Key points

• Technology giants continue to scale their AI infrastructure investments, suggesting confidence in its long-term potential as adoption maintains its growth
  
• The US economy continues to offer a supportive environment for risk assets, despite risks around tariffs and growing budget deficits
  
• The market and technology sector responded positively to a decisive US election result and likely pro-business/low-tax policy agenda
  
  

Market review

Global equity markets were soft in October, although this was more than offset by US dollar strength (trade-weighted dollar +3.2%) leaving the MSCI All Country World Net Total Return Index +2% in sterling terms for the month.

Equity markets largely shrugged off rising US treasury yields, driven by the prospect of a strengthening economy following the 50bps rate cut by the Federal Reserve (Fed) in September and higher than expected employment and inflation data in October. Treasury yields were also impacted by rising odds of a Donald Trump US presidential election victory, with proposed policies expected to further widen the budget deficit. The US labour market reaccelerated in September, adding 254,000 jobs – the strongest growth in six months and higher than the average monthly gain of 203,000 over the previous 12 months.

While inflation has fallen meaningfully from peak levels, wage growth during the month remained high, with average hourly earnings increasing +0.4% month on month (m/m) in September, above forecasts of +0.3%. Likewise, the US Consumer Price Index (CPI) increased +0.2% m/m in September, above forecasts of +0.1%. Although the annualised inflation rate decelerated for a sixth consecutive month, to +2.4% year on year (y/y), core CPI (which excludes volatile items such as food and energy) unexpectedly edged up to +3.3% from the +3.2% recorded during the previous two months.

The minutes from the September Federal Open Market Committee (FOMC) meeting revealed uncertainty ahead of its decision to cut the target range for Fed Funds¹ by 50 basis points (bps)². While this was the first reduction in borrowing costs since March 2020, the Fed noted that the 50bps reduction should not be interpreted as evidence of a less favourable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path.

Since then, there have been several events that might influence the future path of US interest rates. First, very weak October employment numbers (just +12,000 jobs with a material downward revision to September) although these were likely distorted by hurricanes and strikes in the US. While suggesting a weaker labour market, unemployment remained at 4.1% while consumer confidence came in at 108.7 (the largest m/m increase since 2021).

More importantly, Donald Trump achieved a resounding victory in the US presidential election, while the Republican Party looks likely to have achieved a so-called ‘clean sweep’ (presidency as well as controlling both the Senate and House of Representatives). This was received well by equity markets and the US dollar, delighted by a decisive outcome and a pro-business/anti-regulatory policy agenda which should be supportive for corporate investment and capital deployment.

Lower US tax rates and a potentially stronger dollar may also boost inbound investment. On the negative side, higher bond yields reflect the upside risk to budget deficits, inflation and potential tariffs, especially on Chinese imports. This may also have implications for monetary policy (fewer interest rate cuts than previously anticipated) but net, and against a stronger economic backdrop, this should be highly supportive of equities.

Sector review

The technology sector marginally outperformed the broader market in October; the Dow Jones Global Technology Net Total Return Index (W1TECN) returned +3.5% in sterling terms.

Large-cap technology stocks outperformed their small and mid-cap peers, the Russell 1000 Technology Index (large cap) and Russell 2000 Technology Index (small cap) returning +4% and +2.7% respectively. The Philadelphia Semiconductor Index (SOX) declined -0.3%, while the NASDAQ Internet Index and Bloomberg Americas Software Index returned +4.3% and +2.2% respectively.

Against an uncertain backdrop ahead of the US presidential election, AI (artificial intelligence) strength continued. In the semiconductor sector, Taiwan Semiconductor Manufacturing Company (TSMC) posted a very strong ‘beat and raise³, quarter with strength in both gross and operating margins. TSMC now expects c30% y/y growth in 2024 and management noted Chip-on-wafer-on-substrate (CoWoS⁴) demand far exceeds its ability to supply, even after doubling capacity this year. CoWoS supply is expected to double again next year, although this will “still not be enough”.

Leading High Bandwidth Memory (HBM) manufacturer SK Hynix also posted a very strong quarter, growing revenue 94% y/y and posting a record operating profit. Results from Advanced Micro Devices (AMD) were in line with expectations and the company increased its expected sales of AI graphics processing units (GPU) for 2024 to >$5bn, up from >$4.5bn last quarter and >$2bn at the beginning of the year. However, this was offset by a sluggish recovery in its non-AI businesses which weighed on the stock. Semiconductor chip maker Monolithic Power Systems delivered a beat and raise quarter due to broad-based strength; however the shares were weak after its AI power segment was flattish quarter on quarter (q/q), despite growing 86% y/y.

In semiconductor capital equipment, ASML Holding delivered a Q3 order number well below consensus expectations and reduced its 2025 revenue guide. Both Intel* and Samsung Electronics* are struggling with their foundry businesses and it seems have now begun to reduce equipment spending.

