Morning Note: Market News, US Market View, and Inditex.
Market News
US equities fell again last night – S&P 500 (-0.8%); Nasdaq (-0.2%) – as geopolitical uncertainty remains front and centre. President Trump said the “sell-off doesn’t concern me”. The S&P 500 tested and held the 10% correction threshold from 19 February close.
Trump dialled back a threat to double levies to 50% on Canadian steel and aluminum hours after making it after Ontario agreed to suspend a surcharge on electricity sent to the US. However, the global 25% levy on the metals will go into effect today as planned. The EU plans countermeasures on US goods exports worth up to $26bn.
Markets have regained some poise this morning as Trump sought to reassure about the outlook for the US economy and Ukraine accepted a proposal for a 30-day truce with Russia. House Republicans passed legislation to keep the US government open past a Saturday shutdown deadline. The bill will likely need the support of at least eight Democrats in the Senate to become law.
Nikkei 225 (+0.1%); Hang Seng (-1.5%); Shanghai Composite (-0.2%). The S&P futures market is currently predicting a slight rally at the open this afternoon. The FTSE 100 is currently 0.2% higher at 8,513, while Sterling trades at $1.2940 and €1.1850. Gold nudged up to $2,920 an ounce.
Source: Bloomberg
Investment View – US Markets
The last couple of weeks have seen sharp declines in US equities, with particular focus on the high-flying, mega-cap technology stocks, often dubbed the “Magnificent Seven”. Below is our summary of what is going on.
The numbers: Since 20th February, the S&P 500 has fallen 8.4% and the Nasdaq 100 has fallen 12.4%. As the US dollar (USD) has also weakened versus Sterling (GBP), the GBP returns for these indices are -11% and -14.4% in a little over two weeks, a significant decline. On a year-to-date basis, the S&P 500 is -4.5% (-7.6% in GBP) and the Nasdaq 100 is -9.5% (-12.4% in GBP).
Source: Bloomberg
A US phenomenon: By contrast, European equities have fared much better. The EURO STOXX 50 and FTSE 100 are +10.5% and +5.1% respectively in local currency terms.
The initial tremor: The catalyst for the very strong performance of the mega-cap US technology companies in 2023 and 2024 was the emergence of the Artificial Intelligence (AI) theme, with the rally coinciding almost exactly with the launch of OpenAI’s Chat GPT on 30th November 2022. In late January this year, a competing Chinese AI product called DeepSeek emerged, which was purportedly created at a tiny fraction of the cost of the AI platforms operated by the US tech giants. This caused a wobble in the companies as the market began to question the returns on the enormous amounts of capital that had been ploughed into AI platforms. However, while this event capped gains, it didn’t immediately lead to the recent sell-off.
All change at the White House: On 20th January 2025, President Trump was sworn into office for the second time. Since then, we have been hit by a blizzard of executive orders, tweets, and both domestic and foreign policy pronouncements with the most consequential relating to trade tariffs and the war in Ukraine. Without getting into the details in this brief update, the Trump administration is seeking nothing short of a reset of the way the US engages with the rest of the world, both economically and militarily, to address what it views as issues of national security.
Getting the message: The narrative around Trump’s second coming was all about an America first/pro-business/pro-growth agenda that would be great for corporate America. For example, on the day before the election, Tesla’s market capitalisation was $780bn. By 17th December, driven by little more than ebullience around Elon Musk’s proximity to the President, it had risen to $1.54tn. By 10th March, Tesla has more than halved to a market capitalisation of $715bn.
The reason for this and many other similar examples is that the market is coming to realise that the Trump agenda is not necessarily as equity market friendly as they had expected. In a recent Fox news interview, Treasury Secretary Scott Bessent made the following comment. “Over the medium term, which is what we’re focused on, it’s a focus on Main Street. Wall Street’s done great, Wall Street can continue to do fine, but we have a focus on small business and consumers. We are going to rebalance the economy.” Bessant has made other comments along these lines, including being focused on getting the 10-year bond yield down, trying to get the oil price down to $50 to help contain inflation, and referring to “a transition” to an economy that is not addicted to government deficit spending.
