Head of Equity Strategy
Summary: Investors will have to get used to short-term rallies inside this weak equity market as it is perfectly natural and was a key feature of the weakness in 2000-2003 and 2007-2008 periods. E-commerce companies are the worst performing part of the equity market this year as they are pressured from logistics costs, inflation, and changing consumer behaviour due to the cost-of-living crisis. But there is a light at the end of the tunnel and investors must prepare for when the dust settles in e-commerce. Finally, we take a look at Tesla and its importance for the market, and of course next week's earnings.
There is nothing unusual about current market behaviour
The positive post FOMC rate decision reaction in equities have totally been evaporated with S&P 500 futures trading around key levels of support with the 4,100 being a big technical level from yesterday’s session where bids came in hard. China’s lockdowns will continue as the government is doubling down on its strategy adding inflationary pressures and the tight commodity market will also continue to add inflation. These factors combined with the Fed’s policy trajectory will drastically tighten financial conditions even more which means that the outlook for equities in short-term is negative. We might see more of these short-term rallies over two trading sessions, but they are just a distraction against the real trend. The dot-com bubble bear market had many of these occasions each one of theme turning out to be a false turning point.
E-commerce is really looking weak
Our e-commerce theme basket is down 47% year-to-date being the worst performing basket. These companies were the biggest winners in terms of revenue and profit growth during the pandemic, and were rewarded by investors with aggressive equity valuations, but now many of these companies are paying back some of those gains. Earnings from many e-commerce companies including Amazon.com, Shopify, Zalando (published yesterday its first ever negative revenue growth figure), eBay, and related in payments from Block are all confirming that the consumer is hurting from elevated energy and food prices adjusting their behaviour and spending.
E-commerce are being hit hard by rising logistics and fulfillment costs, which recently are beginning to ease a bit, but Apple’s decision to allow users to not being tracked as driven by customer acquisition costs for e-commerce businesses that are relying on Facebook’s ad targeting tools. Depressingly low consumer confidence figures in Europe (see chart) are also not helping on consumer spending. The pain is massive in e-commerce and the future is likely not as bad as sentiment. We encourage investors to begin researching which e-commerce companies could become long-term winners and plan to get exposure when the market is finding a bottom. During the dot-com burst many of the subsequent winners such as Microsoft, Qualcomm, Amazon, and Intel were down a lot, and a similar pattern could repeat itself when the dust has settled.
Tesla is the last bastion of the retail bulls
As we talk about on our podcast this morning, Tesla is becoming the last bastion of the retail bulls as it is one of the largest technology companies with an aggressive forward valuation that has not been crushed to the same degree as the rest. Yesterday’s decline of 8% was a sharp rejection of the previous day’s move higher and the $800 level in Tesla is psychologically the next big test for Tesla. We believe Tesla together with Bitcoin, there is a huge overlap in those two positions among retail investors, are the last two instruments retail investors will sell as those two instruments have the biggest base of investors that have an ingrained view that these are long-term winners. If Tesla’s stock price break below $800 then the next big support area is around $600 which was a key price level twice in 2021.
Q1 earnings are hit hard by input costs
Earnings are down 8% q/q in the MSCI world in Q1 suggesting a significant margin compression driven by rising input costs. Next week’s earnings will not change the overall picture, but that does not mean that they do not matter. Our earnings focus next week is on Infineon Technologies being the biggest supplier of semiconductors to the car industry, Plug Power as a temperature on fuel cells and energy storage as a theme, Coinbase Global as a gauge on crypto appetite, Walt Disney being the world’s biggest entertainment company, Coupang being one of Asia’s largest e-commerce businesses, Siemens due to its massive footprint across many different industrial industries, and finally Alibaba on Friday as important yardstick for China’s economic woes due to recent lockdowns.
The list below are an extended list of the most important earnings releases next week that can either move general sentiment or sentiment in a specific industry:
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
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