Head of Equity Strategy
Summary: The Q3 earnings season has so far been a bit mixed on earnings while revenue growth has been good underscoring our assessment before the earnings season that margin pressure is here as a theme. Margin pressure will add headwinds for companies and with equity valuations at historically high levels and interest rates and inflation expectations on the rise, investors might get a sour cocktail to swallow next year. We also take a look at Tesla which passed $1trn in market value yesterday on the largest single order of EVs ever in history and a new battery from Panasonic.
This is the most important week in the Q3 earnings season with several hundreds of important earnings releases and most importantly from major US technology companies such as Facebook, Microsoft, Alphabet, Visa, Amazon, and Apple. In our earnings preview two weeks ago, we highlighted that the earnings season would be all about margin pressure driven by the ongoing global energy crisis and rising commodity prices.
The earnings season so far has been mixed EPS down 2% q/q in the MSCI World Index, but we are still only a couple of weeks into the Q3 earnings season so many things can change. Facebook surprised yesterday with better than expected Q3 earnings figures although the operating margin was a bit under consensus, and the Q4 outlook was really weak vs estimates highlighting the impressions and pricing pressures in the advertising business. While EPS is down 0.6% q/q for the Nasdaq 100, revenue is up 2.9% q/q showing that underlying demand is good but input costs are rising.
Net profit margin is down for the quarter for MSCI World, S&P 500, and Nasdaq 100, coming off their historical highs suggesting that the EPS tailwind from the pandemic rebound is over as commodity prices and wage growth are eating into profits. The combination of falling net profit margins, historically high equity valuations, and rising interest rates and inflation expectations might turn into a sour cocktail for investors over the coming year. As we highlighted in today’s Saxo Market Call podcast, the rising inflation expectations might for now be a net positive as it forces more institutional investors to increase their equity weighting over bonds to protect future real rate returns.
The most important earnings to track this week are listed below from the universe of companies we track during the earnings season. Today we have got strong earnings in Europe from DSV, Novartis, and UBS Group all beating earnings estimates and DSV even raised their fiscal guidance. In the US, UPS posted stronger than expected Q3 earnings and lifted guidance on earnings, margins, and capex highlighting the favorable conditions for logistics companies. Tonight after the US market close, the three giant US companies Microsoft, Alphabet, and Visa will report earnings, which we expect will be strong across the board.
Tuesday: DSV, Nidec, Canon, Novartis, UBS Group, Microsoft, Alphabet (Google), Visa, Eli Lilly, Texas Instruments, UPS, AMD, General Electric, Raytheon Technologies, S&P Global, 3M, Twitter, Southern Copper
Wednesday: ANZ, Novozymes, Neste, BASF, Deutsche Bank, Ping An Insurance, Fanuc, Hitachi, GlaxoSmithKline, Heineken, Equinor, Iberdrola, Banco Santander, Assa Abloy, Thermo Fisher Scientific, Coca-Cola, McDonald’s Service Now, Bristol-Myers Squibb, Boeing, General Motors, Ford Motor, Twilio, eBay, Spotify, Yandex, Garmin
Thursday: Anheuser-Busch, Shopify, Suncor Energy, Sanofi, Dassault Systems, TotalEnergies, PetroChina, BYD, Agricultural Bank of China, UniCredit, Sony, Keyence, Royal Dutch Shell, Lloyds Banking Group, Hexagon, Apple, Amazon, Mastercard, Comcast, Merck & Co, Linde, Starbucks, Caterpillar, Atlassian, Newmont, Volkswagen
Friday: BNP Paribas, Daimler, Merck, China Construction Bank, Bank of China, Eni, Exxon Mobil, Chevron, AbbVie, Colgate-Palmolive
Tesla pulls S&P 500 to new record on Hertz deal and new Panasonic battery
Yesterday’s gains in US equities were driven in large part by the big move in Tesla up 12.7% surpassing the $1trn market value for the first time. The catalysts were news of an order of 100,000 EVs (Tesla is doing slightly less than 300,000 deliveries per quarter at this point) from the car rental company Hertz, and Panasonic revealing a new and more powerful Lithium-ion battery for Tesla’s above standard models. Panasonic says that the new 4680 cell battery will drive the needed cost reductions to further expand the penetration of EVs to the general population.
The new level of equity valuation for Tesla got many to compare Tesla to Berkshire Hathaway and the likes, but to be fair Tesla has a much better shot at creating the future than Berkshire Hathaway which is conglomerate of old businesses although very profitable. The way to think about Tesla is that at one point it will mean-revert to a free cash flow yield to that of the S&P 500 which is currently around 2.7%. This means that Tesla will have to generate around $28bn in free cash flow in the future to justify its valuation. Tesla has generated $4.1bn in free cash flow in the last 12 months which over 10 years amount to 21% annualized growth in free cash flow. It is possible but it will require Tesla to capture a large share of the future car market and become a significant player in grid energy storage. For now the optimists are winning over the pessimists.
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.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
