Good morning. Oil prices fell sharply yesterday because Israel did not bomb Iranian oil facilities over the weekend. If Americans’ last trip to the petrol station before the election is surprisingly inexpensive, might that change the outcome? Email me your electoral college projections: robert.armstrong@ft.com.
The Magnificent 7: place your bets
Alphabet reports this afternoon, Microsoft and Meta follow tomorrow, and Apple and Amazon report on Thursday. Tesla’s (better than expected) numbers came out last week, and we have to wait a month to hear from Nvidia. So today is a good day to revisit one of Unhedged’s favourite questions: if you had to own just one of the Mag 7, which would it be?
For the sake of argument, let’s specify two holding periods: one year and 20 years. To help you make your decision, here is a table comparing them on recent stock performance, valuation, and historical and estimated growth in sales and earnings.
This is not an idle question. There were moments this year and last when it looked as if the market might be broadening and the dependence on the Mag 7 was declining. They didn’t last. The Mag 7 still makes up a third of the market capitalisation of the S&P 500 and accounts for half of the index’s capital appreciation in 2024 (a quarter of the capital appreciation comes from Nvidia alone). A bet on the S&P 500 remains a bet on the Mag 7 continuing to perform, a proposition that should make everyone nervous. So having a close look at the stocks and the expectations their prices encode is worthwhile.
Regular readers of this newsletter will know, just by looking at the table above, which stock I will pick for the one-year timeframe. As a hopeless, recidivist-value person, it has to be Google. Now that Meta has more than recovered from its 2021-2022 misadventure in the metaverse, Google has the lowest price/earnings valuation in the group and its sales and earnings growth, retrospective and prospective, compares well enough to the others except Nvidia and Tesla. It can meet consensus expectations without accelerating sales or earnings growth; the same can’t be said for Amazon or Apple.
I don’t have the stomach to speculate about the longevity of the artificial intelligence gold rush that is supporting Nvidia, to say nothing of Tesla’s robotaxis. And I don’t see AI ending Google’s search advertising dominance, or the government breaking the company up.
Of course, caring about valuation has been a terrible way to invest for, say, 15 years, but if it starts working again in the next 12 months I want to be there, basking in glory.
Now suppose we choose one of the seven today, and then fall asleep for 20 years. One of Unhedged’s bedrock assumptions is that very few companies can maintain high growth for a long time and it is hard to predict which companies they will be. But over 20 years, current valuation will hardly matter at all; growth will be decisive. So I’m going with Amazon. In both online retail and cloud computing, it seems to be building flexible, enduring, low-cost infrastructure that will give it the ability to churn out above-average returns over time, returns that can be reinvested or paid out.
Amazon just looks like the one of the seven that requires me to prognosticate the least. I actually think it highly unlikely that the company will be the best 20-year performer in the group. I just think it has the lowest chance of disappointing me wickedly when I wake up in late 2044.
I’m keen to hear readers’ picks.
Is weak global growth a threat to strong US growth?
Should this chart spook US investors?
At first, the chart seems to show that the US is one among a handful of large and mid-sized countries that are growing robustly in real terms. Look closer, and it looks like the US’s growth is exceptional.
China’s economy, while growing at almost the government’s official 5 per cent target, is slowing and its structural problems are well known. The EU, the UK and Australia are growing at 1 per cent or less. So are both of the US’s immediate neighbours. Japan has been stagnant (though it grew in the most recent quarters). Brazil is growing fast but the fiscal situation looks unstable. That leaves India and South Korea as the only other relatively bright lights among large economies.
Does the soft growth in the rest of the world — particularly the developed markets — threaten the strong growth in the US, which underpins an expensive-looking stock market? I asked several economists about this.
Adam Posen of the Peterson Institute wrote:
For an extended period (as in up to a few years), the US can maintain higher growth divergent from the EU and China. This is primarily a net story — slowdowns in China and EU do drag on US growth, which offsets the domestic drivers of US growth, but not enough to outweigh them.
There is also a secondary effect, that relative weakness of those zones vs US (more than expected) drives capital flows into the US at the margin. That drives down interest rates and drives up asset prices by some measure. So it offsets the offset…
Over a longer period, the lack of innovation, competition, demand, and investment in China and EU is a drag on the US economy, and will lower trend growth. But it has to persist for it to matter.
Dario Perkins of TS Lombard pointed out to me that what usually prevents extreme economic divergence between countries is currency appreciation. As a country’s currency rises, that should slow its growth relative to the rest of the world. “But that doesn’t work with the dollar, as the world’s reserve currency. Dollar strength hurts the rest of the world more than it hurts the US. So there is no automatic stabiliser.”
“The US is a relatively closed service-based economy,” added Paul Ashworth, chief North America economist at Capital Economics. “Goods exports to the rest of the world account for only 7 per cent of GDP and exports to China are worth only 0.5 per cent of GDP. It’s also worth noting that, to the extent China’s demise is driving down non-energy commodity prices, it’s a positive for the US.”
Ashworth also noted that as the US outpaces other economies, the current account deficit will probably rise, driven by capital flows and the strong dollar. At some point, that deficit will become unsustainable. But for now, the world’s appetite for funding the US seems as robust as ever. That leaves but one limiting factor on US outperformance, as my colleague Martin Wolf suggested to me: resurgent inflation that forces the Federal Reserve to increase rates and damp growth.
One good read
Sanctions are hard to enforce.
FT Unhedged podcast
Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.