AI adoption continues at a rapid pace in the business and consumer realms.In contrast, ASM International posted a solid quarter. The company sees revenues growing >20% in 2025 and 2026 as spending on the most advanced nodes and transistor technologies appears robust. Similarly, KLA beat and guided above analyst expectations, citing leading-edge technologies driving strong process control demand. In Japan, Advantest beat strongly with revenues +37% y/y and raised guidance above expectations on AI/GPU tester strength. Longer GPU test times, NVIDIA’s Blackwell chip as well as ASICs and AI smartphones should continue to support demand next year. Meanwhile, Disco had a slight Q2 shipments miss but strong sales, operating profit and margins. The company expects continued growth in HBM shipments while advanced packaging has emerged as an additional driver with CoWoS tool demand accelerating in the second half.

In hardware, Amphenol saw strong growth and orders driven by IT and data communications (datacom). This was underpinned by continued acceleration in demand for AI-exposed products and robust growth in data centres. Management expects mid-single-digit sequential growth in Q4 taking IT and datacom sales up >50% in 2024. Despite weakness elsewhere, automotive sales proved robust, increasing 4% q/q.

Apple results were largely in line with a modest iPhone upside offsetting a 2% miss in its services business. Next quarter revenue guidance of low-to-mid single digit was slightly below consensus expectations of c7%. The recently rolled out Apple Intelligence saw an install rate over the first three days twice that of iOS 17.1, but it is unclear if this will be a catalyst for an accelerated iPhone upgrade cycle.

In the internet sector, Meta Platforms’ revenues grew 20% y/y and the company guided expectations for Q4 revenues towards the high end of the range. Margins were healthy, c3% above expectations, while the company lowered its operating expenditure guide. Improvements to the company’s AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year alone. Meta Platforms now expects capex spending of $38-40bn in 2024 to support its AI infrastructure buildout, with investors said to be anticipating close to $60bn in 2025.

Amazon beat expectations for operating profit driven by regionalisation efforts, lower cost to serve as well as efficiency gains. Amazon Web Services’ (AWS) growth was lower than expected at +19% y/y, but management noted that generative AI (GenAI) is now a multi-billion run-rate business growing triple digits – three times as fast as AWS achieved at the same stage of development during the cloud era. Alphabet results were solid, in line with expectations across Search and YouTube, while GCP (Google Cloud Platform) growth impressed at +35% y/y. The stock was further supported by comments from the new CFO, who articulated plans to drive further efficiencies and fund more AI investment (Alphabet’s capex will increase again in 2025).

Netflix delivered another reassuring set of quarterly results, adding five million net new subscribers and growing revenues 15% y/y. Margins were strong and management see significant operating leverage in the business. Netflix still only captures less than 10% of viewing time, so management believes there is still a significant addressable market ahead.

In the software sector, Microsoft beat consensus expectations for revenue by 2% and earnings per share (EPS) by 6%, but the stock was weak after a lacklustre guide for its Azure cloud business and the higher than anticipated ‘Other Income’ losses from its OpenAI investment. Microsoft expects its AI business to reach >$10bn in annual revenue run rate next quarter, the fastest business in its history to reach this milestone. ServiceNow results were robust with Q3 bookings growth ahead of expectations. The company also gave further disclosures around AI product contribution with Annual Contract Value at $90-100m, up from c$30m in the previous quarter.

In automotive, Tesla posted a stronger than expected quarter with gross margins ex-credits at 17.1%, well above consensus expectations of 14.9%. The company expects to achieve slight growth in vehicle deliveries during 2024 despite challenging macroeconomic conditions, while energy storage deployments are set to more than double y/y. Most importantly, Tesla said plans for new vehicles remain on track, including starting production of a more affordable model during 1H25.

Outlook

While a new US regime necessarily involves policy uncertainty (and in this case, higher risks associated with the fiscal deficit, inflation and geopolitics), we remain hopeful that these are unlikely to derail the economy or challenge the favourable AI investment backdrop. For now, the US economy remains robust with annualised real GDP growth at c2.5-3% and core PCE (personal consumption expenditure) at c2.5%, which should be a supportive backdrop for risk assets. Measures of wage inflation also appear benign, including the US Employment Cost Index (ECI) which rose +0.8% in Q3, the lowest increase since 2Q21.

Although we expect the Fed to adjust policy should the labour market weaken significantly, it may pause ahead of potentially more stimulative US policy and the prospect of (inflationary) import tariffs. Indeed, the terminal rate (the anticipated bottom of the current Fed interest rate cutting cycle) has increased from c275bps following the 50bps first cut, to c350bps prior to the election and may increase further with a new US policy agenda.

The Trust continues to invest a small amount in out of the money NDX put options⁵ to soften the excess portfolio beta⁶ that comes with our growth-centric investment approach in the event of a sharp market setback. While there is considerable uncertainty related to Trump’s staccato approach to international relations, there is also greater potential for the ‘resolution’ of outstanding conflicts in Ukraine and Israel that could yield significant peace dividends for markets.

