The summer reporting season is in full swing. Results so far have generally been reasonable, although we’re still awaiting releases from many of the most significant companies. We are five short of a full magnificent seven complement, for example.
On which note, it was not that long ago that Alphabet and Microsoft swam in very different ponds, but their recent evolution has brought them into direct contact with one another. In turn, their race for AI supremacy is a massive driver of mag 7 stablemate Nvidia’s growth. The other big tech groups’ capital expenditure on datacentres feeds directly into analysts’ models.
Those models have, so far, been woefully inaccurate. This time last year, consensus was that Nvidia would generate approx. $30bn of operating profit in the year to January 2025. That number has been revised upwards multiple times and forecasts are currently around $80bn. There have been similar revisions for 2026 and beyond. The associated appreciation in the chip designer’s market value makes the issue of whether it can maintain the upgrade momentum a 2.8 trillion dollar question.
Elsewhere, and at the risk of sounding like a broken record, there is evidence of a slowdown in discretionary consumer spending. The fortunes of Nike, Burberry and LVMH show hesitancy around the higher end of the apparel market. Ford are hardly motoring along, having materially missed forecasts, and Tesla were in reverse too after reporting weaker demand. All of these examples are corroborated by the latest data from major card companies like Visa and the macro. The unemployment rate in the US ticked up to 4.1% and pay growth is spluttering.
Should these trends continue, we would expect the market to once again indiscriminately throw out babies with bathwater. This could present opportunities to buy into outstanding companies at attractive valuations. To use a different metaphor, the key will be to sort the wheat from the chaff while retaining a long-term perspective.
There are also several sector-specific factors in play. One would be forgiven for assuming that the housing market (homes are surely the ultimate big ticket item) would epitomise a consumer malaise. Wrong. With supply lagging new household formation, the market has held up better than had been expected. Looking ahead, rate cuts, admittedly already later than many had pencilled in, should help with affordability. Of course, the scale and pace of those cuts will remain a determining factor in the success of those operating in the space, and the upcoming election also brings some uncertainty.
Unless you’ve been living under a rock for a few weeks, you’ll know that the UK has already gone to the polls. The UK’s builders are receptive of the new target to build 1.5m homes in the next five years that has been brought in by the new government. In
addition to the favourable impact this new approach should have on volumes, the interest rate and structural shortage dynamics are not dissimilar to those across the pond. There will always be a risk that the situation can change quickly, but for now, the dynamics appear more favourable than has been the case for some time. This likely explains why banks including Natwest and Lloyds included upgrades to UK housing market forecasts with their latest numbers.
Expectations for medium term GDP, unemployment and inflation from both banks have all improved over the year too. This neatly brings us back to one of the themes of this reporting season. Whisper it quietly, but conditions in the UK appear to be improving.
Of course, these are only forecasts. But we’d rather see expectations improve than worsen. And with valuation continuing to look attractive, we remain comfortable that there are attractive opportunities in our still unloved home market.
George Salmon – Senior Investment Analyst
FPC24202
All charts and data sourced from FactSet
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