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Growth Team Weekly Investment Insights

In this week's post, we highlight the August inflation data, performance of technology and consumer staples equities, expected earnings growth of small caps, Apple product announcements, and a rising cloud computing competitor.  

Inflation's Mixed Messages

We received the August inflation data last week. The consumer price index (CPI) rose 0.2% for the month and 2.5% compared to a year ago.

 

 

 

 

 

 

While the headline number showed a notable decrease compared to July and was lower than consensus, falling energy prices (recapped in last week’s post) drove much of the decline.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core CPI (excluding energy and food prices) rose 0.3% for the month and 3.2% versus a year ago. The YoY number was in line with expectations, but the MoM number was disappointing due to an acceleration in shelter inflation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Looking at the monthly data, shelter prices rose 0.5%, the largest gain since January.

 

 

 

 

 

 

 

 

 

 

 

 

 

Things Aren't as Great in Technology as it Seems

This article from the Financial Times highlights something we have witnessed this year—the information technology sector has not been performing as well as it might seem at the headline level, especially within semiconductors. Massive share price gains for large companies exposed to artificial intelligence (AI) have masked weakness in other areas.

The semiconductor industry’s performance in the MSCI AC World Index this year (as of 13 Sep 2024) is 48%. However, this has been driven by a few large index constituents that have done extremely well: NVIDIA, Taiwan Semiconductor Manufacturing Company and Broadcom. The industry has 110 constituents, and only 6 have YTD returns greater than 48%. The simple average return of those 110 companies is -11%. Many semiconductor companies exposed to more traditional end markets (industrial, autos, etc.) have faced difficulties, including weak demand and the inventory overstocking hangover during the coronavirus pandemic.

 

 

 

 

 

 

 

 

 

 

 

 

 

The weakness is more evident in small- and mid-cap indices, where there is no boost from mega-cap AI beneficiaries. Looking at the different market cap indices in the US, the Russell 2000® and Russell Midcap® indices have had technology sector and semiconductor industry returns far below their large-cap peers in the Russell 1000® Index.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Staples Staging a Comeback

Speaking of sector returns, the Financial Times highlighted how the consumer staples sector within the S&P 500® Index recently had its best week of relative performance versus the broader index since 2020, and it has outperformed in six of the past eight weeks.

Investors are snapping up shares in US consumer staples stocks as they hunt for more defensive areas of the market amid concerns about emerging cracks in the US labor market. The employment data has prompted disagreement about how aggressively the Federal Reserve should cut interest rates and concern that the world’s biggest economy could soon tip into a recession.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Cap 2025 EPS Growth Points to Better Days

Last week, we pointed to earnings as a potential catalyst for improving health care performance. A similar case can be made for small caps. After delivering inferior earnings growth for 2023 and 2024, the Russell 2000® Index is expected to deliver a sizable rebound of 40% YoY growth in 2025. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apple Event + Smart Phone Market Share

One of the main events last week was Apple unveiling its latest products, the most notable of which was the iPhone 16. The company hopes to benefit from a powerful refresh cycle as consumers trade up to the newest model in anticipation of its AI features, termed “Apple Intelligence.” Expected features include an enhanced Siri voice assistant, photo editing tools writing aids and free access to ChatGPT through a partnership with OpenAI. 

The iPhone 16 features the new A18 chip, improving performance to handle the demands of running AI models locally on the device. The Financial Times reported that the chip was designed on Arm’s next-generation V9 architecture. Sribalan Santhanam, vice-president of Apple’s silicon engineering group, said the chip showed the company jumping “two generations ahead,” with the A18 “up to 30% faster” than the processors in the iPhone 15 and even challenging “high-end desktop PCs.” Apple’s adoption of V9 for the iPhone represents a boost for Arm, which has a multiyear licensing agreement with Apple. Arm chief executive Rene Haas has said V9 brings in twice the royalties of the previous generation V8.

Samsung and Apple currently dominate the smartphone market but have faced slowing sales in China, where local competition from Xiaomi and Vivo is rapidly growing.

AWS, Azure and Google Cloud Have Competition

Oracle reported great earnings results last week. Revenues and earnings both beat expectations, driven by its cloud business. Notably, YoY revenue growth from its cloud infrastructure segment was 45%.

Shares rallied as investor excitement grew around Oracle's opportunity in the Oracle Cloud Infrastructure (OCI) business. This business competes with Amazon Web Services, Microsoft Azure, and Google Cloud and is benefiting from the rising demand for AI model training and AI workloads. That easily outpaces the recent 20%–30% growth rates from its cloud rivals, although Oracle is growing from a smaller base.

Artisan Partners Growth Team manages portfolios that held securities issued by Taiwan Semiconductor, ARM and Oracle as of 6/30/24.  Portfolio securities are subject to change.