Head of Equity Strategy
Summary: The big winner in the Q3 earnings season has been technology companies with Nasdaq 100 companies such as Amazon, Airbnb, MercadoLibre, Meta, and Alphabet significantly increasing their earnings compared to a year ago. Yesterday's move higher in the US 10- year yield might suggest that falling yields are not a one-way street lower. Adyen is facing its most critical test since going public as the Dutch payments company is hosting its Investor Day updating the market on its mid-term financial targets since the catastrophic first-half results in August.
Around 84% of S&P 500 companies have now reported Q3 earnings and the overall conclusion is that companies globally are doing better than expected and their outlook is supportive for equities. Operating income (EBITDA) has been stable for S&P 500 and STOXX 600 companies compared to Q2 while technology earnings have increased significantly in Q3 on the back of stronger than expected revenue growth in technology and efficient cost focus. Examples of technology companies that have increased earnings a lot in Q3 are Amazon, Airbnb, MercadoLibre, Meta, and Alphabet.
Can long-end US bond yields rise again?
The US 10-year yield rebounded yesterday and has stayed firm today. The big risk-on move last week was driven by Powell’s remarks bolstering the ‘peak policy rate’ narrative as Powell said the higher long-end bond yields had done most of the tightening needed. In an almost comical move long-end bond yields plunged with equities rallying. BlackRock recently said that 5.5% level in the US 10-year yield would be consistent with the underlying inflation dynamics, term premium etc. and JPMorgan CEO Jamie Dimon warned that inflation might be stickier than what most think and that the Fed could be forced to hike 25, 50, or eve 75 basis points more and said that the US 10-year yield at 5.5% to 7% was not unusual.
Recent export figures from South Korea suggests that the global economy might be accelerating and the JPMorgan GDP nowcast figures are still suggesting that the US economy is growing around 1.5% annualized in real terms. In other words, the global economy seems to be robust at the moment. Should US bond yields rise again we could quickly see equities be sold off again.
The payments industry in Europe has been rocked twice this year by first Adyen and later Worldline as we have written about in our research notes Quick take: Payment stocks plunge on Worldline outlook and Risk-off, Nvidia earnings, and Adyen’s sudden collapse. Adyen lived a quiet life in public markets until August of this year when the company announced H1 2023 financial results missing on volume and EBITDA due to cost pressures related to its North American business – revenue was up 21% y/y and EBITDA was down 10% y/y making investors questioning Adyen’s EBITDA margin target of 65% as the EBITDA margin plunged to 43%. It did not make things better that management delivered a horrible explanation in financial news and the quiet approach subsequently made things worse. The recent Worldline revenue growth outlook then made investors questioning Adyen’s mid-term forecasts of 25% revenue growth.
Tomorrow’s Investor Day presentation is key for Adyen shareholders but management to reset expectations. Adyen is valued at a premium to its nearest and most comparable competitor Block, so there is still downside risks to Adyen if they cannot better explain what happened to costs and present a plan for get costs under control. But even more importantly for the long-term value of the business, what is the long-term expected revenue growth rate?
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
