NEWS + VIEWS – 28/6/2024
MARKETS
The US share market pushed further into record territory this week while European and domestic markets turned negative. Nvidia became the world’s largest company and then promptly ended its stellar share price run with a 13% sell off to Tuesday night. The five major technology companies in the US have accounted for most of the market rises this year so US markets were looking top heavy.
Domestically, a higher-than-expected inflation reading of 4% in the year to May won’t help investor sentiment. The Reserve Bank of Australia will be under significant pressure to raise interest rates in August.
We appear to have weathered the often-weaker period for share prices leading into the end of June. Share markets look fully valued but not dramatically so.
US ECONOMY AND SHARE MARKETS
In the last edition of the News and Views, we stated that company profits need to catch up with share price rises for them to be sustained. Similarly, dividends need profits to be maintained or to rise. Below we review US economic activity and the optimism built into share market prices.
The US Conference Board Leading Economic Index (LEI) aims to measure turning points in economic activity. It combines economic activity measures such as average weekly hours worked in manufacturing, initial unemployment claims and new orders.
The LEI fell in May with a ‘firmly negative’ trend although not currently signalling a US recession. The Conference Board expects real GDP growth to slow further to under 1% over the remainder of 2024 due to inflation and high interest rates weighing on consumer spending.
The last reading for Australia also showed a negative trend in 2024 but some signs of improvement.
How does this weak level of economic activity reconcile to the strong S&P 500 performance? The chart below shows the US ISM Manufacturing Index matched against the S&P 500. The S&P 500 falls in 2018/19 and 2020 preceded the Manufacturing Index declines. The Manufacturing Index is only one economic measure but generally regarded as a reasonably good reflection of economic activity.
Since 2023 however, the S&P 500 has exhibited strong gains while the Manufacturing Index (like the Conference Board’s LEI) has barely managed a positive reading (see chart below). Share markets and economic activity can vary significantly in the short term but tend to eventually align.
Source: AMP, Livewire
Another factor that needs to be taken into account is that Microsoft, Nvidia, Alphabet, Amazon and Meta account for 60% of the S&P 500 market gains this year. These companies are unlikely to impact the Manufacturing ISM, which suggests that the effective ‘gap’ may not be as large.
Another indication that US markets are fully valued is that the Price/Earnings (PE) ratio is at the top of its trading range for the last 25 years of 20 to 28 times. The S&P 500 is currently trading at a PE of 28.5 times (based on 12 month trailing earnings).
In summary, either economic activity and company profits must accelerate, or share prices are too optimistic.
COMPANY NEWS
ResMed (RMD) sold off
RMD’s share price fell on the back of news that Eli Lilly’s weight loss drug tirzepatide had successfully treated 51% of trial participants with sleep apnoea. This is the second sell-off relating to the suite of GLP-1 weight loss drugs after Ozempic. RMD’s share price previously recovered once the limitations of the Ozempic-style drugs were better understood (e.g. they cannot be taken long-term).
Gerard O’Shaughnessy
P 0423 771 330
Important Disclaimer
The directors, employees and authorized representatives of PPN Wealth do not guarantee the information in this report to be complete, up to date, accurate nor applicable to your personal circumstances. This is general investment advice only. You should not act on recommendations in this report without discussing proposed actions with your PPN Wealth adviser to ensure recommendations are suitable to your circumstances.
The principals, associates and employees of PPN Wealth may have investments in the securities or companies, referred to in this report.
This report may not be distributed in any way without the prior permission PPN Wealth. The directors, employees and authorized representatives of PPN Wealth do not accept any liability for third parties’ actions relating to this report.
