Inflation mixed with AI

Michael Rudd, CFA | President, CEO & Portfolio Manager

Last week, we wrote about technology stocks and interest rates causing a change in sentiment. We noted that markets had taken a turn downward so far this month and that the mood around technology stocks had turn clearly negative. Technology stocks can be impacted very quickly both by investor expectations and changes, or potential changes, in interest rates. Chip manufacturing sales have been growing at exceptionally fast rates. However, as a generalization, during recent earnings calls, these companies have downgraded their guidance for the next quarter or two but reaffirmed for the full year. Investors took this as a negative and punished the stocks. At the same time, interest rate expectations were reset somewhat due to sticky inflation data. This has an outsized impact on the valuations of technology stocks because so much of the implied value is usually far off into the future. Higher interest rates and inflation significantly impact the valuation formula. This week, however, we experienced a bit of a positive reversion.


  • The rosy outlook analysts and investors have expected of chip makers for recent quarters has been too high but software providers like Alphabet (GOOG US) and Microsoft (MSFT US) released excellent results yesterday. That pushed the market and in particular technology stocks higher. GOOG had good results from both cloud and AI. Cloud division revenue rose 28% and this has caused investors to rethink long-term of chip demand. The stocks ended strong for the week.


  • With respect to inflation, we updated Figure 1 from last week with the most recent Personal Consumption Expenditure data (grey line). The Core PCE (i.e. with the volatile food and energy prices removed) is the preferred measure of inflation of the members of the US Federal Open Market Committee (FOMC). For 2 decades, the committee has targeted 2% as the normal level of inflation in the economy. Inflation is clearly above that level now. We believe it will take an obvious change in the data before the FOMC needs to aggressively reduce administered rates. This should result in risk asset volatility along the way.

“This means that” we remain focused on, and confident in, the long-term operations of the companies that we own. Short-term investor speculation can often lead to volatility (as we have seen over the past month). However, this should be treated as an opportunity for investors who know what they own and why.

Pathfinder Asset Management Ltd. | Equally Invested™
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Sources: Pathfinder Asset Management Limited

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