Chronicle of July 2023
Market in July, Jane Birkin died at 76, and more
S&P 500 gained 3.21% (3.1% excluding dividends) in the month of July, driven by improvement in U.S. inflation rate, earnings season that is so far so good, and already-anticipated Fed rate hike. Year-to-date, the index produced a 20.65% total return.
The S&P 500 index is weighted based on market capitalization. Hence, a 10% disparity between S&P 500 and S&P 500 Equal Weight shows that largest market cap stocks dominated the index performance, leaving smaller caps behind. About one-third of S&P 500 members experienced negative ytd returns.
Only a few companies contributed to the aggregate market returns: those that are often attributed as “Magnificent Seven” ( AAPL 0.00%↑, AMZN 0.00%↑, GOOGL 0.00%↑ META 0.00%↑, AMZN 0.00%↑, MSFT 0.00%↑, NVDA 0.00%↑, and TSLA 0.00%↑ ). The gap of performance between large vs mid/small cap stocks has been widening over last 7 months.
This trend may or may not continue in the near future, but one thing for sure is that mid cap and small cap stocks today are in much cheaper valuations, both in P/E and PEG ratio terms.
Fed Rate Up by 25 bps
In a decision that was already expected by the market, The Federal Reserve hiked interest rates by 0.25% or 25 bps. The benchmark borrowing rate now is in the range of 5.25%-5.50%.
Jerome Powell said that The Fed intends to keep policy restrictive until they are confident inflation is coming down sustainably to the 2% target, and they are prepared to further tighten if that is appropriate.
Perception Creates Opportunities
Businesses may be evolving faster than expected. Not long ago, there was a common perception that an earnings recession was imminent. As mentioned in our previous Chronicle, analysts significantly downgraded the FY 2023’s earnings estimate for S&P 500 companies, setting a lower bar for companies to surpass The Street’s expectation. As a result, 80% of companies that have published quarterly results reported earnings above analysts’ expectations (positive EPS surprise). It happened across various sectors.
Hermès is Defying Gravity
Some goods become objects of desire, leading people to purchase or covet them irrespective of economic conditions. In contrast to the declining U.S. sales experienced by the luxury industry, Hermès International reported robust revenue growth in Q2 2023.
We believe LVMH case is a better reflection of U.S. luxury market in general. While Hermès tends to focus on ultra luxury, LVMH sells wider range of products, from affordable luxury to high-end goods. On the other hand, Kering is still suffering from the backlash over Balenciaga’s pedophilic advertisement of late last year. Seems like Kering is having their own “Budlight moment” (BUD 0.00%↑)
*How to pronounce Hermès
RIP Jane Birkin
Jane Birkin died on July 16, 2023 at the age of 76. The British-French actress and singer was the inspiration for Birkin Bag, Hermès’ bestselling product introduced in 1984.
Stack Overflow Embraces AI
Stack Overflow, a platform for coders and developers, experienced a significant decline in both posts and traffic. This drop may be attributed to the impact of OpenAI’s Chat GPT, which became publicly available in mid-2020, making it easier for people to request code-related assistance. However, last week, Stack Overflow responded by introducing Overflow AI, integrating generative AI into its search functionality. This allows for summarizing existing answers and citing sources, enhancing user experience. Additionally, new tools like the VS Code plugin enable users to ask questions directly within the editor, foregoing the need to open a browser. There are several other interesting features, all are a sign of an evolving business.
Meta’s Metaverse Plans to Lose More
Reality Labs is Meta's unit responsible for the metaverse business, including augmented reality glasses. The relatively new unit has experienced a sales drop and swollen losses. Fortunately, the ads business is thriving enough to cover the losses incurred by Reality Labs. According to Meta’s CFO:
"We expect operating losses to increase meaningfully year-over-year due to our ongoing product development efforts in AR, VR, and our investments to further scale our ecosystem."
"We expect operating losses to increase meaningfully year-over-year in 2024."
"Our ambitions in Reality Labs haven't changed, and it continues to be a significant long-term opportunity for us."
