Head of Saxo Strats
Summary: In today's equity update we highlight the most important earnings releases this week and why they matter. The key focus during the Q1 earnings season is profit margins that have come under pressure amid rising prices on raw materials, logistics costs, and recently galloping wages. We also take a look global equities priced against commodities and how equities are already down 28% since the peak against commodities which is the biggest repricing since July 2008. Finally, we highlight Ark Innovation ETF and its performance against Nasdaq 100 since Cathie Wood recently splashed out excessive return expectations for the fund.
Important week on earnings
Last week the Q1 earnings season kicked off with US financials reporting a mixed bag of earnings with JPMorgan Chase reporting a surprise jump in credit provisions indicating that the credit cycle has likely turned. This week the earnings calendar is busy with the most important earnings releases shown below.
The key theme to watch in the Q1 earnings season is net profit margins which have rolled over and the preliminary figures we have from MSCI World and S&P 500 suggests that profit margins are continuing lower amid rising input costs. If Nasdaq 100 can sustain its higher net profit margin over time and also see less compression during the current commodity and wage inflation cycle, then it could lead to a valuation multiple expansion for this group of equities.
The most important earnings releases and why:
Equities drop the most against commodities in 14 years
Equities always go up, or so the saying goes, and it is in fact the asset class with the highest positive drift over time. However, with inflation rampant in the global economy, for many reasons we have explained in several of our research notes, the game in equities is changing. Equities is a nominal asset class pricing growth, productivity, and innovation, and its trajectory in nominal terms is typically up and only disturbed by an occasional recession. However, high inflation means that equities priced in real terms becomes a real thing to think about as an investor. When commodities and inflation are well behaved there is no reason to talk about nominal vs real, but today that discussion is paramount. Equities have not been repriced against commodities to this extent since July 2008. Global equities are down 26% against commodities in the past 12 months and 28% since the peak in their relative total return indices in November 2020. The correlation between commodities and equities, which is typically positive, has recently moved close to zero suggesting commodities are becoming a great source of diversification to equities and something we think investors should think about when they construct their portfolios.
Ark Innovation does worse than Nasdaq 100
Cathie Wood, founder and CEO of Ark Invest, recently doubled down on her Ark Innovation ETF fund saying that she expects 50% annualized gains over the next five years. In another interview she said that the Ark Innovation fund had outperformed over a 5-year period, which is correct but also a cherry-picking in terms of period. Normally we would not comment on a fund manager, but Saxo has a considerable amount of clients that have invested in Cathie Wood’s funds and we feel we have an obligation to counter these lofty expectations.
One should note that 50% annualized gains are extraordinary in a historic context and would be such an outlier that it would be the greatest luck or pure genius if it happened. The Ark Innovation ETF has delivered 16.8% annualized returns since inception in 2014 and there are no real arguments for why returns should suddenly be triple of the previous return stream except for mentioning of disruptive innovation will accelerate; no one care to discuss how an acceleration in innovation is even measured. It should also be noted that since inception the Ark Innovation ETF has underperformed a low-cost ETF tracking Nasdaq 100 by 1.8%-points annualized; in other words, no alpha or outperformance and certainly not in risk-adjusted terms.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
