Micron technology on, stock markets off (as is starmer)

An excerpt and link to our weekly market overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Market overview

There was a time when forecast-busting results from a tech stock deeply embedded within the artificial intelligence (AI) trade would typically have driven the wider sector, and global stock markets as a whole, higher. But in a sign that markets are becoming more discerning when it comes to the AI-trade, global equities finished the week lower despite memory chip maker Micron Technology reporting a 346% year-on-year (YoY) increase in Q3 revenues.

Memory maker

The reason behind Micron’s stellar numbers? Datacentre demand for the US$1tn+ company’s memory chips is outpacing supply. The results, along with management raising Q4 guidance by 16%, were enough for the share price to surge 16% on the day. Not so the wider market. The main US equity benchmark barely budged. Meanwhile, previous pacesetters, such as chipmaker Nvidia, finished lower, an indication perhaps that the AI-trade is broadening out to include areas of the supply chain that up until recently had been overlooked.

In all, not a good week for tech or for growth names for that matter. In the US, growth stocks ended the week down 3.4% (+0.9% YTD) compared to value stocks rising 0.3% (+16.3% YTD) and small caps 1.0% (+22.1% YTD). As for why growth was on the backfoot, that could be down to a re-evaluation of the outlook for interest rates.

Hawkish Warsh

Until relatively recently, US interest rates cuts were widely expected this year, especially with Kevin Warsh taking over as Federal Reserve chair in May— the common perception was that Warsh was nominated by President Trump because he would be likely to cut rates. Yet the tone of Warsh’s comments following his first rate-setting committee meeting as chair earlier this month were on the hawkish side. His promises to rein in inflation have suggested the next move in rates could well be up. Higher interest rates however reduce the current value of future profits for long-duration growth stocks. Cue share price weakness in the technology and other growth sectors.

With impeccable timing, one of the Fed’s favoured inflation datasets, the personal consumption expenditures (PCE) price index, highlighted the inflation problem. The PCE rose 0.4% in May. That comes on top of a similar increase in April. On a YoY basis, the PCE is up 4.1%, the highest level it has been since April 2023. Core PCE, which strips out food and energy costs, is up 3.4% on an annual basis, the highest it’s been since October 2023…

The value of your investments and the income from them can fall and you may not recover what you invested.