Head of Saxo Strats
Summary: The US earnings season is nearing its end as next week will see more European and Japanese companies reporting earnings. While Uber will most likely grab the headlines Siemens and Toyota are more important for the equity investor due to their global footprint and exposure to consumer and industrial demand.
The earnings season is still in full swing with 70% of S&P 500 companies having reported already and so far, headlines are mostly “better than expected” which is a bit empty given how low estimates have come down over the past year. Growth in S&P 500 revenue and earnings is around 4% and 0% y/y respectively. EBITDA growth y/y is just around 1% for MSCI World while -7% for MSCI Emerging Markets reflecting the global slowdown.
Next week more European and Japanese companies will take over releasing earnings but given their important the US earnings will get the most headlines. In particularly we expect Uber’s earnings release on Monday to be key focus as one of the most anticipated IPOs in recent years has disappointed with shares closing yesterday at 31.50 compared to the IPO price of 45.
Analysts are expecting revenue growth of 15% down from 37% a year ago highlighting the issue for investors; growth rates are coming down much faster than anticipated. In addition, cash flows from operations worsened in Q2 pushing the negative free cash flow to $1.1bn in just a single quarter. In our view, Uber only has a few couple of quarters to show a clearer path to profitability in order to avoid investors beginning to a more touch assessment of valuation multiples. The key issue for Uber is drivers costs which could jump by 20% if drivers are forced to be treated like employees as a recent bill in California is suggesting. European regulators also want Uber to be treated as a regular transportation company and it might give access to growth, but it comes with higher complexity and costs. If Uber is forced to treat drivers as employees can they then retain those drivers? And will the costs reach levels where Uber is not significantly cost competitive with normal taxi companies? Many unknown answers for investors.
While Uber will surely get the media attention the most important earnings next week are from Siemens and Toyota which have much larger global footprint directly linked to consumer and industrial demand. Siemens is expected to deliver only 1.5% revenue growth and the key focus for investors is cash flow generation which has been a disaster the last three quarters.
Toyota is expected to deliver 2% revenue growth and showing margin pressure as global car demand is still weak as consumers are holding back. With 40% of its business in Japan and Asia the earnings release is a good indicator on consumer confidence in Asia.
The table below shows the 30 largest companies on market value reporting earnings next week.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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