Uncertainty about further Fed action
Unexpectedly, the US Federal Reserve raised interest rates by 0.25 percentage points to between 5.00 and 5.25 percent – the highest rate since 2007. However, the statement that further interest rate hikes might be appropriate was removed from the press release. The market took this change in statement as the end of the most aggressive rate cycle since the 1980s. However, Fed Chairman Jerome Powell underlined in the press conference that further interest rate hikes are possible depending on further events. There would be no resolution for a pause in the interest rate cycle, although the Fed expects a mild recession in the second half of the year. However, Powell emphasized that he thinks it is possible that a recession will be avoided. He answered the question about rate cuts later in the year – which the market is pricing in – with his expectation that inflation will be with us for a while longer. Therefore, the Fed is currently not planning any rate cuts in the near future. As a result, the S&P 500 plummeted. That wasn’t what the markets wanted to hear.
ECB: Interest rates will continue to rise
And the ECB? It also raised interest rates by 25 basis points. ECB President Christine Lagarde seemed a bit tense when she announced the decisions of the Governing Council. Apparently there were different opinions on how to proceed. There were Council members who would have liked to have raised interest rates more, i.e. by 0.5 percentage points. At the same time, however, the ECB has announced that it intends to reduce its trillion-dollar bond holdings more than previously planned, starting in July. But the ECB “still has some ground to make up” in the fight against inflation, as Lagarde emphasized, and will not “pause”. That also didn’t sound in the interest of the stock exchanges.
Big Tech is back!
What now? In order not to get depressed, there are a few other facts to keep in mind. Since the beginning of the year, the large technology groups have caught up on a lot of what they had previously given up. One reason is the good onesn quarterly figures. This also benefited the portfolio values from the Frankfurt equity fund for foundations and our Frankfurt UCITS ETF – Modern Value like Microsoft, Amazon.com, Meta Platforms or Alphabet. All of them were able to convince with good numbers.
You can see what a difference half a year can make. A few months ago, the world of big tech threatened to collapse. Their stocks fell massively. In the top was last year at Apple, Alphabet & Co. wiped out a stock market value of no less than 5 trillion US dollars. Shares from Apple to Meta Platforms lost between 29 and an incredible 65 percent in the 2022 stock market year. But those who are said to be dead live longer, as is well known. Meta papers have more than doubled since the beginning of the year. At Microsoft and Apple, the increase is over 20 percent.
Pricing power: Microsoft shows how it’s done
The corporations have the advantage that they can use their market power and raise prices. For example, Microsoft recently increased the prices for its cloud products by eleven percent. That is well above the current rate of inflation. It was also announced that the prices would be “adjusted” every six months. But the Redmond-based company has now expanded its dominance with subscription products such as Microsoft 365 to such an extent that there is hardly any real competition today. According to calculations by the analysis company Avispador, 30 to 40 percent of cloud customers are now on OfficeSwitched subscriptions. Further price increases are only a matter of time. This is pure pricing power!
And don’t forget: With innovations in the field of artificial intelligence such as the AI platform ChatGPT, the tech giants keep driving each other to new heights. There is no end to the story in sight. And with it no end to the dominance of big tech.