Head of Equity Strategy
Summary: The rally in equities has taken equity valuations to the highest levels since October 2000 setting the equity market up for a high-risk period during the months of October and November with Q3 earnings and the US election. Tesla announced yesterday a $5bn capital raise to strengthen the balance sheet and support growth which makes a lot of sense given how little the $5bn dilute the existing shareholders. Finally, we are zooming in on five US technology earnings tonight after the US close with a lot of anticipation and speculation in especially MongoDB shares.
The relentless rally in global equities driven by the technology and health care sector has pushed equity valuation on the MSCI World Index to 1.31 standard deviations above the average since 1995. This is the highest level since October 2000. The jump in valuation is naturally driven by the combination of collapsing earnings and cash flows, and the strong bet on a sharp rebound in economic activity. This means that the Q3 earnings in October and November will be crucial for the equity market. The earnings season happens to collide with this year’s US election setting the market up for a high-risk period over this two-month period. The October monthly contract on VIX futures has moved up to 33.4 which is a quite elevated level for expected volatility.
Back on July 8 we tweeted that Elon Musk, the CEO of Tesla, should consider taking advantage of the high equity valuations of Tesla’s shares and issue equity capital to accelerate growth even further.
Less than two months following our thoughts Tesla announced an equity distribution pact worth $5bn meaning that the company can issue new shares “from time to time” with the intention to use the proceeds to strengthen its balance sheet and fund growth. The world’s leading EV-maker is expanding rapidly having just finished a manufacturing plant in Shanghai and is expanding with new factories in Germany and Texas. The news caused its shares to decline by almost 5% yesterday which is significantly above the dilution effect from the new shares. In the option market a lot of activity is still visible on the $500 strikes with heavy call option volume on the expiration date on Thursday. This means that today’s price action will even more exciting.
Today a small group of US technology companies will report earnings after the close. The companies are Crowdstrike, Copart, MongoDB, Guidewire and Smartsheet. What we have observed over the past couple of weeks is that US technology companies reporting earnings have seen speculative rallies into the releases, so potential behaviour could happen again in today’s session. Of the companies reporting today especially MongoDB stands out with a 31% rally since 10 August. It seems investors are betting heavily that analyst estimates are way off expecting revenue only to grow 28% from a year ago following a 46% growth in FY21 Q1 (ending on 30 April) which showed robust revenue generation despite COVID-19.
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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.
