Charles-Henry Monchau

Chief Investment Officer



Chart #1 —

Another week of gains for US equities

Despite disappointing results from major US technology companies, the main US equity indices enjoyed a second consecutive week of gains. The S&P 500 gained nearly 4% last week. There was a significant dichotomy between the Dow Jones and Nasdaq indices. The Dow Jones gained 5.7% over the week and is up over 4 consecutive weeks (+14%), its biggest 4-week rally since April 2020. The Nasdaq, on the other hand, gained 2.2% over the week and "only" gained 5% over the month, due to weak results and forecasts from large caps in the technology sector (see next point).


Divergence in performance between the Dow Jones and the Nasdaq indices


pic 1-3


Chart #2 —

A double-whammy for mega-cap tech stocks

During the years of quantitative easing (QE), FAANGs outperformed the markets, reaching very high weights in the indices (see point 4). This dominance was further amplified during the COVID years as their business models took full advantage of global containment and teleworking. But these stocks are now facing a double whammy: as the economy reopens and some operating costs rise (salaries, delivery costs, etc), revenue and profit growth is slowing down significantly. For Facebook (Meta) and Netflix, this is the lowest revenue growth rate in the company's history. Meta/Facebook revenue is down 4.5% year-over-year, the worst performance in its history. The stock is down 25% in the past week; its market cap is down 75% since the September 2021 peak. Its market capitalisation has fallen from $1.1 trillion to $269 billion over the period.
Alongside the slowdown in growth, the decline in liquidity and the resurgence of value stocks are hurting GAFAs valuation multiples. Since 2021, the reduction in the combined size of central bank balance sheets (-$3.3 trillion) is paralleled by the decline in the market capitalisation of US technology mega-cap companies (-$4.1 trillion). If central bank balance sheets are further reduced, the compression of multiples could continue.


Central bank balance sheets vs. market capitalization of US mega-cap Tech stocks



pic 2-3



Chart #3 —

A loss of hegemony of the "big 5"? 


Different periods in history have been marked by the dominance of a few large stocks. As the chart below shows, the Top 5 of the S&P 500 has been made up of stocks from different sectors: energy, finance, telecoms, technology, etc. With the GAFAs, the weight of the top 5 has never been so important. Indeed, the weighting has reached 23% in 2021. The GAFAs began to lose some of their dominance in 2022 even though their weight in the index still represents 17% of the S&P 500.


Weight of Top 5 stocks within S&P 500


pic 3-4Source: Bianco Research


Chart #4 —

Apple is holding up much better than other FAANGs


The only tech giant to emerge relatively unscathed this week was Apple, which despite reporting slower than expected iPhone 14 sales growth, reported very strong results. Apple shares ended up 7.6% on Friday, its best day since 2020. The stock is at a record high against the Nasdaq 100 index.


Change in market cap of the FAANGs


pic 4-4Source: Chartr


Chart #5 —

Energy stocks are outperforming tech stocks


Historically, the relative performance of energy compared to the technology sector has been characterised by long periods of outperformance and underperformance. With the bursting of the internet bubble, the energy sector had outperformed technology until the great financial crisis. Between 2009 and 2020, the outperformance of technology was particularly marked. But since 2021, the trend has started to reverse. Company results also show a dominance of the technology sector. Exxon Mobil just reported its best earnings in 152 years...


pic 5-2

Source: Jeff Weniger


Chart #6 —

China stocks tumbled


Shares of Chinese companies listed in the US fell sharply on Monday, following the Chinese Communist Party Congress which saw President Yi Jinping win a third term and further strengthen his grip on power. On Monday, the China Internet ETF (KWEB) hit an all-time low, down 81% from its February peak. The indiscriminate selling by investors looked like a capitulation.



Kraneshares CSI China Internet ETF (KWEB)

pic 6-2

Source: Charlie Bilello


Chart #7 —

Slight change of tone by central banks


As expected, the European Central Bank raised key interest rates by 75 basis points. Another 50 or 75 basis point increase is expected before the end of the year.
The surprise came from the cautious speech of President Christine Lagarde, who spoke of the risk of a slowdown in the economy and mentioned that rate hikes will be decided "meeting by meeting" (i.e. depending on macroeconomic data. At the last ECB meeting, she had said that she expected rate hikes over several meetings. It seems that the risks were directed towards downside risks to the economy rather than upside risks to inflation. The ECB has not mentioned a date for the start of quantitative tightening. As the eurozone is already on the brink of recession, these concerns make sense.
If the intention was to stabilise the bond markets, it has worked rather well. The yield on the 10-year bund has fallen by more than 20 basis points (below 2%) and spreads with Italian BTP have tightened.
The ECB is not the only central bank to have changed its rhetoric or the course of its monetary policy action. Last week, the Bank of Canada raised rates less than expected (50bps vs 75bps). Brazil's central bank suspended its rate hike and Mexico's central bank halted the monetary tightening cycle.
As the chart below shows, most central banks are pursuing a restrictive monetary policy. But as is often the case, it is the second derivative that matters to the markets.

Monetary policy from main central banks

pic 7-1Source: Charlie Bilello



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