Market snapshot: tech stocks take a pounding

It was a bad day at the office for traders as a combination of factors dragged equity markets lower.

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The scene was set when the US inflation print came in hotter than expected, with an annualised rate for the Consumer Price Index of 3.7% comparing to 3.4% the previous month and the 3.6% market estimate. At a core level, which excludes food and energy, the annual rate of 2.6% was also in excess of the 2.5% expected.

Drilling down even further there are increasing signs of inflation which are not tied to the obvious current spike in energy prices, raising the possibility of entrenched price pressures. The odds of a rate hike from the Federal Reserve therefore rose for the October meeting, although more likely to be in December where the consensus is nailed on.

The AI trade continues to be battered by increasing revenues for chipmakers, but more ominously by concerns on the general level of infrastructure spend required and the unknown likelihood of a return on capital. In addition, the strength of the US economy seems increasingly dependent on this single sector, which carries a huge weight of expectations. The cost of data centres and associated high yielding debt is becoming something of a spectre on the sector, and the losses were widespread as a result.

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Shares of CoreWeave Inc Ordinary Shares - Class A (NASDAQ:CRWV) plunged by more than 15% and Oracle Corp (NYSE:ORCL) by 9%, while there were declines of 4% for Intel Corp (NASDAQ:INTC) and Micron Technology Inc (NASDAQ:MU) and of 5% for Advanced Micro Devices Inc (NASDAQ:AMD) and SanDisk Corp Ordinary Shares (NASDAQ:SNDK), with heavier weights on the indices coming from falls of 3.2% for NVIDIA Corp (NASDAQ:NVDA) and 3.1% for Broadcom Inc (NASDAQ:AVGO).

While such declines drove some investors into US Treasuries, therefore limiting any further yield rises for the moment, the red mist continued overnight in Asia, where South Korea’s Kospi index fell by 8% (and now by 16% this month) underneath which were sharp declines for Samsung Electronics and SK Hynix of 10% and 11% respectively. A similar theme was evident in Japan, where the Nikkei 225 tumbled 5% following dips of 10% for SoftBank, 7.5% for Tokyo Electron and 11% for memory chipmaker Kioxia Holdings.

Nor was the gloom confined to the more recent concerns around AI, inflation and Treasury yields. Bank of America shares fell almost 5% after missing expectations, with sentiment soured further by a $1.2 billion government fine for money laundering failings. Morgan Stanley also dipped by 3% despite topping expectations, all of which sets the bar higher for earnings expectations and share price punishment should estimates not be materially exceeded.

For the time being, and despite the growing list of weights on the main indices, progress remains positive in the year to date. There may have been some weakness of late but all remain in sight of the records recently set, with the Dow Jones ahead by 7.4% so far this year, and with gains of 12.8% and 14.8% for the S&P500 and Nasdaq respectively.

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For the FTSE100, the tech fallout had a limited impact beyond steep drops for the likes of Polar Capital Technology Ord (LSE:PCT)and Computacenter (LSE:CCC). The mining sector was the main culprit for the initial pressure, with Antofagasta (LSE:ANTO) dropping by almost 6% after a trading update which was poorly received despite the group’s increased production and reiteration of guidance. An additional weight on the stock came from some weakness in the copper price, while the mood was further dampened by a broker downgrade resulting in a 4% drop for Rio Tinto  Ordinary Shares (LSE:RIO), and the general bearishness reading across to the likes of Anglo American (LSE:AAL) and Glencore (LSE:GLEN), which fell by around 4% and 3% respectively.

Even so, such weakness was offset as the primary index flexed its defensive muscles, with some strong buying interest in traditionally economically immune shares such as RELX (LSE:REL), Imperial Brands (LSE:IMB), British American Tobacco (LSE:BATS) and Experian (LSE:EXPN). The index has again shown its attraction as an alternative destination in the face of tech-related shockwaves being experienced elsewhere, and the initially defiant gains leaves the FTSE100 ahead by 8.1% in the year so far.

Entain Q3

In the midst of undoubted turmoil within the industry, Entain (LSE:ENT) has made some marginal progress and reiterated its guidance for the year. Net Gaming Revenue (NGR) grew by 2% in the third quarter and 4% in the year so far, underpinned by online NGR growth of 3% and a contribution of 8% from the UK & Ireland business. The outlook for the full year remains unchanged, with online NGR growth pencilled in at between 4% and 6%, and underlying earnings in a range of £910-960 million.

However, inevitably companies in this sector do not have a clear run, leaving their shares at the higher end of the risk spectrum. At any given time, adverse sports results can hinder profit margins (as they did in August and September), quite apart from the more ominous spectre of regulation. Betting companies are an easy target for governments aiming to raise additional income through taxes, and indeed the share price has suffered more recently given the increase of UK online gambling tax from 21% to 40% earlier this year, the effects of which are yet to fully wash through.

In addition, a plea from the CEO for the government not to impose any additional taxes in the forthcoming Budget may fall on deaf ears despite the fact that for some – Entain excluded – the threat is becoming existential. Regulation remains an intractable thorn in the side for gambling companies, as evidenced by previous crackdowns in both the UK and Germany as well as higher deposit limits in the Netherlands, and the latest ban on online sports betting and gaming in Brazil, which has sent its NGR in that country plummeting by 36% in this period.

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More positively, Entain also has a 50/50 joint venture in the US with MGM Resorts, namely BetMGM, which updated earlier this week. The JV also reiterated guidance of net revenue of $2.9-3.1 billion this year, and adjusted earnings of $300-350 million, compared to $2.8 billion and $220 million respectively the previous year. This followed a strong third quarter in which net revenue rose by 6.4% and adjusted earnings by 110%, with online sports growth of 6.9% being a highlight.

As such, this is still seen as a particularly enticing tie-up with an estimated addressable market in excess of $35 billion of revenue following the loosening of some regulations in the US. Such prospects enticed Entain’s rival Flutter Entertainment to move its primary listing to New York, citing greater potential access to liquidity as well as heightened brand awareness. However, such a potential pot of gold has inevitably attracted a swathe of competition which is intensifying.

Overall, the burden of the twin anxieties of taxation and regulation have been too much for the share price to bear. The shares have fallen by 47% over the last year compared to a gain of 11% for the wider FTSE250 to which it was relegated last month. The price is now some 80% shy of the peak which it hit in September 2021 and yet the precipitous share price decline and an inevitably lower valuation seem only to have strengthened investors’ resolve to invest in the longer-term story.

The market consensus of the shares as a strong buy seems at odds with the actual performance, especially given the weak initial reaction to the update, but nonetheless remains firmly intact.