Head of Equity Strategy
Summary: S&P 500 earnings in Q3 have so far been better than expected with the technology sector showing almost 10% earnings growth from a year ago. Our view remains positive on Q3 earnings, but there will likely be hiccups here and there in some of the most hyped stocks. Both Netflix and Tesla reporting earnings this week are part of the 'US technology trade' this year and expectations are extremely for those two companies to deliver. In today's equity update we take a look at both companies.
We have said repeatedly that the Q3 earnings season is very important because the rebound in equities has discounted a sharp rebound in corporate earnings which are expected to rise 35% q/q. If earnings are not showing a strong rebound, it will be difficult to justify the current levels in equities unless investors get a positive surprise on the fiscal impulse.
Based on the 51 earnings releases in the S&P 500* so far for Q3 the revenue and earnings surprise has been positive with especially earnings surprising a lot to the upside. Growth in revenue and earnings is still negative y/y but only -2.7% for revenue and -19% for earnings with the information technology showing +10% y/y growth in earnings in Q3 highlighting the risk appetite for technology stocks by investors. Earnings estimate still suggest that US companies will be back to record earnings by Q3 2021. One potential drag on this rebound trajectory could come from a Biden administration if his tax policies are carried out to the extend communicated in his campaign material. Biden’s proposals to increase the corporate tax rate and the GILTI (global intangibles low-taxed income) tax rate could create a 10%-point headwind on S&P 500 earnings and hit the IT, health care and communication services sectors the hardest.
Can Netflix maintain its positive cash flows?
The first real test of the wider technology segment in US equity markets will be tomorrow when Netflix reports Q3 earnings after the market close. Netflix shares have been riding the Covid-19 bonanza in technology stocks up 64% this year elevating expectations for strong Q3 numbers. But the Q2 numbers did not show a significantly positive impact on revenue growth but instead higher usage from existing subscribers. This disappointed the market with the shares dropping 6.5%, the biggest drop related to its earnings releases since Q2 2019.
Production delays played its positive part on operating cash flows accelerating to $1.04bn in Q2 creating the largest free cash flow in Netflix’s history of $900mn up from a negative free cash flow of $1.6bn in Q4 2019. Analysts expect free cash flow to be $180mn this year and then go back into negative in FY21 raising the question whether Netflix will ever reach the profitability level needed to support the valuation which is almost 5x the global equity market on EV/EBITDA. Given the slowdown in content production we believe there is a real danger of Netflix disappointing the market tomorrow.
Will Tesla deliver on the hype?
Tesla reports Q3 earnings on Wednesday after the close with analysts expecting revenue to jump 31% y/y to $8.3bn. With its shares up 426% this year there is a lot at stake for Tesla as the hype has gone hyperbolic underpinning the market’s bet that Tesla will dominate the future car industry as electric vehicles penetrate the overall car market even further. Tesla has recently announced price cuts across its models and pushed global deliveries to 139,300 in Q3 which has to accelerate to 181,000 in Q4 to meet its 500,000 target for this year. The key catalyst for Tesla in the short-term is the growing EV market in China which is supplied through its Gigafactory in Shanghai and the outlook for China sales is key to how the stock price will react. The historical absolute change around earnings releases has been around 9.5% and we expect a lot of volatility around Q3 earnings simply because of the enormous momentum in the stock price this year.
The table below shows the other important earnings being released this week.
* Companies that have two months of a fiscal quarter overlapping with the calendar quarter will be designated to the Q3 earnings season. A company with earnings ending on August 31 (reported sometime during September) will be added to the Q3 earnings season numbers.
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Steen Jakobsen,
Chief Investment Officer
A political switch in China towards less tough control of its people and companies may kick things back into gear.
Redmond Wong,
Market Strategist
While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.
Chris Dembik,
Head of Macroeconomic Research
As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.
Peter Garnry,
Head of Equity Strategy
New alliances and collaborations outside of China may lead to prosperous times in Asia.
Charu Chanana,
Market Strategist
For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.
Peter Siks,
Investment Coach
Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.
Ole S. Hansen,
Head of Commodity Strategy
2023 could be a tough year for currencies but EUR and JPY may have some upside.
John J. Hardy,
Head of FX Strategy
The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.
Jessica Amir,
Market Strategist
From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.
Mads Eberhardt,
Cryptocurrency Analyst
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
