PMIs Suggest UK & European Slowdown; Nvidia Underwhelms.

Market Review: It was a strange week for the financial markets, which, as of Friday, could have gone either way before a late surge in the US turned an average week into a good week for global equity investors. The “buy-anything” reaction to Trump’s victory has cooled (outside of Bitcoin) and morphed into a more selective approach to equity purchases. It is too early to make a definitive call, but there seemed to be a building narrative that the best opportunities might now come not from the Mag 7 but maybe small cap and consumer cyclicals.  Nvidia beat on the earnings front but was underwhelmed by guidance. After a few dismal weeks, despite weak economic data, it was a relief to see the UK and European markets break into positive territory. Gold, oil, and USD found support in the back of escalating tensions between Russia and Ukraine.

UK: Let’s start with the UK for a change and get the bad news out of the way first. The UK private sector stalled in November, moving from growth to stagnation, following Chancellor Rachel Reeves’ budget, according to S&P Global’s PMI survey. The composite PMI fell to 49.9 from 51.8 in October, the lowest in over a year, indicating contraction and below estimates. Business confidence dropped, probably due to the payroll tax hike from the October budget, with firms’ outlook for the year ahead at its lowest since late 2022. The services sector slowed sharply, with its PMI dropping to 50, a 13-month low, while manufacturing contracted at its fastest pace in nine months.

Gilts rallied as traders became more optimistic that the Bank of England would have to cut rates to support a slowing economy, and the pound continued to fall against the dollar. Reeves’ budget, which raised £40 billion in taxes, has faced criticism from firms burdened by increased costs, including higher minimum wages. Economists warn the UK may see further economic decline and job losses unless business sentiment improves.

Mirroring the dismal tone of the PMI data came figures that showed UK retail sales had dropped 0.7% in October, worse than expected, as uncertainty before the budget led consumers to curb spending, particularly on clothing. Perhaps that shouldn’t come as a surprise, as Labour messaging in the run-up to the budget would have tempered even compulsive shoppers. However, amidst these challenges, a UK sentiment index popped higher in November, signaling a potential shift in consumer sentiment. It could be possible that Brits have already begun to brush off earlier concerns about the budget and the U.S. elections. According to the GfK Consumer Sentiment survey, optimism about personal finances and the broader economy has returned, a hopeful sign for the future, even if it’s not quite back to summer highs. Let’s not forget wage rises are exceeding inflation, and households have more disposable income than in prior years. Retail bosses, too, are sounding upbeat, with several expressing cautious optimism about the holiday shopping season.

That said, it wouldn’t be a British winter without a dash of realism. Confidence still lags behind pre-August levels, and the energy price cap is set to rise again in January, marking the first back-to-back increase since the peak of the energy crisis. Overall, the mood is a mixed bag, but the groundwork is there for a better-than-expected festive season, assuming consumers can keep shaking off the headwinds and we can get more upbeat messaging from the Government.

Europe: Arguably, the outlook for the Eurozone is quite a bit worse than that of the UK. Germany’s private-sector contraction deepened in November, with S&P Global’s composite PMI dropping to 47.3, a nine-month low. Services that were able to offset manufacturing’s decline for a while are now showing signs of faltering. The economy struggles with weak foreign demand, high energy prices, and restricted government spending amid political turmoil following the collapse of the ruling alliance. Snap elections set for February have added to the uncertainty, as has the threat of tariffs when Trump takes office. The Bundesbank predicts stagnation this quarter, keeping Germany on course for a second consecutive year of contraction.

US Economy: If you were in any doubt as to why the US Stock Market has been outperforming the European indices, then the marked contrast in economic direction paints a clear picture. US business activity is expanding at its fastest pace since April 2022, supported by stronger demand and optimism tied to anticipated pro-business policies from the incoming Trump administration. The S&P Global flash November composite output index rose to 55.3 from 54.1. While services primarily drove the expansion, manufacturers expressed the highest optimism for future production since April 2022.

Economic sentiment has been buoyed by expectations of lower interest rates and a more business-friendly policy environment, leading to increased output and new orders. Price trends were also favourable, with the composite index of prices charged by services and manufacturers dropping to a four-year low of 50.8. This points to a slowdown in inflation, aligning with the Federal Reserve’s goal of keeping consumer inflation below 2%.

While services activity reached its strongest level since March 2022, manufacturing remained in contraction territory for the fifth month. However, the prospect of greater protectionism and tariffs has lifted confidence in the goods-producing sector. Overall, the outlook has brightened, with service-led growth mitigating challenges in manufacturing and easing inflationary pressures.

US Market: The US PMI data on Friday was welcomed enthusiastically by investors, as much now rests on the economy to provide a favourable backdrop for the stock market, as equities are priced, if not quite to perfection, then still aggressively. ‘All the red lights are flashing,’ warned Anthony Bolton  (yes, he is still going strong!) during a recent talk and along with many of the old guard, you’ll hear something along the lines of, ‘Sure, artificial intelligence may transform the world, and the combination of cheap energy and technological innovation may seem exciting, but none of that changes a fundamental truth that prices matter, and in the US, they’re getting very expensive’.

