Google and Microsoft AI plans clouded by rising costs

Tuesday’s US market witnessed a mixed performance, with shares closing relatively flat. While the S&P 500 held steady, the NASDAQ experienced a decline of over 0.7%. European markets saw gains fuelled by positive eurozone GDP data. Short-term yields rose in response to favorable economic indicators, indicating caution regarding potential Fed rate cuts. JPMorgan Chase surged by 2.1%, leading to gains in the Dow. Technology shares eased ahead of earnings reports from Microsoft and Alphabet. Investors now await the outcomes of the FOMC meeting later today and the Nonfarm Payrolls report on Friday for crucial market cues. 

Summary for 31.01.2024 

• Asian equity markets declined as investors analysed regional economic data and awaited the US Federal Reserve’s first monetary policy decision of the year. Pressure on technology stocks followed disappointing quarterly reports from major US tech firms. Australia reported a two-year low of 4.1% in fourth-quarter inflation, while Japan’s industrial production and retail sales fell short in December. 
• European shares are anticipated to dip slightly before the Fed’s rate decision, while Nasdaq 100 futures are down nearly 1% due to disappointing corporate earnings from Alphabet and AMD. 
• Oil prices edged down to approximately $77.5 per barrel on Wednesday, influenced by cautious market sentiment ahead of the US Federal Reserve’s policy decision. Concerns over weakening demand from China, highlighted by the fourth consecutive month of contraction in manufacturing activity, countered geopolitical tensions in the Middle East. US President Joe Biden’s reassurance to avoid escalating conflict in the region added to market dynamics. 
• The IMF increased its 2024 global growth forecast to 3.1% from 2.9%, attributing the upward revision to the remarkable resilience observed in the US and several significant emerging market economies, alongside substantial fiscal support in China. Notable adjustments include raised projections for the US (2.1% vs 1.5%), China (4.6% vs 4.2%), and India (6.5% vs 6.3%), while forecasts for the Euro Area (0.9% vs 1.2%) and Japan (0.9% vs 1%) were lowered. Although global inflation is anticipated to decrease to 5.8% in 2024 and 4.4% in 2025 from 6.8% in 2023, the potential for upside surprises to global growth remains.  
• In Q4 2023, the Euro Area economy unexpectedly stalled, avoiding a recession with Spain and Italy showing growth, while France stagnated and Germany contracted. Positive contributions came from smaller economies like Portugal and Belgium, but challenges persist in 2024 due to high borrowing costs, subdued demand, and a weak manufacturing sector, particularly in Germany. 
• In January 2024, China’s NBS General PMI Output Index rose to 50.9, marking a four-month high, driven by service sector growth. However, factory activity continued to contract for the fourth consecutive month, with the Manufacturing PMI at 49.2. Concurrently, the Non-Manufacturing PMI edged up to 50.7, reflecting 13 months of service sector expansion despite declines in key metrics. 
• Australia’s inflation rate in Q4 2023 dropped to 4.1% year-on-year, below market expectations of 4.3%, marking the lowest since Q4 2021. Services and goods inflation slowed, with notable declines in food, housing, and transport costs. Meanwhile, the monthly CPI indicator for December 2023 recorded a 3.4% increase, signalling a third consecutive month of moderation in annual inflation. 
• In December 2023, Japan’s retail sales rose 2.1% year-on-year, marking the 22nd consecutive month of growth, though slower than November’s 5.4% increase. Meanwhile, industrial production grew by 1.8% month-over-month, rebounding from a previous drop, with notable contributions from machinery and chemicals sectors. 
• In November 2023, the S&P CoreLogic Case-Shiller 20-city home price index in the US rose by 5.4% year-on-year, hitting a one-year high but below forecasts. Detroit saw the highest annual gain at 8.2%, while Portland reported a 0.7% decline for the third month. Monthly, home prices dropped by 0.2%. 
• In the US, December JOLTS job openings exceeded expectations, reaching 9 million, suggesting a slow but steady return to normalcy from the peak levels observed in 2022. While a gradual easing of labour-market conditions is projected for 2024, strong consumer spending persists. This week, the US labour market will be further evaluated with the ADP employment survey and the highly anticipated nonfarm-payrolls report on Friday. 
• Microsoft posted its strongest revenue growth since 2022, spurred by interest in new artificial intelligence products that in turn are driving renewed spending on cloud computing. Revenue in the second quarter rose and profits on a per-share basis exceeded consensus analyst estimates. However, higher AI development expenses led to a tepid post-market reaction. CEO Nadella emphasized AI’s integration, with Azure experiencing significant growth.  
• Alphabet’s fourth-quarter earnings disappointed investors as holiday-season advertising sales fell short of expectations, leading to a 6% drop in shares. While ad revenue increased to $65.5 billion, it missed analysts’ forecasts. The surge in capital expenditure, up 45% due to increased spending on AI infrastructure, drew attention. Although Google Cloud revenue exceeded targets, its growth rate trailed behind Microsoft’s Azure. 
