Head of Equity Strategy
Summary: Q4 earnings have so far shown that considerable margin pressures are taking place and in particularly in the technology sector. Therefore a lot is at stake this week with major earnings reports from Apple, Alphabet, and Amazon all reporting on Thursday after the market close. Analysts are not particularly optimistic going into these technology earnings reflecting the pressures on margins. We also cover earnings tomorrow from UPS, Caterpillar and Snap.
Technology earnings to hit markets
This week is very important for equity markets as a large part of the index weight will report this week with the highlight being earnings from Apple, Alphabet, and Amazon all reporting on Thursday after the market close. With the weak outlooks from Intel and Microsoft there is nervousness in the air ahead of these giant earnings releases. Analysts expect Apple to report the first negative revenue growth rate in three years down 2% y/y and a 7% decline y/y in EPS. The indications we have got from memory chip manufacturers all indicate a significant slowdown in consumer electronics and it would be wild if Apple could escape those headwinds. Alphabet is the talk of town due to Microsoft’s $10bn investment in OpenAI and its ChatGPT technology and many are saying is a threat to Google’s search business; in an equity note tomorrow we will dive into this discussion providing our views on the matter. Analysts expect Alphabet to report its second straight quarter of negative earnings growth with EPS at $1.32 down 6% y/y. Amazon was the big loser together with the e-commerce segment last year and Amazon was particularly hard hit due to overinvestments during the pandemic. Things improved in Q3 with accelerating revenue growth but analysts remain sceptical for Q4 expecting only 6% revenue growth y/y and EPS of $0.52 up 9% y/y.
But before the important technology earnings on Thursday, the market will already get its appetizer tomorrow with key macro earnings from UPS, Caterpillar, and Snap. All three companies will provide different input on the macro economy which can be of great use for the investor. UPS is the world’s largest logistic company and thus is a good temperature on cross-border trading and e-commerce. Analysts expect UPS to report a meagre 1.1% y/y revenue growth and flat EPS y/y at $3.58. Caterpillar is always interesting because of its footprint in cyclical industries such as mining and construction including its large revenue exposure to China. Analysts expect revenue growth of 11% y/y and EPS growth of 30% y/y driven by strong demand in its mining equipment business. In the last couple of earnings seasons Snap has been a market moving event as the company provides the first picture of global online advertising demand. Analysts are quite muted going into the Q4 earnings seeing only 0.5% revenue growth y/y but EPS increasing to $0.08 up from $0.01 a year ago.
Insane margin pressure in US technology companies
The conclusions so far about Q4 earnings are that the outlook is deteriorating, uncertainty remains elevated, and margins are coming down hard making it difficult for companies to deliver the consensus EPS estimates for FY23. The Nasdaq 100 companies are so far reporting a 1.2%-point reduction q/q in the profit margin in Q4 extending the 0.9% reduction q/q in Q3. Since the peak in profit margin in Q2 2021 the profit margin has declined by 3.9%-points in the Nasdaq 100 to the current level of 13.3% which is below the average of 13.8% since 2010. The margin squeeze theme will stay with market for the first half of the year and then depending on whether we get a recession or not the theme could extend into the second half. With equity markets priced for perfection on inflation, earnings, and recession we only need a small deviance from expectations before equity markets could be roiled again.
The list below highlights all the most important earnings releases this week across the different equity markets we track.
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.
