Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
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London Quick Take - 17 July – UK unemployment rises, Trump’s attacks on Powell unsettle markets, Ocado jumps, Netflix ahead
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
US bank earnings continued and we saw some good numbers. Goldman Sachs profits rose 22% on a surge in investment banking revenues, while Morgan Stanley earnings were up 15% on its wealth management and trading divisions’ success. Bank of America earnings beat slightly at +3% but revenues missed expectations at +4%.
Novartis Q2 results impressed with core EPS $2.42 vs $2.34 est. The company announced plans to buyback $10bn in shares by end of 2027 and raised profit outlook as cancer drugs drive sales growth. Shares opened 2% lower.
Netflix is the big one reporting after the close today. After a stellar Q1 and a sustained rally in the share price since then, investors are looking for a bumper Q2 report card and potential upgrade to the full-year guidance.
In April, the company reported a major earnings beat for its first quarter, with revenue up 13% and shares rallying solidly since. The company said better-than-expected revenue growth was down to higher advertising and subscription revenues. It followed the move in January to increase pricing – lift its standard plan to $17.99 a month, its premium plan to $24.99 and the ad-supported plan to $7.99. Netflix reported revenue of $10.54 billion, higher than Wall Street’s estimates. Nevertheless, the company stuck to its full-year revenue guide of between $43.5 billion and $44.5 billion.
London Quick Take – 17 July- UK unemployment rises, Trump’s attacks on Powell unsettle markets, Ocado jumps, Netflix ahead
Key Points
- Market unsettled by fresh talk of Trump firing Fed chair Jay Powell
- UK unemployment rate hits 4yr high as payrolls decline fore 8th straight month
- Ocado shares jump, easyJet slumps
- Netflix earnings due after the closing bell today
Was that a TACO or a volte face? The dollar tumbled over 1% and stock markets dipped sharply on reports US president Donald Trump was close to firing the Federal Reserve chair, Jay Powell. The markets wobbled and Trump was out quickly to say it was “highly unlikely” he was close to firing the central bank chief.
The S&P 500 dipped to 6,200 support on the initial flash before rallying back to 6,263 by the close to finish up 0.32% for the session. The Dow ended the day up half a percent, the Nasdaq 0.25% and the small caps Russell 2k rallied 1%.
European stock markets have opened higher on Thursday with the CAC leading the gains at +1.20% early doors with a bump for industrials, while the DAX rose three-quarters of a percent. In London, the FTSE 100 rose a third of a percent to 8,975 as it tries to recapture its 9k handle with banks leading the gainers and drugmakers on the back foot as investors eye potential pharma tariffs as early as 1 August. The FTSE got some support as sterling sits near a one-month low after some very soft labour market data underscored the case for rate cuts.
Trump may have soothed some nerves but you see in the market the concern about what a Trump pick would mean at the helm of the Fed. Front-end yields dipped sharply on expectations for more and swifter cuts, while the long bond was sold and the 30yr yield pushed up above 5%...a widening spread that is precisely the bear steepening I talked about earlier this week.
The problem the market has with this is some sort of Thirldworldification of the US – fiscal dominance where the central bank is there to do the bidding of the Treasury. You get higher inflation and a weaker currency as the market loses faith in the policymakers’ ability to control things. Market expects more inflation, weaker currency and the long-end of the curve gets out of control and hard to pin back without drastic measures that will be bad news for equities.
Wholesale inflation in the US was cooler than expected, while producer prices were unchanged on the month, in contrast to the uptick in consumer prices seen the day before which weighed on the market. US industrial production rose 0.3% in June from the previous month, with manufacturing up 0.1%...a modest uplift that indicates little impact from tariffs yet although primary metals production did rise 3.1%.
Meanwhile the UK jobless rate went up to a four-year high, payrolls fell for the eighth straight month and pay growth is declining (at a faster rate in the private sector than the public), while inflation is rising...In short the economy is in a dire mess. A total of 178,000 jobs were lost in Labour’s first year and the only solutions they offer is further tax hikes to pay for new arrivals. The BoE will need to cut some more.
