Logic Monday Espresso Podcast

Monday Espresso Podcast - 3rd March 2025

[00:00:00] Nathan Sweeney: It is Monday, the 3rd of March, hard to believe spring has sprung. Today I'm joined by Rory Dowey. So Rory is an investment manager here at Marlborough. And good to have you on the show again, Rory.

[00:00:13] Rory Dowie: Yeah. Good morning, Nathan. Great to be back again.

[00:00:15] Nathan Sweeney: So let's kick off with, markets last week. So obviously a little bit of volatility last week.

[00:00:20] Nathan Sweeney: So what's happening in markets?

[00:00:22] Rory Dowie: Yeah, absolutely hit the nail on the head there. Bit of volatility. It was a very red week last
week, particularly in the US which led the way downwards across most of the developed markets. The S&P 500, which is the broadest measure of the US stock market that finished up around down around 4% and is now marginally in the red year to date.

[00:00:40] Rory Dowie: If you actually look at the Nasdaq, which is the tech heavier part of the US market, that was down 7% for the week and is now down 4% for the year. So really you're seeing those tech stocks leading the way down within the US. Europe was marginally down over the week, but remained up over 11% year to date.

[00:00:57] Rory Dowie: And actually that performance differential between the Europe and US is now about 11% year to date. So Europe really leading the way there. And I thought really interesting stat that I saw. The S&P 500 is now just 1% away from its closing level on November the 5th, which is the day of the when President Trump was elected.

[00:01:13] Rory Dowie: So that Trump trade really feels like it's starting to run out of steam a little bit. Also worth mentioning what was going on in Asia. Obviously there's been a lot of noise around tariffs with Trump. And actually on Friday, we saw China come out and say that they would take all necessary measures against the new US tariffs.

[00:01:28] Rory Dowie: This comes after Trump announced an additional 10% taking effect on March the 4th. And obviously that's on top of the previous 10% that he implemented earlier in the month. So again, that really led to a bit of weakness across some of the Asian markets. Although the Hang Seng, which we spoke in depth about last week, that still remains up 14% this year.

[00:01:45] Rory Dowie: So in summary, yes, US and Asia in the red, Europe was broadly flat.

[00:01:49] Nathan Sweeney: Yeah. Okay. So, you know, we're expecting tariffs obviously to come into play for March and to be a key theme, but there was a lot of talk about US exceptionalism and obviously we're not really seeing that. So what's specifically happening in the US to see those moves down?

[00:02:03] Rory Dowie: Yeah, absolutely. And again, we mentioned this on the pod last week. And really, the first half of the week was a continuation of what we saw on Thursday of the previous week, where Walmart came out and kind of cautioned around the state of the US consumer for this year. Remember, they guided down their expectations for revenue and earnings for this year.

[00:02:20] Rory Dowie: And really, that kind of carried on the sentiment over the first couple of days this week, we had Home Depot numbers on Tuesday. again, that's another retailer in the US gives a pretty good indication of what the consumer, what state the consumers in. And again, there was some bit of worry around some of the noise that they were making.

[00:02:37] Rory Dowie: The second half of the week though, really, it was Nvidia. And I spoke about it last week. The darling of the US market over the past couple of years, they reported numbers, which came in a little bit soft on Wednesday evening. And as we saw on Thursday, we saw quite an aggressive sell off after that. And again, a little bit of a recovery on Friday, but still some weakness in some of those tech names.

[00:02:55] Nathan Sweeney: Yeah. Okay. So you did mention NVIDIA there and, you know, as you mentioned, there's a big player on the AI space. So have you got any kind of granular level detail on that? So what's behind the news?

[00:03:06] Rory Dowie: Yeah, absolutely. Actually looking back, Q4 earnings from NVIDIA were really, really strong. Revenue came in a little bit ahead of expectations.

[00:03:13] Rory Dowie: And actually that was a 78% year on year increase, which is, it was quite remarkable. And as we've seen over the past couple of years, really that came from that data center business and their new Blackwell chip, they call it, which beta expectations, that Blackwell chip generated revenue of 11 billion versus consensus of nine and Jensen Huang, who's the CEO of NVIDIA, he was really talking about the explosive demand they're seeing on the back of that new chip and talking around the increased compute power that you need to make your AI answers smarter, basically.

