Covering August Market
August was a positive month for stocks during which a number of major indexes including the S&P 500, the Dow Jones Industrial Average, the Nasdaq, and the FTSE 100 hit new all-time highs.
Better-than-expected corporate earnings, robust economic data, anticipation of lower interest rates, and strength from several mega-cap tech stocks were some of the main drivers of the gains.
The best-performing sectors of the month were Materials and Health Care. Utilities was the biggest underperformer.
Artificial intelligence (AI) continued to dominate headlines in August.
This year, technology companies such as Microsoft and Meta Platforms have been making enormous investments in AI infrastructure. And this was reflected in Nvidia’s Q2 earnings, which were posted in late August. For the quarter, the chip designer reported revenue of $46.7 billion, a 56% increase year-over-year, despite no chip sales to China. Breaking this down, Data Center revenue was up 56% while Automotive and Robotics revenue was 69% higher. On the earnings call, CEO Jensen Huang said that he anticipates $3 to $4 trillion in AI infrastructure spending by the end of the decade. Another company that delivered strong Q2 earnings on the back of AI spending was Palantir. For the quarter, it generated revenue of $1.0 billion, up 48% year-on-year, with US commercial revenue increasing 93%. Snowflake and MongoDB, which provide AI-related data services, are also worth highlighting. For the second quarter, these companies posted revenue growth of 32% and 24% respectively.
It’s worth noting that during the month, there was talk of an “AI bubble,” with a few investors comparing the current market to the dotcom bubble that burst and shook the markets 25 years ago. However, others argued that the companies spearheading the AI revolution are well-established, profitable companies with strong balance sheets and substantial free cash flow. While these companies are investing heavily in AI, their valuations are built on pre-existing, successful business models (e.g., cloud computing, digital advertising, etc.). Another key difference is that unlike in the dotcom boom, the technology is already a part of the daily operations of many businesses and being used by millions of people worldwide. For example, ChatGPT now has around 800 million weekly active users.
Despite investor interest in artificial intelligence, not all areas of the Technology sector performed well in August. In the first half of the month, software stocks such as Salesforce, ServiceNow, and Adobe fell after a research firm published a piece stating that AI is going to “eat” software. The argument here was that automation could lead to less seats that software companies can charge for while AI could also enable companies to build software applications themselves.
Cybersecurity stocks also experienced weakness despite strong results from the likes of Palo Alto Networks and CrowdStrike. As for semiconductors, performance here was mixed. Some chip companies such as Lam Research and Micron delivered gains on the back of strong earnings while others such as Applied Materials and Marvell delivered disappointing.
Zooming in on the Magnificent 7, Apple and Alphabet were the best performers in August. Apple posted strong results on the last day of July in which revenue was up 10% year-on-year to $94 billion. This led to gains in early August. Alphabet rose during the month after Meta announced a $10 billion deal with Google Cloud. Up to now, Meta has largely been reliant on Amazon Web Services for cloud computing.
Outside technology, financials had a solid month. While private equity names saw some profit taking (despite the fact that US President Donald Trump signed an executive order allowing private equity investments and other alternative assets to be held inside 401(k) accounts), bank stocks generally delivered gains with several hitting new all-time highs.
As for defense, which has been one of the best-performing industries this year, it experienced weakness in August. This was particularly true in the European defense space, which was hurt by a sudden shift in geopolitical sentiment driven by the prospect of a peace deal to end the war in Ukraine.
In terms of M&A, AI start-up Perplexity made a $34.5 billion unsolicited all-cash offer for the world’s most popular web browser, Google Chrome. This surprised a few investors as Perplexity has been the subject of acquisition rumours itself this year.
In the 5G arena, AT&T announced the acquisition of $23 billion worth of spectrum licences from EchoStar. This marked one of the most significant infrastructure plays in the US telecoms market this decade.
In the food and beverage industry, Keurig Dr Pepper said that it will acquire JDE Peet’s in an $18 billion deal. Its brands include Douwe Egberts, Kenco, and Peet’s Coffee, and Keurig Dr Pepper plans to split into a soft drinks company and a coffee group after the deal is completed.
On the economic front, tariffs remained in focus.
On August 7, a new round of US “reciprocal” tariffs went into effect, ending a period of uncertainty for many countries. These were country specific, with rates ranging from 10% to more than 40%. India was hit with 25% tariffs, but this was later doubled to 50% due to the country’s continued purchase of Russian oil. Late in the month, attention was focused on the Jackson Hole Economic Symposium. Here, Federal Reserve chair Jerome Powell said that risks to inflation are tilted to the upside, while risks to employment are to the downside. He added that with the current policy rate being restrictive, the shifting balance of risks may warrant an adjustment of the central bank’s policy stance. This was seen as a major shift in tone from previous Fed communications and investors now expect a rate cut in September.
During the month, there was some interesting action in the bond markets.
In the US, the gap between long-term and short-term yields reached their highest level in three years after Donald Trump tried to fire Federal Reserve governor Lisa Cook. In the UK, long-term yields reached their highest level since 1998 on the back of concerns over weak economic growth, persistent inflation, and a high level of government debt. In Japan, 30-year yields hit all-time highs of around 3.22% amid concerns over sticky inflation and expectations of rate cuts in the US.
In the commodities space, oil prices weakened in August. Drivers of the weakness included easing geopolitical concerns and worries over oversupply. Gold had a good month, however. It rose sharply on the back of rate cut expectations, as lower rates generally increase the appeal of owning the precious metal. This movement pushed many gold mining stocks up significantly. Note that silver outperformed gold in August, rising about 10%.
Finally, it was a mixed month for crypto. During the month, Bitcoin hit new all-time highs of around $124,000. However, it ended the month near $108,000. One reason for the drop was that many investors rotated into Ethereum. The latter ended the month up about 19% as investors backed the cryptoasset to play a major role in the Web3 revolution.