Taken together, the market is getting the message (and rightly so in our view) that the new administration is willing to accept a weaker equity market if it allows them to achieve their main policy goals and that, tactically, they feel any necessary pain is better to be front loaded.
It’s the flows that count: Ultimately, it’s the money that flows in and out of assets that determine their performance. For at least the last decade and especially in the last couple of years, there has been an enormous one-way flow into US equities from all corners of the globe. To illustrate, Bank of America calculate there have been $255bn of outflows from European equities since February 2022 (when Russia invaded Ukraine). In the past 4 weeks (since Europe has dramatically outperformed) for every $100 of outflow (since February 2022) Europe has seen only $4 of inflows. Similarly, at a sector level, since the launch of Chat GPT (November 2022) for every $100 of inflows into tech funds ($99bn total) there have been just $6 of outflows in the past 5 weeks. (1)
It is not to say that this tide needs to fully go out, but the risk that this moment marks a change in the longer term trend is glaring.
In summary: The sell-off in US equities is driven by.
1) a realigning of market pricing from a post-election honeymoon to a world with high and rising economic and policy uncertainty.
2) a unified “I don’t care” response to the sell-off from key figures in the new US administration.
3) a massive overweight investor positioning in the names that have driven the major US indices to record highs and a catalyst to reverse that position.
Our view: The recent price action demonstrates the virtues of true geographic diversification within the equity component of portfolios. Years ago, many investors’ portfolios were plagued with a home country bias that delivered sub-optimal returns. Shifts to global portfolios have largely led to investors exchanging concentration in their domestic market for concentration in the US market. This is great when the US out-performs, but over the long term represents a risk that investors should try to mitigate through better diversification. It is not hard to imagine the moves of recent weeks developing into more of a long-term trend.
1. Bank of America Global Research, The Flow Show, 6th March 2025.
Company News
Inditex has today released results for its financial year to 31 January 2025 (known as FY2024). The figures were in line with market expectations, but the company warned that the current year had got off to a slower start. In response, the shares have been marked down 6% in early trading.
Inditex is the world’s leading apparel retailer, with annual sales of almost €39bn. Through brands such as Zara, Pull & Bear, and Massimo Dutti, the group has around 5,700 managed and franchised stores and a strong online presence.
The company’s strategy based on fast fashion at attractive prices has met with headwinds on environmental grounds and, in response, the group is transforming towards a fully integrated, digital, and sustainable business model. With a low share of a highly fragmented market, the company sees strong growth opportunities, with sales productivity in its stores increasing. The group is undertaking an ongoing store optimisation plan – in 2024, there were openings in 47 markets and gross new space increased by 5.8%.
In FY2024, sales grew by 10.5% in constant currency to €38.6bn, with growth in all concepts. Store sales grew by 5.9%, reflecting incremental footfall in increasing productivity. The higher level of store sales was achieved with 2.0% more commercial space and 2.3% less stores than in 2023. Online sales grew by 12% and represented 26% of total sales.
Gross profit increased by 7.6% to €22.3bn and the gross margin rose by eight basis points to 57.8%. The group has continued to ‘rigorously’ manage its operating expenses, which grew by 6.5%, below the rate of sales growth. Net income increased by 9% to €5.9bn.
Inventory was 12% higher at 31 January 2025 than last year. Free cash flow generation was strong at €4.8bn, albeit below the €5.1bn of last year. The group ended the period with net cash of €11.5bn, up 0.8%. The board is proposing a dividend of €1.68 (3.7% yield), up 9% on last year, and made up of an ordinary dividend of €1.13 and a bonus dividend of €0.55.
In the current quarter, between 1 February and 10 March, store and online sales rose by 4% year on year and Spring/Summer collections “well received” by customers. In the last commercial week, store and online sales in constant currency increased 7% versus the same period in 2024.
The growth of annual gross space in the period 2025-2026 is expected to be around 5%. The group expects space contribution to sales to be positive in this period, accompanied by strong online sales. Gross margin is expected to be stable (+/- 50 basis points).
Source: Bloomberg