you, ask for financial advice. Investments can rise and fall in value, so you could get back less than you invest.
Managing AI integration
What has determined their fate? How these tech juggernauts are – or are not – making a success of artificial intelligence (AI). Whether the billions and billions of dollars of investment they’ve poured into AI – more than $600bn planned through 2026 – is actually translating to real revenues and profits.
This is not a new investment theme, nor is it unique to the tech sector. Early focus of the AI revolution focused on the investment opportunities presented by the chip makers. Now focus has turned to how companies are integrating and monetising AI, and on the flipside, whether some firms will be able to monetise anything at all post the AI revolution.
Earlier this year, the market was hit by the so-called SaaSpocalypse, as concerns that AI agents will replace the need for many corporate services. In February the software sector lost $285bn in value in just two days after Anthropic released an AI agent that seemed to be able to do the job of humans, better, faster and cheaper.
Fear thundered through the market. After the software sector, legal services, wealth management, data companies, insurers and even advertising firms all saw disruption.
The February sell-off was indiscriminate and created some investment opportunities for the nimble trader. Some of the companies that saw their share price tank already integrate AI into their core proposition, using bots to scale, operationalise and drive efficiencies and just got caught up in market contagion.
Other companies benefit from economic moats thanks to regulation. The more heavily regulated an industry the harder it is to disrupt, and the less likely customers are to swap out established relationships for the unknown. Proprietary data and intellectual property can’t be replicated by a bot either and the sell-off failed to recognise this competitive advantage.
But these are not factors that make businesses completely immune from disruption – nor should investors underestimate the benefits that AI can bring to almost all industries. This is a theme that will continue to divide the market into haves and have nots for some years to come.
Oil and inflation
From sci-fi to Western – the other dominant theme driving markets this year? Oil.
We opened this year with expectations of lower inflation, falling interest rates, and a peace-promoting President in the White House. All three of these no longer seem to be the case, as new conflict between the Iran and a US-Israel alliance has disrupted global oil supply and caused havoc in equity and bond markets.
Economists have downgraded growth forecasts for the UK, and markets are expecting interest rate hikes – rather than the cuts expected just a couple of months earlier in expectation of significantly higher inflation. The oil price peaked at $126 a barrel this week – the highest level in four years, and the 10-year gilt yield spiked above 5%.
The UK is considered particularly vulnerable to the impact of oil shocks. Unlike the US, a net exporter of oil, the UK is dependent on Middle East production. Our starting point for growth forecasts this year was also weaker than some other G7 countries.
Frozen interest rates
As well as tech earnings, the week I am writing this has seen the Federal Research, the European Central Bank and the Bank of England (BoE) all vote to hold rates – much as the market expected.
Only the BoE’s economist Huw Pill voted to raise rates, against 8 other members who voted to hold.
The BoE also released scenario analysis related to the war in Iran, and the potential effect on inflation and economic growth. Their most likely scenario recognises that the conflict has impacted prices and would continue to do so, but it seems that for now it’s sufficient for the Monetary Policy Committee to monitor markets rather than act on rates. Gilt yields fell on the news.
We think, unlike in 2022, the weaker jobs market constrains the likelihood of wage inflation, and so our house view is that the BoE holds rates rather than hikes. However, we recognise that there’s significant continued uncertainty and volatility in the gilt market is expected to continue.
Volatility, in fact, is one of the few things we feel we can be certain about – fuelled by the Trump administration, elevated equity valuations and global geopolitical uncertainty. As ever through bumpy markets, the best thing for investors to do is often absolutely nothing. Focusing on the long term, maintaining a level head – and a well-diversified portfolio – are the best tools for building wealth, however bumpy the journey.