Head of Equity Strategy
Summary: This week's earnings will be about e-commerce with Amazon and Alibaba, the two e-commerce giants from the US and China, reporting earnings with both expected to deliver revenue growth y/y above 30% as consumer demand for e-commerce continues to be strong and driven by lockdowns. Google will likely post strong growth due to underlying robust online advertising growth and healthy demand from businesses for its cloud services. UPS is interesting for many reasons such as the link to our reflation theme for 2021 which in the short-term is driven by global supply bottlenecks including logistics and longer term driven by excess demand due to stimulus.
The earnings season continues at full speed this week with another 175 companies out of the 2,500 companies we track during the earnings season reporting Q4 earnings. The list below shows the 30 most important earnings to watch this week with the most important day being tomorrow when the digital and e-commerce complex consisting of UPS, Amazon, Alphabet (Google), and Alibaba reports earnings.
Monday:Thermo Fisher Scientific
Tuesday:UPS, Exxon Mobil, Amazon, Alphabet, Amgen, Alibaba, Pfizer
Wednesday: Ping An Insurance, Novo Nordisk, Siemens, Sony, GlaxoSmithKline, PayPal, Qualcomm, AbbVie
Thursday: Unilever, Royal Dutch Shell, Chugai Pharmaceutical, Philip Morris, T-Mobile US, Roche, Merck & Co, Bristol-Myers Squibb
Friday: NTT, Linde, Sanofi, Estee Lauder, Deutsche Telekom
The positive earnings surprise ratio has come down during last week’s earnings from 91% to 82% which is still very high. The aggregate growth rate on revenue and earnings from the 185 companies in the S&P 500 that have reported earnings are -0.2% and 3.1% y/y respectively highlighting that companies are driving earnings growth through cost efficiencies. As the chart below shows, quarterly earnings per share is down only 1% y/y in the MSCI World Index which means that corporate profitability has recovered. This recovering will likely lead to increased investments and risk taking by corporate throughout the year as more stimulus will create a strong growth outlook driven by strong demand from pent-up demand and excess savings in the private sector that will be unleashed when the Covid-19 vaccines are rolled out in every major economy.
Can strong earnings from e-commerce continue?
E-commerce stocks have done extremely well during the pandemic driven by necessity from consumers with limited buying options in the physical world. As we wrote back in November, the Q3 earnings from 48 of the largest e-commerce companies in the world showed 30% revenue growth y/y although return on invested capital as a group is negative (it is positive for the 10 largest e-commerce companies). Analysts are very positive and the overall index weight in global equity markets is around 4% so there is plenty of room for more growth. But e-commerce stocks come with an expensive valuation as growth is not cheap these days.
Amazon is expected to report 37% revenue growth and 61% growth in earnings fueled by strong consumer demand and strong growth in its cloud business AWS, but we expect growth rates to come down meaningfully from current levels as major economies lift restrictions with the rollout of vaccines. Alibaba is expected to deliver 33% revenue growth y/y and 48% earnings growth y/y demand driven by strong rebound in consumer spending as China has managed the pandemic without impacting the economy too much. The quick question is whether investors will care about Alibaba’s strong result as the recent government crackdown on monopolies including Alibaba has caused global investors to worry about how it will limit future growth and profitability of Alibaba.
We expect a strong quarter for Alphabet as its Google search engine division has likely had a good quarter given the good numbers Facebook reported on online advertising last week and the good numbers on cloud business from Microsoft. Earnings are expected to be up 21% y/y but the last six quarters have seen volatile earnings growth figures from Alphabet and investors are generally not as positive on Alphabet compared to five years ago. The company needs a new major product besides search and cloud to maintain the love of investors.
UPS is probably the most interesting earnings release because of its link to our reflation theme announced in early January and the soaring logistics costs that we have regularly mentioned in our daily Saxo Market Call podcast and in a research note back in November. In our research note from December on logistics companies Are logistic companies long-term winners? We show that a basket of global logistics companies have outperformed the global equity market over the past nine years. Demand is soaring for logistic services in a globalized world and increasing e-commerce is the main driver increasing profitability and large-scale global logistics operations come with a good moat to protect these companies against competition. UPS is expected to deliver 11% revenue growth y/y but no earnings growth which we find too pessimistic by analysts. UPS has recently sold its freight business to TFI International in a streamlining of the business under the slogan of “better not bigger” with UPS focusing more on creating a more efficient logistics network around e-commerce.
2024: The wasted year
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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.
