Head of Equity Strategy
Summary: In today's equity update we highlight the most important earnings releases this week and why they matter. The key focus during the Q1 earnings season is profit margins that have come under pressure amid rising prices on raw materials, logistics costs, and recently galloping wages. We also take a look global equities priced against commodities and how equities are already down 28% since the peak against commodities which is the biggest repricing since July 2008. Finally, we highlight Ark Innovation ETF and its performance against Nasdaq 100 since Cathie Wood recently splashed out excessive return expectations for the fund.
Important week on earnings
Last week the Q1 earnings season kicked off with US financials reporting a mixed bag of earnings with JPMorgan Chase reporting a surprise jump in credit provisions indicating that the credit cycle has likely turned. This week the earnings calendar is busy with the most important earnings releases shown below.
The key theme to watch in the Q1 earnings season is net profit margins which have rolled over and the preliminary figures we have from MSCI World and S&P 500 suggests that profit margins are continuing lower amid rising input costs. If Nasdaq 100 can sustain its higher net profit margin over time and also see less compression during the current commodity and wage inflation cycle, then it could lead to a valuation multiple expansion for this group of equities.
The most important earnings releases and why:
Equities drop the most against commodities in 14 years
Equities always go up, or so the saying goes, and it is in fact the asset class with the highest positive drift over time. However, with inflation rampant in the global economy, for many reasons we have explained in several of our research notes, the game in equities is changing. Equities is a nominal asset class pricing growth, productivity, and innovation, and its trajectory in nominal terms is typically up and only disturbed by an occasional recession. However, high inflation means that equities priced in real terms becomes a real thing to think about as an investor. When commodities and inflation are well behaved there is no reason to talk about nominal vs real, but today that discussion is paramount. Equities have not been repriced against commodities to this extent since July 2008. Global equities are down 26% against commodities in the past 12 months and 28% since the peak in their relative total return indices in November 2020. The correlation between commodities and equities, which is typically positive, has recently moved close to zero suggesting commodities are becoming a great source of diversification to equities and something we think investors should think about when they construct their portfolios.
Ark Innovation does worse than Nasdaq 100
Cathie Wood, founder and CEO of Ark Invest, recently doubled down on her Ark Innovation ETF fund saying that she expects 50% annualized gains over the next five years. In another interview she said that the Ark Innovation fund had outperformed over a 5-year period, which is correct but also a cherry-picking in terms of period. Normally we would not comment on a fund manager, but Saxo has a considerable amount of clients that have invested in Cathie Wood’s funds and we feel we have an obligation to counter these lofty expectations.
One should note that 50% annualized gains are extraordinary in a historic context and would be such an outlier that it would be the greatest luck or pure genius if it happened. The Ark Innovation ETF has delivered 16.8% annualized returns since inception in 2014 and there are no real arguments for why returns should suddenly be triple of the previous return stream except for mentioning of disruptive innovation will accelerate; no one care to discuss how an acceleration in innovation is even measured. It should also be noted that since inception the Ark Innovation ETF has underperformed a low-cost ETF tracking Nasdaq 100 by 1.8%-points annualized; in other words, no alpha or outperformance and certainly not in risk-adjusted terms.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
