Head of Equity Strategy
Summary: The Q3 earnings season is well over half done and some clear signs are emerging. Financials and consumer oriented industries are the winners in terms of revenue growth and consumer industries have even been able to expand their operating margin from a year ago. The margin compression is the big theme in Q3 as companies are facing unprecedented wage pressures and for some industries the materials cost is still high. Margin pressure has been the highest among semiconductors and media companies. While energy companies are still doing great in terms of price performance their fundamentals have deteriorated slightly in Q3.
Analysts were too optimistic on Q3 earnings
The earnings season in S&P 500 is now 60% completed and a more clear picture is emerging. The EPS estimate on S&P 500 in Q3 has proven to have been too optimistic as the chart below indicates as earnings have rolled over in Q3 due to margin compression with technology companies being the hardest hit on margins. If we turn to geography the biggest hit to earnings has been in China followed by Europe. In the US equity market, the technology sector (Nasdaq 100) has been hit harder than the general S&P 500. Our expectation is that margin compression will continue for some quarters as net profit margin remains above the historical average and Atlanta Fed Wage Growth Tracker Median remains above 6% y/y.
Diversified financials and consumer companies are the winners in Q3
If we dig deeper into the 24 industry groups we see that consumer oriented industries such as consumer durables & apparel and household & personal products have seen the highest revenue growth q/q except for the winner diversified financials up 9.9% q/q. Diversified financials is a diverse industry group that has benefitted from higher market volatility leading to more trading activity and Berkshire Hathaway’s physical businesses have also seen healthy revenue growth. The list below highlights the 10 largest diversified financials in the world.
The household & personal products industry group is interest because the group has seen a 254 bps. jump in its EBIT margin suggesting strong qualities amid inflation and input cost pressures which is something investors are willing to pay a high price for going forward. The list below highlights the 10 largest household & personal products companies in the world.
The two biggest losers in Q3 in terms of margin compression are semiconductors and media & entertainment with a 414 bps. and 508 bps. EBIT margin reduction q/q respectively. The media & entertainment industry group is significantly impacted by the excessive spending by Meta on its metaverse bet covered in our equity note last week.
Energy is still the momentum leader
While energy companies have seen a decline in revenue q/q in Q3 and slightly lower EBIT margin, the industry group is still standing out as by far the best performing industry group; in fact, the only industry group to be up in USD terms over the past 12 months. Being overweight was the most decisive decision to be made by investors over a year ago. In fact, the only true inflation hedge together with commodity futures. Everything else from crypto to real estate have proven useless as an inflation hedge. Media led by weakness at Alphabet, Netflix, Disney, and Meta is by far the worst performer over the past 12 months and the bad performance has continued over the past month.
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.
