Markets are sliding and the main stories investors tell themselves to understand the world are disintegrating. Apart from that, the second quarter of the year is going just great. The first of those stories, or “narratives” if you want to try and sound clever, is around the interest rate outlook. There, both policymakers and investors are putting their hands up and admitting they got this wrong. A run of upbeat inflation data means we are no longer likely to see the Federal Reserve cutting rates hard and fast, kicking one of the foundational pillars away from gains in risky asset prices. This rather embarrassing rethink on what is, after all, the biggest variable in determining how stocks and bonds behave, matters a great deal. But it is not the only market pillar that is buckling, and feeding a 4 per cent decline in global stocks so far this month.
Another is the much-vaunted Magnificent Seven phenomenon, whereby a handful of supersized US tech-focused companies, particularly those with a whiff of artificial intelligence about them, have been holding up a whole lot of sky. Together, Nvidia, Meta, Apple, Tesla, Amazon, Alphabet and Microsoft, have done a huge amount of the heavy lifting in pulling up the overall US stock market — and even global stocks in recent months. They famously account for around a quarter of the value of the entire S&P 500 index of US stocks. You could fit several European stock markets inside any one of them.
This has been a perfect theme for investors for almost a year. Catchy nickname? Check. Eye-popping numbers? Check. Gigantic returns for investors who got in before the latest sweep higher? Sure. If you bought stocks in chipmaker Nvidia at the start of this year, you are up a cool 70 per cent or so. Nice work if you can get it. Plenty of other markets in Europe and Asia have much higher levels of concentration. But the vast size of these US companies — Nvidia’s market capitalisation is around $2tn — means they are often cited not just as a collection of stocks but as a determinant of where other asset prices head too.