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 another president prior to now 40 years mentioned that, the bond market would have had kittens, and it could be the largest story on this planet. 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 will probably be written up within the FT. This yr, the FT is asking people about how pay insurance policies have shifted following the elimination of the banker bonus cap, which can imply a lot larger bonuses for some, however decrease base pay for a lot of others. Click on here to take the survey.
Apple sauce
Yesterday we offered a tidy concept of the Magnificent Seven’s underperformance prior to now month or so. Thought of as an asset class, the seven are the brand new defensives shares — corporations with nice manufacturers that may develop even in a slowing financial system. However the market in the mean time, removed from taking part in defence, needs publicity to financial progress by cyclical shares.
There’s a bit drawback, although: many of the decline within the seven comes down to at least one firm. Apple is down 14 per cent since Christmas. Tesla is down 11 per cent, however is just 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 huge caps, usually.
We may repurpose our argument to be nearly Apple, which very clearly is a defensive inventory, somewhat than all of the Magnificents. However there are particular issues occurring 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 referred to as “What’s flawed with Apple?” We thought-about six explanations:
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It’s overvalued
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Gross sales progress will keep mushy
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It lags behind in synthetic intelligence
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Defensives have gotten unpopular
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Its excessive China publicity is problematic
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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 after 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 increased 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 normally, and the notion that Apple is lagging behind Android on that tech has grown. This casts doubt on the concept AI will drive an enormous iPhone improve cycle. As Craig Moffett of MoffettNathanson analysis sums up:
Not solely have we not seen any signal of an improve cycle . . . now we have seen rising proof that buyers are unmoved by AI performance (not simply Apple’s however certainly everybody else’s as properly). In the meantime, absolutely agentic AI, the inspiration of any actual bull case for Apple, appears additional away now than it did even 5 months in the past.
The weak point 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 doubtless that Chinese language shoppers will grow to be extra hostile to the corporate’s merchandise.
The authorized points are maybe essentially the most acute danger. The decide 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 chopping the funds by a minimum of 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 is perhaps a GLP-1 bubble — extreme hype round Eli Lilly and Novo Nordisk, the 2 corporations making glucagon-like peptide-1 (GLP-1) weight problems and diabetes medication. On the time, the medication had despatched the 2 pharma corporations to the highest of their respective worlds: Novo Nordisk grew to become the most important 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 a minimum of 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 supplied 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:
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Eli Lilly’s gross sales have been mushy for 2 quarters in a row, inflicting traders to doubt future demand
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Novo Nordisk’s subsequent blockbuster drug disenchanted in a trial
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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
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New start-ups have entered the sector, and firms corresponding to Pfizer are making progress on their very own weight-loss medication
There’s additionally a “vibes” primarily based part to the sell-off. From Karen Andersen at Morningstar:
Lilly has had constructive newsflow, together with a constructive head-to-head trial in opposition to Wegovy. They’re clearly rising because the front-runners. But, the inventory has not been capable of maintain any constructive momentum.
Wall Road has began paring again its bets on future earnings. Right here, for instance, are the median income estimates for each corporations 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 excellent information:
If the marketplace for weight-loss medication 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 just lately?
Beginning in 2023, snack corporations and grocery chains raised alarm that buyers pumped filled with GLP-1 medication would purchase much less meals — significantly processed meals (made by corporations like Kellanova and Normal Mills) and ready-made meals (manufactured by Tyson, Campbell’s and others). In October of 2023, a Walmart govt mentioned weight-loss medication have been already weighing on meals gross sales. Cookie maker Mondelez’s CEO mentioned in November 2023 there can be a downward strain on volumes.
However the function of eating regimen medication 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 medication, solely hit its stride in 2021, however snack makers have been underperforming going again to a minimum of 2020. Income progress for the business, adjusted for inflation, has been abysmal since 2017:
There was one thing of a revival throughout the 2021-2022 inflation, when the packaged meals corporations have been capable of cross on huge value will increase. However margins solely improved barely, and that has now reversed:
Weight-loss medication 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 — an enormous 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.
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