• AMD’s boosted 2024 forecast for AI processors to $3.5 billion disappointed investors who anticipated more growth. First-quarter revenue projections fell short of expectations. Despite a 38% rise in data centre revenue, weak demand in cloud computing persisted. AMD’s gaming segment declined 17%, while the client segment surged 62%. Overall revenue slightly surpassed estimates. AMD shares dropped about 6% in extended trading following the announcement. 
• Samsung Electronics anticipates a recovery in memory chips and tech demand in 2024 despite a 34% decline in Q4 profit. It expects AI expansion to drive chip demand, focusing on high-bandwidth memory. Mobile profits increased, aiming for double-digit growth in flagship shipments and leading in foldable phones. 
• Pfizer surprised with a quarterly profit, driven by cost cuts and strong demand for its COVID treatment, Paxlovid. However, key product sales fell short. The company’s $4 billion cost-cutting program and internal changes aim to address pandemic-related declines. Despite challenges, Pfizer maintained its 2024 forecasts, anticipating flat to 5% revenue growth.  
• Banco Santander anticipates improved profitability in 2024, targeting mid-single digit revenue growth and a return on tangible equity of 16%. In Q4 2023, the Spanish lender reported a net profit of €2.93 billion, exceeding analyst expectations, with total revenue reaching €14.55 billion. 
• Stryker Corp projects 2024 profit above Wall Street expectations, anticipating a rebound in hospital procedures. Shares rose 3.2% post-announcement. Full-year 2023 sales surpassed estimates at $20.5 billion. Quarterly revenue jumped 11.5% to $5.82 billion, with strong growth in medical surgery and orthopaedics segments. Adjusted profit per share exceeded analyst forecasts at $3.46. 
• Starbucks lowered its annual sales forecast due to the Israel-Hamas conflict impacting its Middle East business and softer demand in January, especially in China. Despite missing first-quarter expectations, shares rose almost 4% as investors anticipated a larger sales decline. CEO cited significant impact on traffic and sales in the Middle East. 
• Mondelez International’s fourth-quarter sales rose, but volume declined due to price hikes impacting demand for chocolates and crackers. Shares fell by 3% as softer demand emerged, particularly in North America, where volume declined 5.5%. The company anticipates customer disruption in Europe due to high inflation. 
• Diageo shares rebounded after falling initially, as the top spirits maker addressed challenges in Latin America and North America. CEO Debra Crew acknowledged the disappointing results but assured investors of proactive measures to address issues, including improving data collection and technology for sales monitoring. 
• UPS reported mixed Q4 results, with revenue slightly below estimates. The company’s adjusted EPS met expectations, but revenue declined across segments. UPS forecasts lower-than-expected full-year 2024 revenue, plans to cut 12,000 jobs, and anticipates a consolidated adjusted operating margin of 10.0% to 10.6%. Analysts expressed initial pressure on shares which fell by over 8% in regular trading on Tuesday. 
• A Delaware judge invalidated Elon Musk’s groundbreaking $56 billion 10-year compensation plan for Tesla, citing its staggering magnitude as unjust to shareholders. This ruling, resulting in a 3% decline in Tesla shares, has sparked optimism among investors for governance reforms within the company. Musk’s decade-long agreement, aimed at financing interplanetary travel, faces uncertainty as Tesla gears up for fresh negotiations over executive compensation. 
• Byron Allen, through Allen Media Group, proposed a $30 billion bid for Paramount Global, encompassing debt and equity, Reuters reported this morning. Bloomberg News, citing insider sources, stated Allen initially offered $14.3 billion to acquire all outstanding shares of Paramount Global. 
• Volkswagen postponed plans to attract investors for its battery unit, citing sluggish electric vehicle (EV) demand and production challenges. The company halted stake sales or listings amid industry-wide difficulties, despite PowerCo continuing construction in Europe. PowerCo focused on standardised cells and explored solid-state batteries with QuantumScape. 
• Vivendi announced on Tuesday that its management board, with the approval of the supervisory board, has proposed dividing its operations into four entities. This follows the company’s previous indication of considering such restructuring. An update on the split project will be provided during the supervisory board meeting on March 7, 2024, coinciding with the release of the group’s 2023 annual results. 
• Wedbush analysts removed Booking Holdings from their Best Ideas List, citing limited upside potential in the current travel climate despite acknowledging its strong performance. They maintain an Outperform rating, citing its leading position, free cash flow, and shareholder returns, but expect fewer earnings beats compared to 2023. 
• Seaport Research Partners downgraded Netflix to Neutral from Buy, removing its price target, citing achievement of the $576 target. They questioned the equity’s valuation, expressing uncertainty about incremental buyers and the advertising scenario’s impact, suggesting limited upside potential from current levels due to inflated valuation parameters.