Twitter’s Trump fight, earnings optimism, Renault’s way out of darkness
Head of Equity Strategy
Summary: Trump's executive order targeting Twitter is mostly political theater according to experts so investors should stay calm; the real risk is related to Q2 earnings. Talking about earnings the current consensus estimates are suggesting that the S&P 500 earnings will be back to new all-time highs by Q1 2021 which we find almost ridiculously optimistic. Finally we focus on Renault as the European carmaker is announcing today that it's laying off 14,600 employees to preserve profitability.
Twitter’s fight with Trump over fact-checking labels has got a lot of attention with Trump’s executive order yesterday calling for new relation under section 230 of the Communications Decency Act potentially revoking social media companies of their liability shield for third party content if they are censoring political content. Twitter’s shares are down 7% over the past two trading sessions and definitely be in focus again today. Legal experts are already calling a political theater as his move will have no legal impact. Another irony of removing the liability shield is that it would force social media platforms to be even more aggressive on removing third party content that could cause liabilities and thus potentially limit free speech even more. In the end this is all noise for shareholders at Twitter and Facebook. The real important events are the impact on online advertising spending in Q2.
As we have been saying for more than a month the equity rally is not founded in fundamentals. Our view is that the Q2 earnings season could be the real shock for the market as investors and analysts will be shocked of the earnings impact. Wall Street analysts expect S&P 500 EPS in Q2 to decline only by 15% and then return to aggressive growth again in Q3 taking EPS to new all-time highs already by Q1 2021. Regularly readers and listeners of our podcast know that we are often highlighting the dividend futures markets and they continue to signal that it will take multiple years for corporate profitability to return pre COVID-19 levels.
Renault shares are down 5.5% despite news that the carmaker is laying off 14,600 employees globally which would reduce costs and preserve profitability. The CEO also said that the carmaker’s strategy in the near term will focus on profitability streamlining its car production across fewer platforms instead of focusing on volume. Renault’s shares are down 76% from the highs in 2018 but this week has seen a significant breakout higher and the best week in many months. The European carmaker has been free cash flow positive since FY 2009 and has a history of managing its operating margins well. If the carmaker can stabilize free cash flow at 50% of previous years the stock is valued at an impressive 20% free cash flow yield. At one point some long-term investors might consider the risk-reward despite the outlook for the industry.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.