Head of Equity Strategy
Summary: Meta blasts Q1 revenue and earnings estimates on top of guiding strong Q2 revenue figures significantly exceeding estimates suggesting the online advertising industry has turned a corner reflecting a more upbeat outlook from companies in Q2. From a macro perspective this is very positive and suggests that a recession is not imminent just yet. Caterpillar revenue and earnings in Q1 are strong and above consensus estimates driven by a much stronger pricing effect than expected while confirming the 2023 outlook. Amazon is the next major earnings release in focus and will be reporting after the US market close in which investors will be hoping for its operating income extending the positive gains showed in Q4.
Caterpillar beats estimates on surprise demand
If there is a company that should begin feeling the headwinds of higher interest rates it should be Caterpillar, the world’s largest manufacturer of machinery and construction equipment, but the company just reported better than expected Q1 results. Revenue came in at $15.9bn vs est. $15.3bn an increase of 17% y/y driven by strong price realization but also higher sales volume. Higher prices also lifts the operating income to $3.3bn vs est. $2.4bn underpinning that Caterpillar has the market power to pass on inflation with customers accepting it without destroying demand. The forward-looking statements from Caterpillar suggests that the economy is humming along.
Meta Q1 results confirm advertising has turned a corner
Meta has been the big winner among the mega caps so far in the Q1 earnings season with last night’s results smashing estimates. Q1 advertising revenue was $28.1bn vs est. $26.8bn and the Q2 total revenue guidance of $29.5-32bn is higher than consensus at $29.5bn suggesting advertising is beginning to surprise to the upside like we saw the other day from Alphabet’s Q1 results. From a macro perspective this suggests that the economy could begin accelerating over the next 3-6 months. The only disappointing thing in the result was that the headcount is only down 1% y/y and that it expects the Reality Labs segment’s operating loss to increase indicating that the CEO and founder Mark Zuckerberg is not willing to sacrifice his bet on the metaverse just yet. Meta shares are up 12% in pre-market trading.
Can Amazon get its mojo back?
The big earnings focus tonight after the US market close is Amazon which is expected to see just 7% y/y revenue growth which implies slightly or no volume growth at the largest e-commerce retailer in the developed world. Amazon misread the signals during the pandemic which led to massive overinvestment which has haunted the company for many quarters and recent cost-cutting exercises should extend the rise in operating income which happened in the last quarter (see chart).
Given the low expectations for Amazon it should be manageable for the company to beat expectations, but despite many years of abrupt success it is no so given any longer. Competition has increased dramatically in e-commerce and cloud infrastructure, and Amazon’s international e-commerce operations remain a negative for the outlook.
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.
