Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief Investment Strategist
Summary: The Q2 earnings season starts next week and will run at full speed during the rest of July and first half of August. We focus on the most important earnings releases over the coming three weeks and explain what to watch in each report. One thing is certain, companies with margin power will be rewarded by the market. Finally, we put a perspective on the recent 25% rally in our NextGen Medicine theme basket highlighting that the industry is fragile as long as financial conditions continue to tighten.
Q2 earnings are all about margin power or not
The Q2 earnings season starts next week and we recently wrote an earnings preview focusing on rosy expectations ahead of Q2 earnings and that the energy sector would continue to shine. The overall theme this season is margin pressure (see chart) and companies that can surprise to the upside on operating margin will be rewarded by the market. In our view the outlook from companies will be so uncertain that it will be difficult for Q2 earnings to materially lift the equity market as the FOMC rate hike in July and tighter financial conditions will likely overshadow earnings. In any case, companies with margin power are the winners of the market during the Q2 earnings season.
The equity desk will be running low in July due to holiday but of all the major earnings expected over the next three weeks the following ones are the most important one to watch.
The most important earnings releases the next three weeks are listed below. Please note that some of these earnings dates might be moved after this publication.
Biotechnology rebound rally at odds with financial conditions
Our NextGen Medicine basket which is reflecting a large part of the innovative biotechnology industry is up 25% from the recent lows rallying on a combination of easing inflation and interest rates expectations, and potentially short covering. This part of the equity market has the absolute highest duration (sensitivity to interest rates) as many of these companies are many years from break-even because many of them have high equity valuations and are most research-driven companies.
While biotechnology stocks have rebounded recently we remain cautious on the industry over the next six months as financial conditions continue to tighten (see chart) and the current levels and direction will continue to negatively impact financing for these companies which is a necessary feature of the industry to fund their drug research activities.
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