Meme Stock Mania

 

 

US equities hit a series of all-time peaks last month as Trump announced some major trade deals, notably with Japan and the EU. In these instances, and in line with America’s deal with Japan a few days earlier, all EU goods will be subject to an additional tariff of 15%. Importantly, the agreement also reaffirms US goods imported into the EU will also be subject to zero tariffs. While not helpful for some countries, it has, for now averted a full-blown global trade war.

So far, early indications are the tariffs that have come into effect are being met partly by overseas exporters, partly by US importers, but mostly by US consumers – who are effectively experiencing a tax increase. This sounds like a rather painful outcome!

However, the recent dramatic resurgence of many US equities does mean that market valuations are also close to record levels.

On average, companies in the S&P 500 are now valued by investors at more than 3.3 times their revenue, according to Bloomberg data, an all-time high. Across the S&P 500, other financial valuation metrics such as price to book, price to cash flow and price to dividend are all near record levels. A Barclays ‘equity euphoria’ indicator, a composite of derivatives flows, volatility and sentiment, has surged to twice its normal level, into territory associated with past asset bubbles.

Highly valued US tech stocks, such as AI chipmaker Nvidia, have also soared and is now the first company to become valued at over $4 trillion. The 2021 ‘meme stock’ craze has also resurfaced. Meme stocks are shares that gain popularity amongst retail investors, typically through social media activity. Retail traders have been piling into shares of camera maker GoPro and doughnut chain Krispy Kreme. The exuberance has also spread to corporate credit, where the additional interest rate on highly rated US companies over benchmark government debt has shrunk to 0.8%, its lowest level since 2005.

Investors have also continued to mainstream cryptocurrencies such as Bitcoin, which recently climbed above $120,000 for the first time. This has been driven by the long-awaited Trump crypto report.

No wonder that some US fund managers are now becoming concerned that there are very early parallels to what was seen during the internet boom in the late 90’s and early 2000’s. One said ‘There is this lottery ticket mentality that tends to exist. It’s a dangerous setup.’ A Deutsche Bank analyst has also questioned whether a rise in borrowing to fund share purchases was a sign of the ‘hottest euphoria’ since 1999 and 2007.

Who really knows, but they do say,  ‘what goes up…’

 

What have we been watching?

 

The Mag-7 hit a new all-time high (see end of Alpha Bites) despite Trump outlining a plan for 100% tariffs on semiconductors. In other major tariff news, he imposed a further 25% tariff on India, to come into effect in 21 days, in response to its purchases of Russian oil, taking total tariffs on Indian goods to 50%. He then said that there could be ‘a lot more’ secondary sanctions related to Russian oil, including potentially against China, but that this could depend on how talks proceed. The UK’s leading equities also hit another all-time closing high.  

Having imposed tariffs on India for buying Russian oil, Trump then announced that there was a ‘very good chance’ that he could meet with Putin. The two leaders are now set to meet this Friday in Alaska, with Trump suggesting a ceasefire/peace deal would ‘involve some swapping of territories’, with reports indicating that it would see Ukraine ceding Russia the parts of the Donbas that it still controls.

Meanwhile, Trump continues to use the threat of tariffs to get countries and companies to invest in the US. Trump has warned that the EU could face 35% tariffs if it does not follow through on its promise to invest $600bn in the US. Apple announced an additional $100bn of investments in the US, particularly in new manufacturing. This comes on top of an earlier pledge of $500bn of investments over 4 years as the company has sought to reduce tariff risks. Trump then said that he would ‘be putting a tariff of approximately 100% on chips and semiconductors.’ However, he added that companies that are building, or ‘have committed to build’, capacity to move production to the US would face no tariff charge. While it is not clear how the current tariff will work, markets appeared hopeful that many of the leading Taiwanese and South Korean chip manufacturers might be able to follow Apple’s lead by investing in new manufacturing facilities in the US. Meanwhile, the BBC reported that AI chip giants Nvidia and AMD have agreed to pay the US government 15% of their Chinese revenues to secure export licences to China. The deadline for the pause in trade tariffs between the US and China is tomorrow and markets will be watching closely to see if there is a further extension to enable more trade talks. Some long-awaited sector tariffs, including pharmaceuticals as well as semiconductors, are expected to be announced by the US.

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In the UK, the pressure continues to pile on Chancellor Rachel Reeves. UK construction activity dropped at its sharpest rate in five years while within this, the housebuilding activity indicator dropped from 50.7 to 45.3. Then, the NIESR updated its view on the ‘hole’ in the government’s finances, which will have to be filled in the Autumn Statement. It now sees the government needing as much as £51bn to get back to the £9.9bn of headroom. The reasons for this include the reversal in welfare savings reform but more so the slower UK economic growth due to the National Insurance hikes. It looks like the Chancellor will either need to raise one of the mainstream taxes or reduce spending if she is to meet her self-imposed fiscal rules. The Bank of England (BoE) attempted to ride to the Chancellor’s rescue, delivering the widely anticipated 0.25% interest rate cut, bringing base rate down to 4%. The vote was tight at 5:4 in favour. The BoE also raised its UK economic growth forecast for 2025 from 1% to 1.25% based on two further interest rate cuts by the third quarter of 2026. The central bank committee also expects inflation to peak at 4% in September before falling back to its target 2% in the second quarter of 2027.

 

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In the US, the July services ISM activity indicator dropped to 50.1 from 50.8 in June, disappointing expectations for a rebound to 51.5. More alarmingly, within this data were service prices, which rose to their highest level since October 2022, raising renewed concerns that Trump’s tariffs risk pushing the US economy towards stagflation.

 

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China’s trade data for July was better than expected, with exports up by over 7% helped by shipments to non-US countries. Exports to the US fell at double digit for the fourth consecutive month. Imports also climbed surprisingly, suggesting an improvement in domestic demand in July.

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Brent oil edged lower to $66 on Trump’s Russian oil tariff threat, albeit traders will no doubt be watching the peace talks in Alaska.

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Finally, as we highlighted above, the Mag-7 has hit a new all-time high. Some of the mega US tech stocks continue to dominate equity indices and stock market returns. This has become further accentuated, according to data from Bloomberg, which shows that AI chip giant Nvidia and Microsoft alone have accounted for almost half of the S&P 500 returns this year. Nvidia’s market value is currently $4.4 trillion while that of Microsoft is $3.8 trillion, both well ahead of the value of the entire UK stock market!

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.