Third quarter results season has been solid, although stock reactions have proved more mixed. In part, this may reflect high expectations, as well as a lack of upside in AI enablers. While NVIDIA’s Blackwell chip is said to be seeing “insane” demand according to CEO Jensen Huang (a view supported by supply chain data points and hyperscaler capex increases), production has only just begun to be ramped, following its high profile delay. Sell-side estimates had originally ‘baked in’ production beginning in Q3, resulting in a lack of significant upside surprises to date. Despite this, all of the so-called Magnificent Seven⁷ stocks managed to exceed estimates during Q3 while most should enjoy AI-fuelled tailwinds next year.

We expect accelerating AI adoption during 2025 with productivity benefits becoming more obvious to allIn the meantime, we are increasingly confident that 2025 will see further upside, helped by aggressive AI capital expenditure focused on building out AI infrastructure at Microsoft ($20bn in the quarter, +79% y/y), Meta Platforms ($9.2bn, +36% y/y), Amazon ($22bn, +81% y/y) and Alphabet ($13.1bn, +62% y/y). Despite increased spending, both Microsoft and Amazon referenced capacity constraints as hampering current AI demand. In aggregate, capital spending for these companies should exceed $300bn next year, +25% y/y and a near-doubling from 2023 levels, according to Morgan Stanley. In fact, Morgan Stanley also estimates that since the end of 2023 expectations for cloud capex in 2025 have risen by $67bn or by 30%, with Amazon +28%, Microsoft+38%, Alphabet +47%, Meta Platforms +33% and Oracle +56% – which has emerged as the fifth largest spender, exceeding Apple.

While some investors are concerned about the return on investment associated with such rapid growth (and remarkable absolute dollar numbers), these are well-funded, high-RoIC (return on invested capital) businesses with billions of users. As such, we take confidence in their clear excitement and willingness to invest in AI at scale. The early indications regarding the return on the increased spend are positive. Since the end of 2022 (ChatGPT launched in November 2022), aggregate hyperscaler capex has risen by $93bn while their aggregate cloud revenue backlog has increased by $184bn, according to Jefferies.

AI adoption continues at a rapid pace in the business and consumer realms. A Wharton study on 800 US enterprises found weekly AI usage among business leaders surged from 37% to 72%; Perplexity – an AI-powered Answer Engine and potential Google disruptor – disclosed it is now serving 100 million search queries a week, equivalent to c400 million per month, up from 250 million monthly queries in July. At the same time, Open AI weekly active users jumped from 200 million in August to 250 million in September.  Together, this suggests very rapid adoption and significant changes in consumer behaviour with widespread longer-term implications. All this before Blackwell and new more powerful models that are expected soon.

It is also notable that despite extraordinary growth and scale of capital investment to go after the AI opportunity, headcount growth has been much more muted (Microsoft +2% organic, Amazon -3%, Alphabet -1%, Meta Platforms +9%). This reflects a continuation of the ‘efficient growth’ theme that many technology companies have adopted following the Covid/zero interest rate policy era, as well as the early impact of AI on internal operations. For example, Alphabet’s management noted that >25% of the new code written at Google is being written by GenAI tools and Amazon noted GenAI “success in cost avoidance and productivity”. This, along with continued robust growth, has driven near-term EPS upgrades and speaks to the potential for significant further operating leverage ahead. The businesses themselves continue to perform well with the combined cloud revenue run rate above $220bn and aggregate revenue growth accelerating to +26% from +25% last quarter.

We have returned the Trust to a more fully-invested position with a constructive stance supported by favourable post-election/year-end seasonality. We expect accelerating AI adoption during 2025 with productivity benefits becoming more obvious to all, supporting continued investment. Elon Musk is likely to exert a positive influence on US policy to ensure it remains a global leader in AI. There is of course uncertainty regarding tariffs, but we believe the Taiwanese/Japanese AI supply chains are too important to US ambitions in AI for anything notable to change near term. The market and technology sector reaction to a decisive election result and pro-business/low-tax policy shift is encouraging. The clarity this provides should allow CEO confidence to grow and investment to resume, with the associated benefit to the US economy outweighing any temporary headwind from tighter financial conditions/higher bond yields.

* not held

[1] The overnight lending rate among US banks
[2] A common unit of measure for interest rates and other percentages in finance. One basis point equals 0.01%. 
[3] Beating expectations and raising its own outlook
[4] Chip on Wafer on Substrate: an advanced way of combining and connecting different semiconductor chips to make processors much faster and more efficient 
[5] An out of the money put option on the NASDAQ 100 Index (NDX) allows a holder the right to sell the Index at a specified (‘strike’) price before or on a certain expiration date
[6] A measure of a stock's volatility compared to the market/ an index; the market/index has a beta of 1 with each stock rated at +/-1 in comparison
[7] Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta Platforms and Tesla