A broadening out of performance across the market.
Reflecting on the past month, Jeremy Richardson explores;
Shifts in the market context, encouraging more outperforming stocks
Goldilocks conditions as margin and revenue growths balance out
Developments in the world of AI
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Transcription
Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update.
I wanted to bring you up to speed with what we've been seeing in global equity markets, and a shift in the market context. You may remember in the second quarter that global equity performance was being very much driven by a small number of large companies, meaning that a lot of small mid-sized companies were being left behind.
Well, over the third quarter, and it seems so far into the fourth quarter as well. We've been seeing a broadening out of performance across the market, spurred perhaps by its, good economic conditions; small mid-cap stocks are now beginning to participate, and this is a good thing for investors because if as a stock picker, you're trying to fill a portfolio with stocks that outperform is generally more helpful if more stocks are outperforming.
So this is a encouraging development, I think, in terms of the broadening of the market context. The reason for the change, I think, is because the market has become yet more comfortable now that interest rates are beginning to fall, particularly in the United States, that economic conditions are going to continue to sort of remain broadly supportive. If we have a set of, almost Goldilocks, kind of conditions at the moment, for investors, that is, very helpful because there has been this concern if we go back in our minds to the earnings seasons of Q1 and Q2, that the positive results that we were seeing back then were driven more by margins rather than by revenues. And of course, you can't have margin growth forever unless you also have some revenue growth.
So, if we are now facing a situation where there is no landing, the economic, you know, the economy can continue to evolve in a supportive direction, then maybe it means the outlook for both revenues and margins is going to be improving, and that's going to benefit mostly those companies that at so far have been left behind. So that's I think an encouraging development. But, we mustn't lose sight of some of the things that are going on within some of those large companies because life isn't standing still.
Just, over the last few weeks, you've had some really interesting developments in the world of AI, for example, where new large language models are uncovering new ways of solving problems. As individuals, if we receive a problem that we need to try and solve. The natural instinct is for us to try to work out the best method for solving the problem before we then execute on that method. Up until now, large language models have actually just been applying brute force in order to solve problems. But by adopting these more humanistic reasoning methods, to try and identify the most productive method first and then pursuing that method, we're getting much more, rich results coming from the very latest large language models.
The reason why this is important is because up until now, there has been some doubt about the level of investment and the sustainability of that investment into artificial intelligence and the level of capital expenditure, and what that would mean for the demand for semiconductor chips and all the other bits of hardware that support that. If now the efficient frontier of artificial intelligence large language models is moving further forward, then that should mean that more investment will be coming and that should sustain revenues for a large part of the market, particularly respect to the semiconductor companies and other hardware manufacturers.
I hope that's been of interest, and I look forward to catching up with you again soon.