6th May 2024

Weekly Index Movement

Aussie All Ords+0.1%

The question is – why did stocks go on a rollercoaster ride last week?

To understand this we need to understand why stocks rallied for 5 straight months in the first place and that comes down to expectations of interest rate cuts.

After raising rates throughout 2022 and into 2023, in the last quarter of 2023 the market decided the Fed was done and would begin cutting rates in 2024. As the year started, the market was pricing in 6 cuts in 2024. That would be good news for stocks and so the rally continued and peaked at the end of March.

But a few data prints in April changed this view. The rate of decline in inflation is slowing. You can see that here

Notice how actual inflation is flattening out away from the downtrend.

Part of the PCE inflation announcement is PCE Wage Growth. That came in at +0.5% for March and puts wage growth in excess of 4% annually.

Then we had the Employment Cost Index that shows things have gotten worse as that report came in higher at +1.2%.

High wages leads to high inflation so it is no surprise to see the 2 yr yield marching back above 5% again.

You will recall that stocks fell last year from end July through end October as the yield increased from 4.5% to 5.0%, but then stocks rallied from early November on as the yield retreated.

That 5% yield on the 2 Year was enough to end the rally last year, and it did it again in 2024.

For stocks to regain their march higher, we really need this 2yr yield to retreat again.

Some pundits were even saying the Fed might be forced to increase rates again to combat this wage growth threat.

But Powell quashed that on Wednesday in his press conference. He said

“current policy rates are sufficiently restrictive to achieve the Fed’s 2 percent inflation target over time”

“Demand for labor has cooled as has business investment and the US housing market”

It is “unlikely” that the next Fed rate move would be a hike and it would take “convincing evidence” for the FOMC to believe further rate hikes are necessary.

Then on Friday we got employment numbers that came in lower than expected and the unemployment rate increased by 0.1% to 3.9%.

That data is the opposite of the prior two labour market numbers and so stocks reversed the losses they started the week with.

Summary – The Fed isn’t going to hike, rate cuts are coming, just not this year. That means we have no real impediment to stock gains, as long as earnings continue to grow. That is all that matters now.

Final thought – when Powell spoke US markets rallied over 1%. It was disconcerting to see them give it all back by the close. I had a flashback to 2 years ago when on May 4th, Powell said “a 75 basis point increase is not something that the committee is actively considering”. Markets initially cheered that message, with the S&P500 up 3.0 percent on the day. Only to fall 8.5 percent the following week as markets decided Powell was wrong. And so he was, the FOMC went on to raise by 75bps the very next meeting.

I’m not sounding the alarm bells here, but rather pointing out that markets tend to get things right before the Fed comes to the same truth.

Nothing changed my view this week. The best place to be is large cap tech and any declines can be treated as buying opportunities.

This whole business of expectations of interest rate cuts is silly. We started the year at 6. In the middle of last week after the first two wage numbers it was down to 1. Then on Friday after the employment numbers it was back to 2.

And that is why stocks went for a wild ride last week.

But this is all short-term rubbish. It doesn’t matter if we get one or two cuts. Powell confirmed he is confident they have inflation under control. Earnings are improving. The story remains bullish.

Everyone needs to remember the old saying “Don’t fight the Fed”. Get long big tech and stay long.

AI Investments – But at what cost?

Tech earnings season is in full swing and one thing has become apparent.

It’s taking a lot of money to make money on AI.

Amazon (AMZN), Google (GOOG), Meta (META), and Microsoft (MSFT), four of tech’s biggest AI players, have each called out AI sales growth, though without many specifics, while pointing to increased spending on capital expenditures to meet AI demand.

Microsoft announced last week it spent $14 billion on capital expenditures tied to its AI buildout in its fiscal third quarter, up from $7.8 billion in the same period last year. The company’s 2024 capital expenditures have already eclipsed its spending across all of 2023, and there’s still another quarter left in its fiscal year.

Google parent Alphabet said it spent $12 billion in the last quarter and will continue at that pace for the rest of the year. Meta similarly said it’s cranking up spending for the full year from $30 billion-$37 billion to $35 billion-$40 billion. And CFO Susan Li said that number will increase in the year ahead as well.

Amazon said it would blow past last year’s $48.4 billion in capital expenditures, saying the $14 billion it spent in Q1 will be the low for the year.

Those are mountains of cash. And while there are early signs that AI is driving revenue growth, it’ll take time before it truly makes an impact on companies’ bottom lines.

During its earnings call last week, Microsoft said AI accounted for 7 percentage points of revenue growth in its Azure and other cloud services business. That was up from 6 percentage points in the prior quarter and 3 percentage points in the quarter before that. In Q4 last year, the company said AI drove 1 percentage point of growth in Azure.

Google CFO Ruth Porat noted a similar increase in AI sales during her company’s earnings call, saying that Google’s Cloud Platform saw increasing revenue contributions from AI, though she didn’t provide an exact number.

For Amazon’s part, CFO Brian Olsavsky said customers continue to sign up for larger and longer deal commitments for Amazon Web Services, with many adding generative AI components.

We are still at the start of seeing just how AI can add profitability to companies and at this stage the best way to play it is still with the big boys. They have the pockets to roll it out and ramp it up. It will be a hard slog for the smaller guys to build out their models without significant funding.

Even more reason to just stick with the big boys for now.

Sour Apples

What follows will be considered blasphemy to the true believers.

Apple (AAPL) announced earnings last week and revenue declined for the fifth time in the past six quarters, dragged down by ailing iPhone sales and new competition from smartphone rivals in China. Still, shares of Apple rose more than 7% in after-market trading as the company authorized $110 billion in stock buybacks and signaled that the current quarter is likely to see revenue growth. Also, while sales and profits fell in the March quarter, the numbers were slightly better than analyst expectations.

I know Apple has been the growth stock darling of the last two decades, but the company is not what it once was. As soon as we lost Steve Jobs, Apple lost its way.

Revenue is persistently declining and there have been no new products to speak of. The days of innovation are gone. The caretaker board of directors are closing down research departments and instead of funding for future growth they have decided to buyback shares because they cannot come up with a better idea of what to do with the cash. It is a clear signal of the future for the company.

It does not mean the stock price is suddenly going to fall. But I suspect it will just keep pace with the index rather than outperforming by a huge margin as it has done in the last 20 years.

The only reason to own Apple now is for the same reason Apple has announced this buyback. Because you can’t think of what else to do with your money.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.