Summarize this content to 2000 words in 6 paragraphs in Arabic Good morning. Here is how much the market discounts what the new president says: speaking at Davos, Donald Trump said he would “demand that interest rates drop immediately”. Later in the day, he said he planned to talk to the chair of the Federal Reserve about it. If any other president in the past 40 years said that, the bond market would have had kittens, and it would be the biggest story in the world. But the market did nothing, and the story didn’t make a homepage. Literally no one cares. Email us: [email protected] and [email protected], for UK readers: the FT’s annual bonus survey is open for entries. It’s anonymous; it’s not just for bankers; takes three minutes to complete; and the findings will be written up in the FT. This year, the FT is asking folks about how pay policies have shifted following the removal of the banker bonus cap, which will mean much bigger bonuses for some, but lower base pay for many others. Click here to take the survey.Apple sauceYesterday we presented a tidy theory of the Magnificent Seven’s underperformance in the past month or so. Considered as an asset class, the seven are the new defensives stocks — companies with great brands that can grow even in a slowing economy. But the market at the moment, far from playing defence, wants exposure to economic growth through cyclical stocks.There’s a little problem, though: most of the decline in the seven comes down to one company. Apple is down 14 per cent since Christmas. Tesla is down 11 per cent, but is only a third of Apple’s weight in the S&P 500. The rest of the seven are meandering along, a bit above (Nvidia) or below (Alphabet) the performance of US big caps, generally.We could repurpose our argument to be just about Apple, which very clearly is a defensive stock, rather than all the Magnificents. But there are specific things going on with the company that explain its even steeper decline.In April of last year, after another bout of underperformance from the iPhone maker, we wrote a piece called “What’s wrong with Apple?” We considered six explanations:It is overvaluedSales growth will stay softIt lags behind in artificial intelligenceDefensives are becoming unpopularIts high China exposure is problematicLegal risksWe were not too impressed with any of those arguments then. Our instincts turned out to be good: the stock rose 50 per cent from when we wrote the piece to the end of the year. But now, all six worries have gotten worse.Even after the recent sell-off, the stock’s price/earnings valuation is a third higher than it was back in April. The sales growth and AI issues have come together: consumers have not demonstrated wild enthusiasm for AI-enabled phones in general, and the perception that Apple is lagging behind Android on that tech has grown. This casts doubt on the idea that AI will drive a big iPhone upgrade cycle. As Craig Moffett of MoffettNathanson research sums up:Not only have we not seen any sign of an upgrade cycle . . . we have seen growing evidence that consumers are unmoved by AI functionality (not just Apple’s but indeed everyone else’s as well). Meanwhile, fully agentic AI, the foundation of any real bull case for Apple, seems further away now than it did even five months ago.The weakness of defensives we discussed yesterday. An ascendant and aggressive Trump increases the odds that Apple will not get a tariff exemption for iPhones (Edison Lee of Jefferies estimates 90 per cent of which are made in China), and makes it more likely that Chinese consumers will become more hostile to the company’s products.The legal issues are perhaps the most acute risk. The judge in the Google search antitrust case has ruled the company’s payments to Apple for search traffic are illegal. These payments amount to perhaps $16bn or more a year, more than 10 per cent of Apple’s operating earnings in the US. CFRA Research’s Nicholas Rodelli put 60 per cent odds on the legal remedy cutting the payments by at least half.Apple still looks expensive to us. Let us know what you think.GLP-1s and packaged foodBack in October, we wondered if there might be a GLP-1 bubble — excessive hype around Eli Lilly and Novo Nordisk, the two companies making glucagon-like peptide-1 (GLP-1) obesity and diabetes drugs. At the time, the drugs had sent the two pharma companies to the top of their respective worlds: Novo Nordisk became the largest company in Europe by market cap, and Eli Lilly became the world’s largest pharma company. That bubble seems to have popped, or at least let out some air. Since we wrote on the subject, shares in Novo are down 31 per cent, and shares in Lilly are down 17 per cent.We offered a couple counterarguments to their soaring valuations — increased competition, Medicare price negotiations, pipeline issues, and lingering questions about demand. All have been at play since October:Eli Lilly’s sales were soft for two quarters in a row, causing investors to doubt future demandNovo Nordisk’s next blockbuster drug disappointed in a trialIt is unclear if the new US administration will let Medicare pay for the treatments, and there is only a five-year window between Novo Nordisk’s drug going into Medicare negotiations and its patent expiringNew start-ups have entered the field, and companies such as Pfizer are making progress on their own weight-loss drugsThere is also a “vibes” based component to the sell-off. From Karen Andersen at Morningstar:Lilly has had positive newsflow, including a positive head-to-head trial against Wegovy. They are clearly emerging as the front-runners. Yet, the stock has not been able to sustain any positive momentum.Wall Street has started paring back its bets on future earnings. Here, for example, are the median revenue estimates for both companies for fiscal year 2027. Analysts have downgraded Novo’s outlook considerably, and have kept Lilly’s revenue expectations flat for months, despite its string of good news:If the market for weight-loss drugs is a bit smaller than hoped a few months ago, might that be good news for packaged food stocks — one of the worst performing sectors recently? Starting in 2023, snack companies and grocery chains raised alarm that shoppers pumped full of GLP-1 drugs would buy less food — particularly processed foods (made by companies like Kellanova and General Mills) and ready-made meals (manufactured by Tyson, Campbell’s and others). In October of 2023, a Walmart executive said weight-loss drugs were already weighing on food sales. Cookie maker Mondelez’s CEO said in November 2023 there would be a downward pressure on volumes.But the role of diet drugs in the bad performance on packaged food stocks has been overblown. The problems started much earlier.Here is the S&P packaged foods sub-index, plotted against the S&P 500 and the S&P Select Food Index:Ozempic, the first of the weight-loss drugs, only hit its stride in 2021, but snack makers were underperforming going back to at least 2020. Revenue growth for the industry, adjusted for inflation, has been abysmal since 2017:There was something of a revival during the 2021-2022 inflation, when the packaged food companies were able to pass on big price increases. But margins only improved slightly, and that has now reversed:Weight-loss drugs may be part of the picture, but the issues are much larger. Likely at play: growing suspicion of processed foods’ effect on heath, boring young people (Aiden) eating spinach and avoiding cookies, and competition from grocers’ generic brands.We used to think of staples stocks as defensive; inelastic demand for processed food made packaged food stocks — a major part of staples indices — a big part of that story. But after the beating food stocks have taken in the past few years, perhaps what counts as defensive is changing.(Reiter and Armstrong)One good readComparison is the thief of joy.
