Equity update: US banks, European earnings, and Apple earnings

In the bigger picture something remarkable has happened. The long time narrative in the market has gone like this. US structural growth was better than in Europe, the Fed’s policy was more positive for banks than the ECB’s negative rates, and loan growth was better in the US. From this narrative, which was right, investors bought into US banks leading to a significant outperformance relative to European banks from mid-2010 to mid-2021. Since then, US banks have underperformed by 41% relative to European banks in that looks like a stunning reversal of past dynamics. While the US is dealing with a banking crisis that will not die off, Europe has moved past Credit Suisse troubles although funding costs are still on the rise and the risk premium in AT1 bonds past the Credit Suisse shotgun wedding with UBS has not disappeared.

The overall point to understand today is that three rate hikes this year in the US are not coming if we not getting an escalation of the banking crisis. The nominal economy does not warrant rate cuts in 2023.

Strong European earnings persist into Q1

A consistent theme since Q1 2022 has been the physical world outperforming the digital world and in that process European companies have done better than US companies. Over the past year EBITDA has fallen 7.2% for the S&P 500 while rising 10.5% for the STOXX 600 suggesting very different dynamics between the two regions.

This morning we have got Q1 earnings results from European companies such as  Equinor, AB InBev, VW, BMW, Novo Nordisk, ArcelorMittal, Infineon Technologies, Shell, Maersk, and Ferrari. The red thread among these earnings results is that revenue and operating profits are above estimates, and all the companies are reaffirming their outlooks suggesting the economy is still looking resilient.

Qualcomm earnings was a bad rehearsal for Apple earnings

The next big earnings release is tonight with Apple reporting FY23 Q2 (ending 31 March) results after the US market close. Analyst estimates indicated revenue of $92.6bn down 5% y/y and EBITDA of $30.2bn down from $32.7bn a year ago. High inflation has negative impacted demand for high-end consumer electronics including iPhone and Mac sales. While Intel, Samsung, and AMD are indicating that consumer electronics demand will revert back to growth in the second half of the year, the growth rates are expected to be low. The question for Apple investors is whether the services segment can offset the weakness in device sales.