US stocks in bull market territory and Croda warns on profit amid destocking

“Tech stocks have enjoyed a resurgence this year, so much so that the S&P 500 is now officially in bull market territory,” says Russ Mould, Investment Director at AJ Bell.

“The US index has now risen 20% from its most recent low (October 2022), driven by the likes of Nvidia which is seen as the ultimate play on artificial intelligence and Meta Platforms which has stripped out costs through job cuts and enjoyed stronger than expected earnings.

“After a miserable 2022 for US shares in general, investors are happy that they’ve returned to their previous form. After all, this part of the market made a lot of people rich in the 10+ years after the global financial crisis, so many portfolios across the UK are likely to have large US exposure.

“The key question is what happens next. With plenty of signals suggesting we might see a recession soon, investors will be asking themselves if they should bank recent gains in US stocks or stay put and hope any economic downturn is only shallow and quick to pass.

“What might persuade investors to take a different course of action? Valuations are looking a bit rich and there is a risk that artificial intelligence becomes a bubble that’s waiting to burst. Savvy investors might think it is worth cashing in gains before the market turns. However, if inflation starts to become less sticky and the Fed decides it doesn’t need to keep raising interest rates, there is the possibility that markets can keep pushing higher, so why not enjoy the ride?

“UK investors will certainly be looking to the US and wondering why the FTSE 100 once again is lagging the S&P 500. The UK blue chip index enjoyed a burst in January, it fell back in February, recovered in March and April, and is now back to where it began the year.

“A rare warning from UK chemicals group Croda certainly soured sentiment at the end of the trading week, showing that even companies that command the ‘high quality’ tag can go through bad patches.

“Next week we have results from Ashtead and Halma in the FTSE 100, two more stocks that have a reputation for nearly always delivering the goods. If either of them disappoints the market with their results, investor fears could increase over a second-half corporate downturn.”

Croda

“When a company has a track record of delivering the goods, as Croda largely has in recent years, then a premium rating is awarded by the market. Which means when something goes wrong the share price reaction can be particularly negative.

“The chemicals business soared during the pandemic thanks to its acquisition of Avanti Polar Lipids in July 2020. This made Croda one of the few companies able to make LMPs or lipid nanoparticles, fatty molecules used in drugs and vaccines to encase and protect the stuff in the drugs and vaccines that help people – including in mRNA treatments like the Covid vaccines made by Pfizer and Moderna.

“Inevitably the retreat of the pandemic had an impact on demand in this area and helped to dampen some of investors’ excitement around the business, even if longer-term mRNA has a role to play in other types of medicine.

“Typically, the company’s broad range of end-markets, including agriculture, medicines, personal care, electronics, building and construction and renewable energy, have helped to insulate it from the ups and downs in the wider economy.

“However, the uncertain backdrop seems to be having some impact on volumes and this is being exacerbated by destocking, following a period when companies were stockpiling thanks to a supply chain crunch coming out of the pandemic.

“Croda remains a quality business and has a decent amount of credit in the bank with investors but it needs to make sure it communicates better with the market to avoid the sort of profit shock it has served up today.”

These articles are for information purposes only and are not a personal recommendation or advice.