In the ever-evolving landscape of global finance, we've witnessed a peculiar phenomenon in recent years: macro factors seem to have lost their sting when it comes to rattling equity markets. It's as if the stock market has developed a thick skin, shrugging off geopolitical tensions, assassination attempts, and even full-blown wars with the nonchalance of a seasoned poker player.
It may seem like the market has put on noise-canceling headphones, tuned to the frequency of ‘business as usual.’ However, this dangerous complacency, while not the focus of this letter, is a significant concern that should not be overlooked.
The markets, it seems, are turning a blind eye not only to politics and geopolitics but also to adverse policy and economic news. The less-discussed but influential macro factor that is shaping market behavior is corporate pricing power, with its significant impact on nominal top- and bottom-line growth.
Pricing Power: The New Macro King
Regardless of what central bankers see in cycles induced by their YoY calculation matrices, corporations exhibit a pervasive pricing power in all major markets except China. Companies across sectors have held firm on price lines, even those grappling with demand challenges.
Effectively, we live in a world where discount tags are becoming an endangered species; gone are the days when a whiff of demand weakness would send pricing strategies into a tailspin. Today, we're witnessing a bizarre bazaar with few "Sale" signs.
This newfound pricing power has become the secret sauce in the recipe for stock markets’ ability to ignore so much else. As nominal growth increasingly draws its strength from price hikes rather than volume growth, even cost-push inflation isn't just tolerated but almost celebrated;
More Power for Industries with Positive Secular Trends
Of course, there are exceptions that keep us cautious from going too far on the pricing power factors. Commodity markets like copper and iron have experienced price declines. Deflationary pressures in China also challenge the narrative.
This brings us to the pricing in hardware segments, generally bunched together with other commodities, the space where we have most of the era's exceptions.
Within it sits the memory sector—an industry at the crossroads between old and new habits. Historically, the memory chip industry has been cyclical, prone to oversupply and vicious price wars, despite being dominated by a small handful of players. Micron, Samsung, and Hynix, for example, have all participated in the old ritual of slashing prices in the face of rising supply time and again. But now, as we stand on the precipice of a new era, the question looms: will the memory sector embrace the new habit of steadfast pricing or revert to its old ways at the first sign of trouble?
Companies like Micron, Hynix, and Samsung are riding high on double-digit growth, their coffers swelling with the proceeds of their pricing power. Yet, some analysts persist in their Cassandra-like prophecies of impending revenue declines or stagnation. It's as if they're peering through a rearview mirror, expecting the ghosts of price wars past to materialize at any moment.
This question is important for this small group of companies and, by association, is critical for margin trends across hardware segments, starting with the GPUs.
Old Habits vs New Habits
There are no easy answers, but the weight of evidence and logic points to a change in pricing behavior from the GPU makers and almost all hardware segments, including memories.
Logically, as we have argued, hardware making is becoming super-specialized. In a world where high-bandwidth memory (HBM) is more likely to be found nestled next to a GPU in a high-tech manufacturing facility than on the shelves of your local electronics store, the old rules may no longer apply.
In essence, we’re dealing with components that fuel the fastest-growing sectors of today’s global economy. Last week’s Micron results drive home a straightforward lesson: the staying power of pricing influence will likely be a key force shaping expectations at both broad and stock levels. It's time to move beyond the easy, old habit of cyclical pattern-matching (including in whether rising interest rates would drive the markets lower) and instead lean on the rationale of new market behaviors and fresh growth drivers. This does not mean markets will never fall or memory prices will not exhibit cyclical swings, but simply that there is more to analysis than pattern fitting when secular forces are changing.
