Head of Equity Strategy
Summary: In today's equity note we focus on Nvidia which is reporting earnings next week with revenue expected to drop 18% from a year ago as prices on GPUs are falling due to collapsing demand from crypto miners. The recent fallout of the crypto exchange FTX could put the crypto industry in its longest and deepest winter yet and impact Nvidia's business for a long time. FY2023 revenue expectations are down 22% since April. We also take a look at the potential earnings recession as the margin compression intensified in Q3 and could continue next year.
Can Nvidia avoid the crypto vortex?
The earnings season has lost its impact on the overall equity market, but next week’s earnings do offer plenty of interesting earnings releases. Our key focus is Nvidia which reports FY23 Q3 (ending 31 October) on Wednesday. Analysts expect revenue of $5.84bn down 18% y/y and EBITDA of $2.1bn down from $3.2bn a year go and EPS of $0.71 down 30% from a year ago. Despite Nvidia’s lack of mentioning crypto in their earnings statements everyone knows that crypto mining is a big driver of revenue in recent years. Last time the crypto industry went through a crypto winter with mining operations seizing to exist the 12-month forward revenue expectation plunged the most since the Great Financial Crisis. Nvidia’s shares declined 54% from its peak back in 2018 before hitting the bottom.
This time Nvidia’s shares plunged 66% from the peak in November 2021 to the bottom last month as crypto mining operations are no longer as profitable as before shutting down its operations causing an oversupply of GPUs. This has led to lower prices and inventory writedowns for Nvidia. The current FY2023 revenue estimate is €27.1bn down 22% from its peak in April of $34.9bn. The slowdown in crypto mining and the general slowdown in technology thus likely machine learning applications have reduced revenue expectations by staggering $7.9bn. With the latest FTX implosion which have written about here and here, the crypto winter could be very deep and last much longer than the previous one. This means that there is clearly a downside risk to Nvidia’s outlook.
The list below shows the most important earnings releases next week across our universe of more than 2,000 companies that we track during the earnings season.
The inflation celebration and the incoming earnings recession
Yesterday’s moves across all markets were a sign of the bear market as these moves do not happen during bull markets. What made the moves more spectacular were that they happened following a period of recent risk-on. Listen to our podcast from this morning where we discuss the market reaction across all markets. Everyone is celebrating the lower than estimated headline and core inflation figures, but as we write in our equity note from yesterday the inflation rate is getting entrenched in the services sector, so the last chapter has not been written yet.
As we have recent written about the next dynamic is the margin compression and how it will impact earnings going forward. While the margin compression was evident in Q3 the downward revision to 12-month earnings estimates has been minuscule with the current 12-month earnings drawdown being only 3.5%. This fact makes us still cautious on the equity market.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
