Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Investor Content Strategist
Key Notes:
US stocks rally as Microsoft and Meta reignite the tech story
US and Ukraine agree mineral rights deal
Lloyds profits dip as impairment charges jump, sets aside £100mn for tariff impact
Tesla denies CEO search for Musk replacement
FTSE 100 eyes 14th day of gains but oil majors weigh
Has he got the minerals? It looks like Trump does indeed have the minerals – Ukraine's to be precise. The US and Ukraine have reached a deal granting the US privileged access to new investment projects to develop Ukraine's natural resources, including aluminum, graphite, oil, and natural gas. This is positive from a peace deal perspective and probably risk-on overall for Europe – DAX and CAC trade higher this morning while the FTSE 100 is down on lower oil prices.
US stagflation alert: GDP contracted by 0.3% in Q1, while the Q1 price index at 3.7%, its highest since August 2023. Core PCE – what the Fed looks at – was at 2.6% in March....this is the ultimate headache for the Fed – inflation plus slowing economy. Ok, the figures were skewed by a 41% jump in imports in the last quarter as firms rushed to beat tariffs and stockpile. But we are now seeing the LA port boss warning that the ships are not coming in now...which means the impact is yet to be felt. All that matters for the Fed is the jobs market so we head into a big risk event with tomorrow’s payrolls report.
Tesla’s chair denied that the electric car company is looking for a replacement for Elon Musk. It comes after a WSJ report that claimed several board members had reached out to executive search firms. “This is absolutely false (and this was communicated to the media before the report was published). The CEO of Tesla is Elon Musk and the Board is highly confident in his ability to continue executing on the exciting growth plan ahead,” said chair Robyn Denholm.
The FTSE 100 continued its winning streak with the meekest of gains as the momentum, fragile sentiment and some pretty exhausted bulls ran into the brick wall of poor US data – GDP and inflation turning over in bad ways as well as arguably some month-end repositioning. Quarterly results also painted a mixed picture overall. The blue chips also faced the stern test of the 50-DMA, having earlier cleared the 200-DMA.
Slow and steady wins the race though – another gain today would be a 14-day win streak to match the January 2017 run...I think that’s the record.
The blue chips got off to a lacklustre start to trading May, with BP and Shell dragging the index lower after a sharp decline in oil prices following the US GDP figures. Meanwhile reports indicated that the Saudis have no intention of boosting oil markets and will instead push to raise production in June. Last month OPEC+ said it would advance its planned phase-out of voluntary output cuts by upping output by 411,000 barrels per day in May. Front month WTI fell below $58 and is nearing its April lows.
Another big day for FTSE earnings reports – after a dip at the start of trade the index rallied a bit to 8,500. US futures are solidly positive.
Lloyds profits dipped as impairment charges rose. It set aside £309 million for impairment charges, up from £57 million a year ago, including £100 million specifically earmarked for “potential impact from US tariff policies”. Lloyds said that “Initial non-UK tariffs announced in the first few days of April and the immediate market response were larger than expected,” said Lloyds. Although profits slipped 7% last year on higher costs and impairments, net interest income held up and the bank reaffirmed guidance so we are just seeing some trimming of longs at the moment with shares knocking around decade highs.
LSEG – market volatility was good for trading (cf CME Group, HOOD). Its Markets business was up 10.7%, and up 13.5% including the benefit of the ICD acquisition, as LSEG’s capital markets venues and post trade businesses saw heightened activity in response to the higher political and economic uncertainty in the quarter. Equities +3.1% - retail buying the dip. Fixed income and derivatives +17.3%, pros hedging.
Rolls-Royce – trading in line, sees “degree of uncertainty” from tariffs...shares +3%
Whitbread – softness in UK, growth in Germany offsetting and shares +4% early on.
Informa – shares +2% after reaffirming guidance of 5%-plus, £4.1bn revenue for the year after Q1 sawunderlying revenue growth of 7.6%.
National Grid – shares –1% on CEO move.
Wild session and wild month. President Trump lashed out at his predecessor after US stock markets fell following weak Q1 GDP figures. “Biden’s Stock Market, not Trump’s”.
But there was an abrupt turnaround late in the session – did someone know what those Microsoft and Meta earnings were? The Dow erased 800pt loss at one stage and had a 1,000pt swing over the day. The Nasdaq ended April higher, Nasdaq 100 – yesterday’s rally was potentially important from a technical perspective as it cleared the 50-DMA, while the S&P 500 finished less than 1% down on the month, and its 50-DMA held.
Microsoft was a knock-out with EPS at $3.46 vs $3.22 expected on the Street. Azure cloud growth +33% was well ahead of expectations and 16pts of this was down to AI...monetization story playing out. Revenues climbed 13% to a record $70.1bn.
Meta also blew the lights out – EPS of $6.43 vs $5.27 expected. Key thing was raising AI capex for the year to $64bn-$72bn from a prior $60bn-$65bn...doubling down on the biggest tech narrative out there. Though we should note that this reflects both additional data centre investments to support artificial intelligence efforts as well as an increase in the expected cost of infrastructure hardware.
But here’s a stat – Meta’s family of daily active people rose 6% to 3.43bn - that’s not far off half the planet.
The numbers from these two are important for the other hyperscalers – Amazon reports today, as does Apple (biggest China/tariffs story out there). It really shows that this AI-driven corner of the mag 7 is kind of immune to tariffs.
Today we have earnings from Amgen, Eli Lilly, Mastercard, McDonald’s, Airbnb, Block, Strategy and Twilio.
Today also sees a likely weak US April ISM Manufacturing number (47.9 expected after 49.0 in March, but several of the weekly manufacturing surveys have been weak for April, including yesterday’s April Chicago PMI, which came in at 44.6 vs. 45.9 expected and 47.6 in March). Tomorrow’s main event is the April US jobs report, as Nonfarm payrolls growth is expected to dip to +135k, while the unemployment rate is expected to remain at the post-pandemic cycle high of 4.2%. No real tariff impact yet – still slow-to-hire and slow-to-fire for now, though ADP yesterday was weak at +62k vs +115k expected for April.
Elsewhere, the Bank of Japan kept its policy rate unchanged at 0.5% and halved its economic growth outlook to 0.5% for this year while pushing back the timing for reaching its inflation target after the global trade war had darkened the economic outlook.