Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Strong July for equities relies on soft landing
Peter Garnry
Chief Investment Strategist
Summary: US equities rose 9.3% in July as the market is increasingly betting on a soft landing in the economy as inflationary pressures are easing and financial conditions have eased considerably from a much tighter level in late June. We also take a look at the Q2 earnings season which has turned out to be a positive with earnings in the MSCI World Index bouncing back almost 13% from Q1. This week we will focus on earnings from Caterpillar, Alibaba, BMW and Adidas.
One of the best months for equities in 50 years
Last month turned out to be an incredible strong month for global financial assets with US equities rallying 9.3% as FOMC’s rate decisions and Powell’s comments during the press conference avoiding to put any forward guidance out saying the Fed was moving towards becoming data dependent in its policy trajectory. The market has so far taking that as a clue that the Fed will soon slow down on its tightening and the market is still pricing in rate cuts next year. It seems the market is betting that the economy will in fact make a soft landing as inflationary pressures are easing. This is a big bet given the uncertainty and many of the drivers behind higher inflation are still in place. The full effect on the consumer from last year’s inflation has still not played out so investors should still remain cautious.
The MSCI USA Net Total Return Index has its 16th best month since December 1969 and the main question is now whether momentum will continue or mean reversion effects will set in pulling equity indices lower. Mean reversion effects dominate in the short-term, so statistically we would expect equities roll over in the near term. The rally in July has also pushed equity valuations to 0.4 standard deviations on the MSCI World Index which is a bit excessive given the 3-month average Chicago Fed National Activity Index turned negative in June suggesting a significant slowdown this year.
Across our theme baskets crypto companies had a stellar month as cryptocurrencies are the purest expression of risk taking. Renewable energy and energy storage stock also did well amid the ongoing energy crisis in Europe increasing the need for new and fast solutions to Europe’s energy needs as the continent is pulling away from Russia’s supplies. The worst performing part of the market in July was Chinese technology and consumer stocks down 9.6% as the clampdown by Beijing continues to weigh down on growth and the financing access in US public markets is getting narrower as many Chinese companies could be delisted in the future.
Q2 earnings are bouncing back
Companies were hurting in Q1 from rising input costs lowering operating margins and the outlook was deteriorating due galloping commodity prices and the war in Ukraine. Aggressive cost cutting and raising prices have pulled companies back from the abyss with Q2 earnings up 12.9% q/q driven by an accelerating in revenue, driven by higher prices which is a function of inflation, and operating margins expanding across the board. When you look closer at revenue growth in Q2 it is almost flat for Nasdaq 100 companies while it is sharply higher for the MSCI World driven by substantial increase in tangible revenue compared to intangible revenue.
This week there are plenty of earnings to watch and we have listed the most important ones below. We are curious to see the outlook of German companies this week such as BMW, Adidas, Bayer, and Vonovia given the energy crisis in Europe. Tomorrow, Caterpillar is the most important earnings release as it is the ultimate barometer on global construction and thus the macroeconomic backdrop. Booking on Wednesday is also worth watching providing some forward-looking statements on the consumer and on Thursday Alibaba is the big one with China still being weak and the e-commerce giant added over the weekend on SEC’s list of foreign stocks that could be delisted.
Monday: Xinyi Solar, HSBC, Heineken, Activision Blizzard, Devon Energy, Mosaic
Tuesday: Kweichow Moutai, Generali, Mitsubishi UFJ, BP, Koninklijke DSM, AMD, Caterpillar, PayPal, Starbucks, Airbnb, Occidental Petroleum, Marriott International, Uber Technologies, Ferrari, Electronic Arts
Wednesday: Nutrien, Maersk, AXA, Societe Generale, Siemens Healthineers, BMW, Infineon Technologies, Vonovia, Nintendo, JDE Peet’s, CVS Health, Booking, Moderna, Regeneron Pharmaceuticals, Fortinet, Albemarle, eBay, MercadoLibre
Thursday: Novo Nordisk, Credit Agricole, Merck, Bayer, Adidas, Beiersdorf, Toyota, SoftBank, Glencore, ING Groep, Eli Lilly, Alibaba, Amgen, ConocoPhillips, EOG Resources, Air Products and Chemicals, Block, DoorDash, Twilio
Friday: Canadian Natural Resources, Suncor Energy, Allianz, Deutsche Post, Naturgy Energy Group
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