Update Equities: Hope prevails as an investing theme
The earnings season has now concluded, and investors are once again turning their attention to broader themes. A key factor influencing stock market performance this week is the hope for another interest rate cut by the US Federal Reserve at its December meeting.
Just last week, the outlook for the Fed’s future course appeared mixed. However, some weaker economic data and negative revisions to figures delayed by the US government shutdown now give the Federal Reserve new room to manoeuvre. This assessment is also reflected among investors in global markets, who increasingly adhere to the well-known market rule: “Don’t fight the Fed.” Lower interest rates provide more liquidity and valuation potential, particularly for US technology stocks. According to the CME Group’s FedWatch Tool, nearly 85% of market participants now expect a 25 basis point cut at the Fed’s December meeting. This has risen from just 50% a week ago.
Hope has also been a key driver in two other areas this week. After vague hopes for peace in Ukraine strengthened on Tuesday, stock market investors became more confident. Peace efforts in the Russia/Ukraine conflict undoubtedly inspire optimism, as a sustainable peace solution would impact various asset classes. At the same time, hopes and doubts about the sustainability of the artificial-intelligence boom have alternated, highlighting the uncertainty factor for equity markets. This is true even though market leader Nvidia recently delivered and met high expectations. Concerns also weighed on sentiment regarding whether the partly debt-financed investments in artificial intelligence (AI) will pay off in the long term.
Corporate news was limited following the end of the earnings season. The spotlight was certainly on Google’s parent company Alphabet, where two share classes hit new all-time highs. The trigger was prospects for lucrative business with AI chips for Meta, the parent company of Facebook and Instagram. According to the tech news site The Information, Meta could spend many billions of US dollars on Alphabet’s AI chips. This positive news supported Alphabet on its path toward a USD 4 trillion market valuation. Chipmaker Broadcom also benefited, climbing to a record high. In the pharmaceuticals sector, study results in Alzheimer’s research disappointed Novo Nordisk investors. Contrary to hopes raised in earlier study phases, the drug Semaglutide failed to deliver groundbreaking improvements in Alzheimer’s treatment. Although the likelihood of a breakthrough was considered low and the actual fundamental impact on company earnings is negligible, investors had pinned high hopes on the latest study results.