[00:03:43] Rory Dowie: As more human logic, they're trying to build into their chips. And obviously that requires more compute. So he was really talking up the demand he's seeing for that new chip. And really that strong revenue led to a beat on the bottom line. That is their earnings per share came in ahead of consensus at 89 cents versus consensus of 85.

[00:03:59] Rory Dowie: So pretty, pretty solid performance. If there was one wobble or one worry, it was on the gross margin. That Blackwell chip is increasingly complex, which means it's a higher cost to NVIDIA to produce, which basically means that chip is a lower gross margin than. Some of their previous products. So that was a little bit of weakness, which investors got a little bit anxious about, but overall, looking backwards, the numbers were very good.

[00:04:21] Nathan Sweeney: Yeah, that's quite funny you mentioned that because the numbers themselves look quite good, but fundamentally, you know, the stock sold off as a result of those earnings. So what is it about that? Is this to do with the forward guidance? What's expected going forward?

[00:04:33] Rory Dowie: Yeah, exactly. Hit the nail on the head there, Nathan.

[00:04:35] Rory Dowie: So often you can get good earnings prints looking backwards, but often stocks will move on what the guidance from management is. And that's exactly what happened here with NVIDIA. You know, management were quite cautious in their outlook for Q1, still expecting revenue growth of 65% mind, hitting 43 billion, which obviously sounds like a lot.

[00:04:53] Rory Dowie: But that was broadly in line with what the market was already expected. But really what spooked the market was the gross margin guide. I, mentioned it just previously on what I was saying, but the gross margin expectations of the first quarter were lowered to 71% roughly, which is down from the sort of the 75% we've got used to over the past couple of years.

[00:05:11] Rory Dowie: And as I said, that's because this new product is increasingly complex, it's slightly higher cost to make, and really, that's led investors to question whether, are we going to have structurally lower margins going forward as these AI products become more and more complex? So really that's the key debate there.

[00:05:25] Rory Dowie: And investors are getting a little bit anxious that, you know, because rates of change on the innovation and AI products are so vast that actually over time, we're going to headwind. And so really that soft guide led the stock to retreat down 8% post the earnings print. I was also reading as well.

[00:05:41] Rory Dowie: It's important to contextualize how strong NVIDIA has been over the past couple of years, they've made a really strong habit of continually printing quarterly numbers ahead of consensus estimates. So they'd beats the quarter, they'd be estimates on both the top and the bottom line. That is the revenue and the earnings.

[00:05:56] Rory Dowie: But actually this beats that we saw over Q4 was the smallest margin since 2023 on the top line. And the earnings beat was the narrowest since November 2022. And that was just before we went on the stellar run. So, maybe a little bit of steam running out there, potentially. I think that also spooked the market a bit.

[00:06:13] Nathan Sweeney: Yeah, still big, big numbers. So lots of great insight there on NVIDIA moments happening last week, but I suppose moving forward, what's on the cards for this week?

[00:06:21] Rory Dowie: Yeah, I mean, thankfully we're kind of towards the end of earning seasons now. So we have a little bit of respite in the markets, but really, I think probably three things to keep an eye out for.

[00:06:29] Rory Dowie: Obviously a huge amount of noise with Trump and some of these tariffs. We've seen China coming out just on Friday, talking about potential retaliation. So I'd keep a real close eye on that. We're expecting broad economic data as well next week, things like manufacturing PMIs, that should give us a very good indication of where we are in the economic cycle.

[00:06:46] Rory Dowie: So we'll be watching those very closely, discussing them as a team. And then finally, I think very important for Europe. We have the ECB meeting on the 6th of March, where we'll get a decision on rate cuts. At the moment, the market's expecting a 25 BIPs rate cuts in that meeting. So again, very interesting to hear what kind of comments we get from that meeting.

[00:07:03] Nathan Sweeney: Yeah. Okay. Perfect. Thank you for all the insight there. Just a reminder to our listeners, obviously it is spring time. So spring cleaning comes to mind. So for me, what that means is I'll be down at the allotment, getting it in shape for the year ahead. I think it's really a good time to get your finances in order with tax year approaching.

[00:07:21] Nathan Sweeney: So if you haven't done so already, I would suggest getting in touch with your financial advisor. Have a great week, everybody. And thank you for listening.