Crucial test of equity sentiment as monster earnings week awaits

Crucial test of equity sentiment as monster earnings week awaits

Equities 6 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  We observe more signs of stabilisation in equities with volatility markets normalising and Italian government bonds coming back from the lows. But this week will be the ultimate test of sentiment with earnings from Apple, Amazon, Microsoft, Facebook and Alphabet (Google's parent) and these stocks have helped the equity market bouncing back faster than expected. Equity valuations remain extremely elevated and thus good earnings and a positive outlook from these major companies are important for sentiment.


Last week was the first real test in weeks of sentiment in equities with Friday showing buyers are still controlling the game. Earnings have had a similar pattern of generally disappointing and the majority of companies skipping their outlooks as the economic environment is too uncertain. Technology stocks continue to be bid higher and volatility futures are close to be in contango for the first time in almost two months. Italian government bonds (BTPs) are also bid this morning as Italy is preparing to open its economy again. Many small positive signs although the oil market is still sending distressing price signals due to massive demand and supply imbalance.

27_PG_1
Source: Saxo Group

But more tests await investors this week with the most earnings week in many years. The five big companies Apple, Amazon, Microsoft, Facebook and Alphabet are all reporting earnings this week and with a combined index weight of 20.2% of these five names this will make or break equity sentiment. That five companies are now more than 20% of the S&P 500 is higher than what we observed during the dot-com highs and the energy dominance in the 1980s. A market cap concentration is always a sign of a structurally sick equity market and that a fundamental shift is coming. It’s also a sign of the narrowness of the equity market and the market is no longer reflecting the real economy – that’s being reflected by banks as the loans of Main Street sit on banks’ balance sheets.

Coming back to earnings we remain very sceptical of Facebook and Google’s earnings despite the positive surprise from Snap which we believe does not represent the overall picture of the online advertising market. Microsoft will most likely deliver to the joy of investors but could issue an outlook as Intel did with massive uncertainty related to the second half of the year. If many small companies go bankrupt globally it could impact the tail of Microsoft customers buying Windows, Office and Azure solutions. Apple could go both ways and is probably where there is the most uncertainty. On the negative side Apple could have been hit harder than expected due to stores closures, but then surprise on their Services segment as more customers have likely used the ecosystem buying apps, music etc. Amazon is really the dark horse this week. Revenue numbers will likely be up massively but margins could disappoint as the company has hired 100,000 extra workers, just increased pay for workers and the advertising segment could have taken a hit like Google and Facebook. With Amazon’s bigger and bigger market share and market capitalization the question of when the company will spin off its Amazon Web Services business (cloud) will arise and it could be a move from the founder and CEO Jeff Bezos to alleviate some of the anti-trust forces mobilizing against the company.

27_PG_2
Source: Earnings Whispers

Besides the mega caps reporting this week we have oil majors, the big pharma companies, European banks and US credit card companies such as VISA and Mastercard reporting. Here the most important ones for sentiment are the European banks which are expected to post higher provisions for loan losses compared to the US banks as the economic downturn is expected to be more severe in Europe than in the US. The US credit card companies are also a must to watch as we expect severe deterioration in credit quality among US consumers and will be a good leading indicator on the health of the consumer.

Finally, while we observe increased stabilisation in equities we are also still observing equity markets being priced at elevated forward valuation multiples which are common with late cycle market behaviour than the early phase of a recession. Typically we observe compressed valuations, below the historical average, reflecting the uncertainty but also increasing the equity risk premium to entice investors to bid on assets. Low valuations are typically the main explanation for future returns which means that buying assets in a recession is a good thing for long-term returns. But this time equities have above average valuation on a forward basis and the economic shock has just started and not fully cascaded through all the layers of the economy. Enjoy the week.

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.