In light of these valuations, BCA Research (an impressive think tank to which we have subscribed from time to time) has just issued a cautious alert. Chief Global Strategist Peter Berezin has warned of a potential deep recession, predicting that the US economy could enter a downturn by early 2025, leading to a 30% decline in the S&P 500. Now, everyone is entitled to their opinion and full disclosure. I happen to be in the glass-half-full camp, so I will counter with a couple of points.

The first is that I can see absolutely no sign of a recession in the economic data, quite the opposite, as I think the US economy may accelerate next year with GDP growth pushing back above 3%. Of course, there is always the caveat that there may be a big geopolitical shock lurking in the wings, and I agree that a recession would lead to a correction, but I don’t see that on the horizon. My second point is that I am always happy to hear the growl of stock market bears; that is a healthy sign, and I will pull up a quote from one of the really old guard, Sir John Templeton; ‘bull markets grow on scepticism’ – please forgive the cheesy cartoon for the full quote…

If pushed, I think the rally in the S&P 500 is set to gain further momentum and expand as an increasing percentage of its companies report positive 12-month changes in forward earnings (see chart). This trend aligns with periods of sustained economic growth and is a sign that the bull market is beginning to mature. I think the most significant danger is that we get a ‘melt-up’ as the bears capitulate and rush from ‘optimism’ to ‘euphoria’, but as long as the bears are still growling, I think that point is still some way in the future.

My hope for this bull market is that earnings can outpace share prices, which is entirely possible if we continue to see productivity gains that boost margins amplified by tax cuts and less regulation. At the moment, FactSet suggests earnings growth of 15% for 2025, so the actual number might still be higher if companies keep beating analyst expectations as they typically do. The forward P/E on the market is high at 22x earnings but arguably justified if we are staring at a period of prolonged economic expansion.  It is the difference of opinion that makes a market, and only time will tell if the bulls or bears are right at this moment in time, but I do remember other moments when none other than the Chairman of the Fed, Alan Greenspan, noted the ‘irrational exuberance’ of the Stockmarket in December 1996. The market eventually crashed in March 2000, but not before the S&P 500 doubled and the Nasdaq trebled.

Nvidia: The announcement of Nvidia’s earnings last week had gained as much significance as a Fed announcement in the minds of market watchers, but the reaction to the numbers probably failed to live up to the hype. Nvidia exceeded revenue expectations across most product categories, as it often does. However, it fell short of some analysts’ more ambitious projections, leading to a roughly 2% drop in shares during extended trading. While the stock recovered somewhat during the session, it remained down following the company’s earnings call.

The discussion wasn’t so much about the level of demand that seems to be taken for granted; it was more about the company’s ability to roll out the new Blackwell chips. The CFO confirmed that shipments will begin this quarter and projected that demand will significantly outpace supply well into fiscal 2026. Addressing repeated questions from analysts, the CFO also indicated that Nvidia could achieve gross margins in the mid-70% range by the latter half of next year. However, the rapid launch of Blackwell is expected to compress margins in the near term. Listening to the call, it would seem that there is no let-up in the explosive growth in AI demand, fuelled by the tech industry’s most prominent players but also many more of the mid-sized firms

China: Chinese markets were dragged lower on the week after a sharp selloff on Friday as disappointing tech earnings and mounting geopolitical concerns rattled investor confidence. The mainland’s CSI 300 Index plunged 3.1%, marking its biggest drop since October 9, while the Hang Seng China Enterprises Index fell 2.1%, posting a second consecutive week of losses. The Hang Seng Tech Index entered a technical bear market, declining over 20% from its October peak.

Market sentiment was already on shaky ground due to Beijing’s slow fiscal stimulus rollout and fears of escalating US-China tensions. However, the situation was further exacerbated by weak earnings reports from key players like PDD Holdings Inc. and Baidu Inc. These reports significantly dampened investor optimism.  Analysts pointed out the lack of positive surprises in corporate earnings, property markets, and consumer spending, which further contributed to the fragile market sentiment.

China is increasingly becoming a ‘marmite’ investment option as, despite these setbacks, some investors view the selloff as a potential buying opportunity with expectations that Beijing could deploy additional policy tools to counter economic challenges, including the possible impact of US tariff proposals. Oaktree Capital’s co-founder Howard Marks said labelling China as uninvestable has created a potential bargain. He contrasted China’s bargain-priced assets with the high valuations in the US, ineloquently saying,  ‘China is on the pile of things people feel ill about’, adding that this is often where the best opportunities are found!

This Week

Q3 Earnings are pretty much over now, but I will be taking a close look to see how CrowdStrike has recovered after their technology failure in the Summer as their share price has almost clawed back to where it was before it caused a global meltdown. But the biggest data point will be the Fed’s preferred US Inflation gauge the Personal Consumption Expenditures (PCE) Price Index for October which we get on Wednesday 27th November.