Good morning. Right here is how a lot the market reductions what the brand new president says: talking at Davos, Donald Trump mentioned he would “demand that rates of interest drop instantly”. Later within the day, he mentioned he deliberate to speak to the chair of the Federal Reserve about it. If some other president prior to now 40 years mentioned that, the bond market would have had kittens, and it might be the largest story on the earth. However the market did nothing, and the story didn’t make a homepage. Actually nobody cares. E mail us: robert.armstrong@ft.com and aiden.reiter@ft.com.
Additionally, for UK readers: the FT’s annual bonus survey is open for entries. It’s nameless; it’s not only for bankers; takes three minutes to finish; and the findings can be written up within the FT. This yr, the FT is asking of us about how pay insurance policies have shifted following the removing of the banker bonus cap, which can imply a lot greater bonuses for some, however decrease base pay for a lot of others. Click on here to take the survey.
Apple sauce
Yesterday we introduced a tidy concept of the Magnificent Seven’s underperformance prior to now month or so. Thought-about as an asset class, the seven are the brand new defensives shares — firms with nice manufacturers that may develop even in a slowing economic system. However the market in the meanwhile, removed from enjoying defence, needs publicity to financial progress by way of cyclical shares.
There’s just a little downside, although: many of the decline within the seven comes down to 1 firm. Apple is down 14 per cent since Christmas. Tesla is down 11 per cent, however is barely a 3rd of Apple’s weight within the S&P 500. The remainder of the seven are meandering alongside, a bit above (Nvidia) or under (Alphabet) the efficiency of US large caps, usually.
We might repurpose our argument to be nearly Apple, which very clearly is a defensive inventory, moderately than all of the Magnificents. However there are particular issues happening with the corporate that designate its even steeper decline.
In April of final yr, after one other bout of underperformance from the iPhone maker, we wrote a piece known as “What’s unsuitable with Apple?” We thought-about six explanations:
-
It’s overvalued
-
Gross sales progress will keep mushy
-
It lags behind in synthetic intelligence
-
Defensives have gotten unpopular
-
Its excessive China publicity is problematic
-
Authorized dangers
We weren’t too impressed with any of these arguments then. Our instincts turned out to be good: the inventory rose 50 per cent from once we wrote the piece to the tip of the yr. However now, all six worries have gotten worse.
Even after the latest sell-off, the inventory’s value/earnings valuation is a 3rd larger than it was again in April. The gross sales progress and AI points have come collectively: shoppers haven’t demonstrated wild enthusiasm for AI-enabled telephones basically, and the notion that Apple is lagging behind Android on that tech has grown. This casts doubt on the concept AI will drive a giant iPhone improve cycle. As Craig Moffett of MoffettNathanson analysis sums up:
Not solely have we not seen any signal of an improve cycle . . . we have now seen rising proof that buyers are unmoved by AI performance (not simply Apple’s however certainly everybody else’s as properly). In the meantime, totally agentic AI, the muse of any actual bull case for Apple, appears additional away now than it did even 5 months in the past.
The weak spot of defensives we mentioned yesterday. An ascendant and aggressive Trump will increase the chances that Apple won’t get a tariff exemption for iPhones (Edison Lee of Jefferies estimates 90 per cent of that are made in China), and makes it extra seemingly that Chinese language shoppers will turn into extra hostile to the corporate’s merchandise.
The authorized points are maybe probably the most acute danger. The choose within the Google search antitrust case has dominated the corporate’s funds to Apple for search site visitors are illegal. These funds quantity to maybe $16bn or extra a yr, greater than 10 per cent of Apple’s working earnings within the US. CFRA Analysis’s Nicholas Rodelli put 60 per cent odds on the authorized treatment slicing the funds by not less than half.
Apple nonetheless appears to be like costly to us. Tell us what you assume.
GLP-1s and packaged meals
Again in October, we wondered if there could be a GLP-1 bubble — extreme hype round Eli Lilly and Novo Nordisk, the 2 firms making glucagon-like peptide-1 (GLP-1) weight problems and diabetes medicine. On the time, the medicine had despatched the 2 pharma firms to the highest of their respective worlds: Novo Nordisk grew to become the biggest firm in Europe by market cap, and Eli Lilly grew to become the world’s largest pharma firm. That bubble appears to have popped, or not less than let loose some air. Since we wrote on the topic, shares in Novo are down 31 per cent, and shares in Lilly are down 17 per cent.
We provided a pair counterarguments to their hovering valuations — elevated competitors, Medicare value negotiations, pipeline points, and lingering questions on demand. All have been at play since October:
-
Eli Lilly’s gross sales have been mushy for 2 quarters in a row, inflicting traders to doubt future demand
-
Novo Nordisk’s subsequent blockbuster drug disenchanted in a trial
-
It’s unclear if the brand new US administration will let Medicare pay for the remedies, and there may be solely a five-year window between Novo Nordisk’s drug going into Medicare negotiations and its patent expiring
-
New start-ups have entered the sector, and corporations reminiscent of Pfizer are making progress on their very own weight-loss medicine
There may be additionally a “vibes” primarily based element to the sell-off. From Karen Andersen at Morningstar:
Lilly has had optimistic newsflow, together with a optimistic head-to-head trial in opposition to Wegovy. They’re clearly rising because the front-runners. But, the inventory has not been in a position to maintain any optimistic momentum.
Wall Avenue has began paring again its bets on future earnings. Right here, for instance, are the median income estimates for each firms for fiscal yr 2027. Analysts have downgraded Novo’s outlook significantly, and have saved Lilly’s income expectations flat for months, regardless of its string of fine information:
If the marketplace for weight-loss medicine is a bit smaller than hoped a couple of months in the past, may that be excellent news for packaged meals shares — one of many worst performing sectors lately?
Beginning in 2023, snack firms and grocery chains raised alarm that buyers pumped stuffed with GLP-1 medicine would purchase much less meals — notably processed meals (made by firms like Kellanova and Common Mills) and ready-made meals (manufactured by Tyson, Campbell’s and others). In October of 2023, a Walmart govt mentioned weight-loss medicine have been already weighing on meals gross sales. Cookie maker Mondelez’s CEO mentioned in November 2023 there could be a downward stress on volumes.
However the function of weight loss plan medicine within the dangerous efficiency on packaged meals shares has been overblown. The issues began a lot earlier.
Right here is the S&P packaged meals sub-index, plotted in opposition to the S&P 500 and the S&P Choose Meals Index:
Ozempic, the primary of the weight-loss medicine, solely hit its stride in 2021, however snack makers have been underperforming going again to not less than 2020. Income progress for the trade, adjusted for inflation, has been abysmal since 2017:
There was one thing of a revival throughout the 2021-2022 inflation, when the packaged meals firms have been in a position to go on large value will increase. However margins solely improved barely, and that has now reversed:
Weight-loss medicine could also be a part of the image, however the points are a lot bigger. Doubtless at play: rising suspicion of processed foods’ impact on heath, boring younger folks (Aiden) consuming spinach and avoiding cookies, and competitors from grocers’ generic manufacturers.
We used to consider staples shares as defensive; inelastic demand for processed meals made packaged meals shares — a serious a part of staples indices — a giant a part of that story. However after the beating meals shares have taken prior to now few years, maybe what counts as defensive is altering.
(Reiter and Armstrong)
One good learn
Comparison is the thief of joy.
FT Unhedged podcast
Can’t get sufficient of Unhedged? Hearken to our new podcast, for a 15-minute dive into the most recent markets information and monetary headlines, twice every week. Compensate for previous editions of the e-newsletter here.
