Head of Equity Strategy
Summary: The CEO of JPMorgan Chase, Jamie Dimon, was positive on the US economy yesterday although also acknowledging that there are storm clouds at the horizon. Almost simultaneously, Snap published a worse than expected revision to its previous Q2 revenue guidance suggesting the online advertising industry is slowing down faster than expected. This is a worrying sign as advertising spending is a leading indicator on the economy and reflects business confidence.
Snap shares down 29% in pre-market on outlook cut
Jamie Dimon, CEO of JPMorgan Chase, put out yesterday a strong outlook for US credit and said the US economy was strong although there are storm clouds on the horizon, which could either disappear again or materialize into a recession. Financial markets have long signaled a deteriorating outlook through rapidly tightening financial conditions, but yesterday’s Chicago Fed National Activity Index (a broad-based measure of US economic activity) showed strong activity levels for April. The US economy is actually humming along at a pace much above the historical trend growth, which makes the recent drawdown in equities much more confusing, but that is because it is driven by financial conditions and not the economy.
Simultaneously with Dimon’s outlook another much more dim outlook was published by Snap, the iconic social media company that together with TikTok have eaten into Facebook’s lunch, cutting its Q2 revenue outlook. Just a month ago, Snap said that it expected Q2 revenue to grow 20-25% y/y which was lower than the 28% consensus. Investors got nervous about the top line, but even more nervous over the sudden reversal in profitability. Snap shares have tumbled since the Q1 earnings release on 21 April. Yesterday’s outlook cut was terrible as Snap said it sees Q2 revenue and adjusted EBITDA below the low end of its previous guidance. The chart below shows the current consensus trajectory for revenue growth and the potential new path based on this outlook cut. Naturally, the stock is being punished in pre-market plunging 29%. Despite these apparent pressures in its advertising business Snap’s CEO Spiegel said that the company is planning to slow hiring instead of focusing on profitability by freezing hiring plans; the lack of determination to bolster profitability is a worrying sign for shareholders.
Snap’s deteriorating outlook might be an omen of Dimon’s storm clouds as a cutback in advertising might be a sign that businesses are seeing a material slowdown relative to recent expectations. It could also be that Snap is the advertising platform with the lowest return on investment so businesses are cutting surplus advertising from Snap’s platform first. In any case, we expect downward pressure today on other social media stocks such as Alphabet (Google), Meta (Facebook), and Pinterest, and also the wider technology sector.
Figures mentioned in this equity note:
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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.
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