Market Pulse
Sunday, July 14, 2024
Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our three stories this week:
Adrian (Portfolio Manager), and the rest of the Sidekick team.
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
"Boring" isn't usually a label anyone wants to hear, but for the Fed Chair, juggling maximum employment and stable prices, a bit of boredom might be a welcome sign of a job well done. Wednesday’s testimony before the Senate Banking Committee [1], typically a platform for signalling policy shifts, resulted in little market reaction and hinted at a period of calm ahead.
But the calm was short-lived. On Thursday, signs of cooling inflation [2] fueled speculation of a potential rate cut as early as September, prompting investors to shift away from the perceived safety of big tech. Bond yields tumbled and investors pivoted away from tech megacaps into riskier assets. The Russell 2000, representing smaller-cap companies significantly outpaced the Nasdaq 100 by 5.8 percentage points, the largest margin since November 2020.
With the large indexes flashing red you’d be forgiven to think the CPI reading was bad news for stocks. Yet in reality, while the S&P 500 fell nearly 1%, almost 400 of its shares went up [3]. Of course, a one-day movement does not a trend make but we are encouraged by the rotation.
Specifically, we view the broadening market leadership beyond the Magnificent 7-AI - Megacaps concentration seen earlier this year as a positive sign. If this trend continues in the coming weeks and months, it will confirm a healthier and more sustainable market expansion in the long run.
However, a sustained sell-off in market leaders could also weigh on major indices, even if most stocks initially remain unaffected. This pressure could trigger investors to reduce their exposure to index-based investments like the SPY and QQQ ETFs. Such a scenario could potentially overwhelm the broader market, impacting even the laggards that have recently started to gain traction.
Our strategies are designed to be resilient across various macroeconomic scenarios, diversifying across sectors and factors. While Megacaps earnings are still expected to be healthy this quarter, their growth is slowing. The onus now falls on the broader market to sustain the momentum.
Tesla Inc. has reportedly delayed the unveiling of its highly anticipated robotaxi to October, according to Bloomberg [4]. This two-month postponement is intended to allow teams more time to build additional prototypes and refine the design.
CEO Elon Musk had initially set the unveiling for August 8th, and the anticipation surrounding the event had fueled an 11-day rally in Tesla's stock price, adding over $257 billion to its market capitalization. However, following the news of the delay, shares tumbled 8.4% on Thursday, marking the steepest decline since January.
The bull case for Tesla rests on the belief that autonomous driving is a revolutionary, winner-take-all technology, and Tesla is poised to dominate. Tesla's data advantage, talent, computing resources, and Elon Musk's vision position it to win not only in autonomous driving but potentially in broader artificial intelligence applications.
Conversely, bears argue that even if one company gains an edge, it will be difficult to sustain in a highly competitive industry, leading to price erosion similar to other automotive innovations like electric windows and airbags.
Our investment thesis on Tesla doesn't hinge on the success of its robotaxi ambitions, but it does offer potential upside if they manage to pull it off. While Elon Musk remains confident about the imminent arrival of the technology, we remain sceptical about its feasibility in 2024. Strict regulatory requirements more than technical hurdles present difficult challenges to achieving truly autonomous vehicles.
Note: We hold Tesla in Flagship.
HubSpot shares took a hit on Wednesday amid news that Google's parent company, Alphabet, had reportedly abandoned acquisition talks. Meanwhile, Google's stock soared to a new all-time high in intraday trading. According to Bloomberg [5], the two companies never reached a point of detailed discussion about due diligence.
HubSpot is a leading software-as-a-service provider, similar to Salesforce but tailored for small and mid-sized businesses, offering a user-friendly platform for marketing, sales, customer service, and operations[6].
The potential merger was seen as promising in the field of generative AI, where a combined Google-HubSpot could have achieved significant synergies. Beyond familiar applications like Microsoft 365 Copilot and code generation, customer support, marketing, and sales are emerging as key areas for AI integration.
While HubSpot boasts a strong CRM platform, its AI solutions have been slow to gain traction with customers, echoing a similar sentiment observed with Salesforce's offerings. Meanwhile, a growing number of businesses are opting for DIY AI solutions using cloud infrastructure providers, building custom-built support bots or automation tools for niche use cases.
Google, on the other hand, possesses robust AI infrastructure but has struggled to penetrate the commercial application market. This is in contrast to Microsoft, whose dominance with Office 365 and Teams has provided a springboard for the successful launch of Microsoft 365 Copilot.
While a HubSpot acquisition could have provided Google with valuable distribution channels and CRM data to bolster its presence in the AI market, we viewed the likelihood of a deal as low. This is primarily due to HubSpot's significant market capitalization of $25 billion and the anticipated regulatory hurdles, even if both parties had reached a price agreement.
Note: We hold Alphabet and Salesforce in Flagship.
[1] https://www.youtube.com/watch?v=tV0oS8ucKlw
[2] https://www.nytimes.com/live/2024/07/11/business/cpi-inflation-fed
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