Warren Buffet compared the stock market to a voting machine and a weighing machine in a letter to Berkshire Hathaway shareholders back in 1987. In the short term, it can be influenced by ever-changing public opinion. But like a weighing machine, over the long term, what truly matters is the concrete, measurable financial results that determine its true value. This idea is relevant to the current situation, where the market is off to a great start for the year; perhaps as a consequence of market participants placing too great a vote of confidence in better-than-expected GDP data and an over-sensitivity to the annual pace of inflation cooling.

Fourth quarter US Gross Domestic Product (“GDP”) figures released on Thursday revealed the US economy grew at a 2.9% annualised rate, slightly better than the expected reading of 2.6%. Several factors, including a boost in consumer spending, an upturn in private inventory investment, greater government spending, and moderate business capital expenditures, lifted the GDP. However, rather than reflecting a genuine increase in economic activity, a significant portion of the GDP growth resulted from increasing inventory levels in the mining, construction, and manufacturing sectors, suggesting a weakening underlying economic growth trend.

The macro picture continued to build with the US releasing the Personal Consumption Expenditures (“PCE”) Price Index and consumer spending data for December. The PCE Index is the Federal Reserve's preferred inflation measure as it more accurately captures consumer spending patterns by excluding volatile food and energy expenses, providing a clearer picture of changes in consumer spending behaviour as prices rise. Inflation numbers indicated the pace of price increases easing with consumer spending falling 0.2%, suggesting the US economy is beginning to cool though inflation remains well above the Federal Reserve’s 2% target.

Policymakers will continue to face a tricky balancing act, but the upcoming earnings season will help to gauge the “true weight” of companies. Minutes due to be released this week from the UK Monetary Policy Committee and Federal Open Market Committee meetings will likely continue to fuel debate around the timing for possible interest rate hike pauses. In the short run, the market will likely continue acting as a voting machine – registering votes in favour of a potential soft landing or an impending recession. 

UK market valuations remain more attractive than global peers, with sterling weakness making UK companies more likely to be bought out. Bestway has taken a 3.45% stake in J Sainsbury, which could potentially increase, but there is no intention to launch a full takeover bid at this stage. Sainsbury's has long been considered a potential takeover target because of past mergers and acquisitions activity in the UK grocery market.

Intel, the leading semiconductor chip maker by revenue, reported a 32% decrease in revenue compared to the previous year. The drop was primarily due to lower demand for personal computers. Despite a surge in home computer sales during Covid lockdowns as people adapted to working from home, the results indicated more than just a difficult comparison to prior sales, with the company forecasting a loss of 15 cents a share for the current quarter versus initial expectations it would earn 25 cents a share. On a sector level, the chip industry has more runway for growth as global digital adoption accelerates.

Diageo is known for its ability to maintain margins despite inflationary pressures due to the pricing power that comes with a dominant market share. However, shares dropped after recent results showed a 92-basis point decline in operating margin and net cash flow from operating activities declining by £0.7 billion to £1.2 billion. The results also raised questions about beverage stocks being recession-proof, with slowing growth reported in Diageo’s critical North American market.