ALTERNATIVE MARKETS UPDATE – END AUGUST 2024

​US equities have had an impressive run so far in 2024. Since July, however, markets have generally trended lower. With one exception in April, equities rose steadily until July. This resulted in peak performances of 50% for the Magnificent 7 and 25% for the Nasdaq. The Dow Jones Industrial Average gained just 5%. The stark differences in performance can be explained by what drove the stock market. With most macroeconomic indicators showing worrying signs, the labour market has so far offset most of the negative signals. However, the labour market is also becoming more worrying as unemployment rises. Interest rates were originally expected to be cut relatively early in the year, which also boosted equities. With no rate cuts this year and considerable uncertainty as to when the first cut will be made since the increases, equity markets have suffered. Now that the labour market looks weaker than before, the equity market is in a difficult position. These concerns led to a decline in July and early August, culminating in the unwinding of the USD-JPY carry trade, which caused huge losses. This, combined with recession fears, led to sharp declines around the world and a huge spike in volatility. Since then, equities have rallied, recovering much of their earlier losses. Figure 1 shows the performance of various US equity indices in 2024.

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RESEARCH PERSPECTIVE VOL. 234 August 2024 Alternative Markets Update US equities have had an impressive run so far in 2024. Since July, however, markets have generally trended lower. With one exception in April, equities rose steadily until July. This resulted in peak performances of 50% for the Magnificent 7 and 25% for the Nasdaq. The Dow Jones Industrial Average gained just 5%. The stark differences in performance can be explained by what drove the stock market. With most macroeconomic indicators showing worrying signs, the labour market has so far offset most of the negative signals. However, the labour market is also becoming more worrying as unemployment rises. Interest rates were originally expected to be cut relatively early in the year, which also boosted equities. With no rate cuts this year and considerable uncertainty as to when the first cut will be made since the increases, equity markets have suffered. Now that the labour market looks weaker than before, the equity market is in a difficult position. These concerns led to a decline in July and early August, culminating in the unwinding of the USD-JPY carry trade, which caused huge losses. This, combined with recession fears, led to sharp declines around the world and a huge spike in volatility. Since then, equities have rallied, recovering much of their earlier losses. Figure 1 shows the performance of various US equity indices in 2024. Figure 1: Performance of the Magnificent 7, the Dow Jones Industrial Average, the S&P 500, the Nasdaq Composite Index, and CBOE’s Volatility Index Since the Beginning of 2024, Sources: Roundhill Mag7 ETF, Standard & Poor’s, Nasdaq, Investing, CBOE, August 2024 With seemingly every indicator pointing to the downside, the current hype around AI seems to be carrying the equity markets. As most AI companies are in the early stages, it has also helped the venture capital and private equity industry to maintain an acceptable level of deal activity. It is also significantly boosting interest in industries that are adjacent to and necessary for AI, such as chips and data centres, among others. In particular, OpenAI, with its groundbreaking ChatGPT, appears to be in the running for a new round of funding that values the company at around $100 billion. Many large companies are interested in this round, including Nvidia and Apple. Due to the strong influence of the Magnificent 7 in AI, it cannot be denied that these companies are currently driving the stock market. Nvidia in particular has benefited hugely from the demand for chips in AI. While the other six companies in the Magnificent 7 were already quite large, Nvidia was by far the smallest company and grew substantially during the AI rally. Figure 2 shows Nvidia's incredible growth over the past two years. It has now grown by 650% over that period. The big question is whether this is sustainable. Based on revenue and net income growth, the rally appears to be somewhat sustainable. Revenue has grown from less than $10bn per quarter to almost $30bn in Q2 2024. Net income is even more impressive. In Q2 2022, the company's net income was around $1bn, compared to $16bn last quarter. The big question will be how long the AI rally will continue and how long such explosive growth numbers can be sustained. Figure 2: Nvidia Stock Price, Revenue and Net Income of the Past Two Years, Sources: Nvidia, Investing, YCharts, August 2024 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates and Tallinn in Estonia. 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