Companies & Earnings
US bank earnings continued and we saw some good numbers. Goldman Sachs profits rose 22% on a surge in investment banking revenues, while Morgan Stanley earnings were up 15% on its wealth management and trading divisions’ success. Bank of America earnings beat slightly at +3% but revenues missed expectations at +4%.
Melius Reseach was out with a note saying operating expenses at AI spenders Microsoft and Amazon are coming down as proportion of sales, which it thinks is bullish. Meta got a price target hike to $850 from $825 at Cannacord, while UBS went to $138 from $120 on Disney and JPMorgan raised its price target on Boeing to $230 from $200 and stayed overweight, though that is where the stock is trading already.
Taiwan Semiconductor Manufacturing Co. reported a 61% profit increase for the June quarter, surpassing expectations. Net income was NT$398.3B ($13.5B), continuing a streak of beating estimates since 2021, following a previous 39% revenue surge.
Diageo rose on reports it was finding a successor to CEO Debra Crew. A profits warning less than six months into her tenure never set her on the right foot in the eyes of investors...kitchen sinking maybe is normal for new CEO to get bad news out early but the stock has not recovered and is about 40% below where it was when she unexpectedly took over from Menezes. Diageo appears to be facing cyclical downshift post-Covid and some problems with structural shift in drinking habits...but both seem tied to inflation and cost of living as people have less to spend on drink. Feel there is a lot they can do on branding - not convinced by the "tobacco moment" argument for alcohol...could be a good moment for the stock to turn round if they execute well, especially as we are likely past peak tariff uncertainty.
EasyJet - Q3 headline profit before tax rose to £286 million, an improvement of £50 million YoY, in line with expectations. Management say they expect FY25 ASK growth of c.9% YoY, with less pronounced growth in H2 (+7%) vs H1 (+12%). However despite the rise in profits shares fell 7% as it warned French air traffic control strikes and higher fuel costs would hit FY profits - estimates of £25mn hit to profits from the 3/4 July strikes that came just at the start of the key summer season.
Ocado shot up 10% on a handsome earnings beat driven by its tech and logistics businesses – for once not leaning on M&S retail division to drive growth. Group revenues +13.2% in the first half to £674mn...Retail revenues rose 16.3% and adjusted earnings before nasties rose over 60% to £33.3mn, a little short of the ~£36mn anticipated. But Logistics EBITDA of £19mn was ahead of the £15.9mn expected, while Technology EBITDA came in well ahead of consensus at £72.8mn vs £53mn. Logistics revenues of £396.7mn vs £370.8mn and Technology revenue of £277.3mn vs £263mn delivered healthy top-line growth that underpinned a superior quarter and first half than anticipated. Shares up 10% but remain –18% YTD and –90% from 2020 highs. I put it in the ARK bracket - if it was not able to do it when rates were zero, how's it going to do it now that we have permanently higher inflation and rates?
Novartis Q2 results impressed with core EPS $2.42 vs $2.34 est. The company announced plans to buyback $10bn in shares by end of 2027 and raised profit outlook as cancer drugs drive sales growth. Shares opened 2% lower.
Netflix is the big one reporting after the close today. After a stellar Q1 and a sustained rally in the share price since then, investors are looking for a bumper Q2 report card and potential upgrade to the full-year guidance.
In April, the company reported a major earnings beat for its first quarter, with revenue up 13% and shares rallying solidly since. The company said better-than-expected revenue growth was down to higher advertising and subscription revenues. It followed the move in January to increase pricing – lift its standard plan to $17.99 a month, its premium plan to $24.99 and the ad-supported plan to $7.99. Netflix reported revenue of $10.54 billion, higher than Wall Street’s estimates. Nevertheless, the company stuck to its full-year revenue guide of between $43.5 billion and $44.5 billion.
Q1 was the first time that Netflix did not break down subscriber numbers – the metric that had been a key driver for NFLX is move on earnings updates. So investors are focusing on more traditional financial measures of health – revenues, profit margins and advertising dollars. Netflix is increasingly leaning on advertising revenues to boost its bottom line. This is a capital-light growth lever for the company and is important to it achieving its goal of hitting $8bn in free cash flow this year. More on the preview to Netflix here.
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