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Roula Khalaf, editor-in-chief of the FT, selects her favourite stories in this weekly newsletter.

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Nvidia

It looks like we got away with it.

Nvidia is a $3.1 trillion company, and its stock has had an 800 percent run in two years. It’s 6 percent of the S&P 500, which understates its totemic importance as the centerpiece of the AI ​​trade. The consensus estimates for quarterly earnings, which came in yesterday afternoon, were for revenue to rise 115 percent. That understates what the market was really hoping for—probably by a lot. Based on (high) expectations for next year’s earnings, the stock is trading at about a one-third premium to the market. All of which is pretty scary from a market stability perspective.

Ultimately, Nvidia’s quarterly growth was 120 percent, and the stock was down only a non-catastrophic 6 percent in late trading. The other Magnificent 7 tech stocks took the news in stride. Breathe a small sigh of relief, everyone. This could have been a lot worse. We just have to make sure the market holds its nerve today.

If that’s the case—a nontrivial question—then perhaps the significance of this report is that it’s the final stamp of a major shift in market leadership. If 120 percent revenue growth can’t even keep Nvidia’s stock flat, it’s hard to see how the company and its larger competitors can continue to lead the market higher, as they have in recent years. Big Tech’s growth has been very good, but at current prices, good isn’t good enough. Unless growth accelerates again, leadership may have to come from somewhere else.

The regime change has been underway since Nvidia peaked on June 18. Since then, technology has been a drag on the broader market, while falling interest rates have seen sectors like real estate, utilities and financials, as well as defensive sectors like healthcare and consumer staples, stand out:

The Mag 7 stocks have largely underperformed the SPX since June 18. Only Tesla (which was beaten down badly), Meta (relatively cheap) and Apple (currently a downright defensive stock) have come out on top:

Option investors caught wind of this change. The put call ratio, which had previously tended toward calls, has been about the same since June:

Regime change is probably healthy, if no one gets hurt in the transition. Relying too much on a single narrative can create instability. But it’s not clear which regime will replace tech and AI. Small caps and value stocks have both beaten the S&P 500 since June, and the S&P equal weight has outperformed the S&P. But growth stocks have underperformed, dragged down by tech:

We are curious to see who will win.

(Armstrong and Reiter)

Greedflation: The Big Questions

This week I’ve written a few pieces on greedflation. I’ve tried to stick to a narrow corporate finance question: has post-pandemic inflation really boosted profits for very large supermarkets, branded food companies, and consumer goods companies? I’ve tried to avoid economic and ethical questions: how much of post-pandemic inflation was driven by higher corporate profits? Were post-pandemic price increases unethical or something we should regulate?

When it comes to inflation, however, the big questions won’t leave a man alone. Isabella Weber, a noted economist at the University of Massachusetts, shared a chart of X and some words from one of this week’s letters, and many people have reposted it. Weber is the author of a famous article arguing that “US Covid-19 inflation is primarily seller inflation” driven by coordinated price increases, and she also thinks price controls are a good policy response to economic shocks.

The reposts have put me, at least on X, in the “greedflation is bad and needs to be regulated” camp. But I’m not. What follows are some things I think we can say about the big questions, from a corporate finance/common sense perspective.

Some large companies in the food value chain saw their nominal profits rise sharply during the post-pandemic inflation, driven largely by price increases. Mondelez is a pretty clear example of this, as we noted yesterday. Here are the company’s operating profits over the past 13 years:

The years 2021-23 were very profitable for Mondelez, but cookie and cracker sales volumes only grew by a few percentage points. There were no major breakthroughs in costs either. What happened was that a company that was growing in the low single digits became a double digit grower because it accepted price increases, and a large part of the resulting revenue became profit. And to reiterate: for the industry in general, this wasn’t about margins, but about extra dollars in profit. Margins on sales are a distraction in the greedflation debate.

In reality, the higher profit is a bit more difficult to interpret. Over 2021-23, Mondelez’s nominal operating profit was up about 28% from 2019 (which was a good year). But CPI prices have generally risen about 20% since the pandemic began. And no one blames a food company for using price to keep its inflation-adjusted profits flat (or do they?). Mondelez would likely have had some profit growth even if there had been no inflation and no pricing. So how much extra profit are we talking about here — and how much would be too much, if there is such a thing as too much? It’s not clear to me.

It matters whether price increases were possible due to excessive demand or due to limited supply. If Mondelez could charge more because people had more money and were therefore willing to pay more for Oreos, that doesn’t seem like the kind of thing we would need to regulate. But if there was a shortage of cookies because of the pandemic, it’s not so clear-cut. I don’t know what the balance of supply and demand shock was for the food industry. But there is an interesting potential wrinkle here. Yesterday, Francesco Franzoni of the University of Lugano sent me a paper he co-wrote that argues that larger companies are less affected than smaller ones when supply chains are disrupted because they have more diversified supply chains and more bargaining power (we’ve heard industry analysts make a similar claim). This, Franzoni argues, allows the big companies to raise prices and capture market share at the same time. Industry concentration can be inflationary under supply constraints.

It matters whether the higher real profits driven by the price are competed away. I just can’t get too excited about companies that make a few extra bucks for a year or two after a big economic shock, when competition eventually normalizes the economic picture. We seem to be seeing competition coming back strongly, for example in fast food. If that doesn’t happen soon in the supermarket, then there’s something wrong with the structure of the market that regulators need to look at. But I don’t think we can conclude yet that competition has failed.

A good book to read

Tribes

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