Technology Stocks: Trend Reversal or Bear Trap? US Elections – The Cards Are Being Reshuffled.

Chart of the Week

Following the last market report on Artificial Intelligence, we received many questions about why this trend is so energy-intensive. The graphic shows how these data centers are structured and which companies provide products for them.

Why This Matters

We all have a computer or notebook. When it gets hot in the summer, the fan can become very loud. Computer chips generate heat and need to be cooled. In data centers, there are dozens or even hundreds of servers, each containing dozens of racks with multiple CPUs. This adds up to hundreds or even thousands of CPUs. The rooms housing these servers must be cooled to temperatures between 15 and 22 degrees Celsius. This requires enormous amounts of electricity.

There are innovative ideas here as well. Wherever cooling takes place, heat is generated. This waste heat can be used to produce hot water for nearby residential communities.

‍Technology Stocks: Trend Reversal or Bear Trap?

Last week, technology stocks experienced sharp corrections in some areas. The sell-off was triggered by the company ASM, a semiconductor manufacturer. The published earnings results came in below expectations, and a somewhat more cautious outlook was presented during the press conference. This led to a reassessment of many technology stocks.

Since July 10, NVIDIA has fallen by 12%, Microsoft by 8%, and ASM by nearly 20%. On July 17, NVIDIA recorded the largest single-day loss ever seen in the stock’s history.

This raises the question of whether this is the trend reversal that many have been expecting for a long time, or a so-called bear trap. Many investors are now preparing for lower prices. These investors are referred to as bears. However, those now betting on further declines could be caught on the wrong foot if the stocks recover and move to new highs. That would be a bear trap.

Financial markets are not always easy to understand. Nevertheless, simple principles apply here as well — principles that hold true for every market. Prices continue to rise as long as more people are buying than selling.

Put simply, there are six classes of investors that typically enter a trend at different points in time:

1. Hedge Funds
2. Institutional Investors
3. Pension Funds
4. Banks Managing Investment Mandates
5. Informed Retail Investors
6. Tabloid Readers, Taxi Drivers

The first investors to enter are mostly Hedge Funds, followed by large institutional investors. By the time retail investors become aware of the trend and start reading about it in newspapers, a large part of the trend is already over. Retail investors often enter a trend too late and also sell too late, resulting in the largest losses (red arrow).

Hedge Funds and institutional investors are often the first to buy and also the first to sell, allowing them to generate substantial profits (green arrow).

What we are currently seeing is that the first wave of institutional selling, involving large volumes, is meeting insufficient demand from retail investors (black arrow). This is causing the sharp daily losses.

The article by Investor's Business Daily uses the examples of Tesla and Taiwan Semiconductor Manufacturing Company to clearly explain how such large daily losses should be interpreted. These sharp daily declines are a clear sign that we are approaching the end of the upward trend. New all-time highs may still be possible, but the momentum behind the rally has been broken.

US Elections – The Cards Are Being Reshuffled.

First came the assassination attempt on Donald Trump, followed by Joe Biden stepping down as a candidate, with Kamala Harris emerging as the most likely new candidate and possible successor. This brings the possibility within reach that the United States could have a woman at the top for the first time in its history.

However, there is still a long road ahead. Campaign strategists and their teams now have to overhaul their plans once again and completely reinvent their approach. The Democrats must now deliver a near-perfect campaign to stop Donald Trump.

For that to happen, it is crucial that they unite behind Kamala Harris as the successor as quickly as possible. If potential Democratic candidates spend the next four weeks attacking each other before the party’s official convention, it will only benefit Donald Trump.

According to the first polls on the US elections, Donald Trump and Kamala Harris are nearly tied, although Trump is leading in all of the polls.

The graphic shows the first US election polls conducted for a potential matchup between Kamala Harris and Donald Trump. The website of The New York Times also provides a strong overview of all current polls. The polls are represented by dots (red and blue), while the red and blue lines show the polling averages.

Kamala Harris has the advantage that she is already well known to the public, but the disadvantage is that many people still do not clearly know what she stands for politically. During the past three and a half years as Vice President, she has largely held back her own positions and supported the policies of Joe Biden. At the moment, many assume that a Harris administration would closely follow Biden’s policies. Critics are already pointing to issues such as strict cryptocurrency regulation and significantly higher taxes, positions she advocated during her presidential campaign four years ago. Whether these positions still reflect her current agenda remains to be seen.

Kamala Harris has a mixed track record. She built a remarkable career as Attorney General, which eventually led her to the Senate. However, since becoming Vice President, her performance has been viewed less positively. Joe Biden assigned her responsibility for migration policy, an area in which she struggled to distinguish herself. On the other hand, following the Supreme Court ruling on abortion rights, Harris was able to establish herself as a prominent advocate for women’s rights.

What do these two candidates mean for the economy?

Trump:

• 10% reduction in corporate taxes.
• Introduction of a 10% import tariff
• Since the two measures above do not offset each other: significantly higher government debt
• Major tightening of immigration policies, likely leading to higher wages and increased costs for companies
• Tougher stance toward China
• Reduction of environmental regulations
• Promise to end the war in Ukraine within 24 hours
• Approval of additional opportunities in the cryptocurrency sector
  

Harris:

• Fairer taxation
• Tendency toward higher taxes for corporations and wealthy individuals, while providing relief for lower-income households
• No easing of environmental regulations
• Stricter regulation of the cryptocurrency sector
• Continued support for Ukraine in the war against Russia
  

The list of Kamala Harris’s policy positions is still relatively short, but it is expected to become more concrete in the coming weeks.

In general, Republican presidents tend to stand for greater economic freedom and lower taxes, while Democratic administrations are associated with more regulation. The positions mentioned above support this broader view.

The stock market had already begun pricing in Donald Trump as president two weeks ago, and markets had risen accordingly. The renewed strength of the Democrats could now put part of those gains into question. We therefore expect additional downward pressure on the markets. So far, however, the market has reacted surprisingly calmly to the change in candidates.

The situation is different in Europe. Donald Trump has raised significant concerns with his peace plans involving Vladimir Putin and his more distant stance toward NATO. The renewed strength of the Democrats has therefore brought relief and contributed to rising stock markets in Europe.

However, for the future of America, not only the outcome of the presidential election matters, but also the elections for the Senate.

The graphic shows the current forecast for the Senate. Of the 100 seats, 34 are up for election. At the moment, the Democrats hold 51 seats, while the Republicans hold 49. Current projections suggest that the Senate is likely to shift to a Republican majority. The two states considered the most competitive are Ohio and Montana. Donald Trump has already made a clear strategic move by choosing JD Vance, a senator from Ohio, as his running mate. For Kamala Harris, selecting a vice-presidential candidate from Montana could therefore be a strategic option.

If Kamala Harris wins, she would likely face a Republican-controlled Senate. From day one, she would therefore be dependent on compromises with the Republicans.

We do not align our investment strategy explicitly around Kamala Harris or Donald Trump. Instead, we focus on the development of inflation, central bank policy, and the evolution of corporate earnings.

We are maintaining our cautious investment strategy with a focus on value stocks, and we believe that this approach remains superior even during politically turbulent times.
‍

Summer Break

With this report, we are heading into our summer break. Normally, the summer months bring little news that significantly moves the markets.