Head of Equity Strategy
Summary: The earnings season has been on the margin positive despite growth rates coming down. Microsoft and Amazon are both reporting this week and represent 7.2% of S&P 500 weight. Our focus will be on Amazon as the share price has lately been wobbling as investors weighing the steep valuation premium against the prospects of more competition in the cloud and its e-commerce business. A solid beat on earnings from Amazon is definitely needed to swing S&P 500 into new highs
This week is the busiest during the earnings season with 428 companies reporting earnings. The earnings season has against expectations been a bit better than expected and were likely a net positive contributor to equity returns last week as we talk about in today’s equity update. However, growth rates on both the top and bottom line are coming down and Q3 earnings could likely be the quarter where global profit growth goes negative. Investors have been quite sanguine despite the picture of low growth and high economic uncertainty, and S&P 500 is close to all-time highs.
This week the two most important earnings releases are from Microsoft (Wed) and Amazon (Thu) as those two companies are 7.2% of the S&P 500 weight. Microsoft’s performance in its latest fiscal quarter will undoubtedly meet expectations as the software maker is still enjoying an upgrade cycle related to Windows 10, conversion of on-premise Office users to the Office 365 cloud solution, and momentum in its cloud infrastructure business.
Amazon shares are down 14% from the peak and have not reached a new all-time high since Q3 2018 which unusual for the e-commerce giant. It reflects increasing hesitation to continue to pay a 100% valuation premium to the overall equity market as its size has swelled to an enterprise value of $900bn and revenue of $252bn. Investors will focus on AWS as this $30bn business is the most profitable for Amazon but also a business with increasing competition from Google, Microsoft and other cloud companies which could negative impact the AWS’s healthy 60% operating margin. Margin pressure has also been a topic in its e-commerce operations both in the North America and International segment, but more worrisome for the International segment is that operating income is negative while growth is slowing down. On the positive side AWS will most likely deliver strong growth and the advertising unit may surprise to the upside. For S&P 500 to set a record Amazon needs to deliver.
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.
