Head of Equity Strategy
Summary: Alphabet and UPS delivered strong earnings overnight lifting sentiment on US equities helping Nasdaq 100 futures push above their 200-day moving average. Adding to the rebound is short covering which we see clear signs of among Saxo's clients. While the rebound coupled with a decline in the VIX suggest things are more calm the underlying dynamics of tighter financial conditions and inflationary pressures persist suggesting downside risks to equities remain high. In today's equity update we are also covering the negative outlook from PayPal.
Google and EPS earnings lift sentiment
Last night, Alphabet reported strong Q4 revenue ex-TAC and EPS figures beating estimates lifting shares in extended trading and they are up 11% in pre-market trading lifting sentiment across the board. Alphabet is also announcing a stock split with a 20-to-1 ratio which will make the shares more accessible for retail investors. The only negative thing to put on Alphabet’s earnings was the bigger than expected operating loss in the Google cloud business.
Besides strong earnings from Alphabet we got much better than expected Q4 figures from UPS last night, but more importantly the 2022 guidance on revenue at $102bn was above estimates of $100bn and the guidance on operating margin was 13.7% vs est. 13.2%. Higher revenue growth while expanding margins is something investors typically like and the outlook is also bolstering the view that demand looks strong in the coming quarters.
The recent earnings releases have pushed revenue growth to 3.9% q/q for the Nasdaq 100 and 3% q/q for the S&P 500 which is impressive annualized figures. However, only technology companies are able to lift earnings at the same speed whereas S&P 500 companies have actually seen earnings decline due to margin compression.
The earnings optimism has helped push Nasdaq 100 futures above its 200-day moving average seen by many retail investors as the inflection point or switch for when to get back into technology stocks. Closing above the 200-day moving average alone got increase risk-on short-term as retail investors step up their buying.
Short covering is the rebound fuel
Based on Saxo’s client behaviour from last week and this week we can see that a lot of the fuel during the rebound has been around short covering. Clients were accelerating their shorting of speculative growth stocks into the selloff on Thursday last week. But in several bubble stocks and other speculative growth stocks half of short positions were covered during Friday’s bounce and the short covering continued on Monday. This flow is ebbing now and thus the rebound is likely to lose speed.
While the VIX Index and the VIX forward curve have both changed in favour of less nervous equity markets and more risk-on, the underlying risks to equities persists with financial conditions expected to be tightened significantly over the coming quarter to cool off inflationary pressures. The fiscal impulse in the developed world is also declining putting extra downward pressure on growth. Our view is unchanged and which is that investors should continue to rotate portfolios into inflation hedges such as commodities, logistics, mega caps, semiconductors, cyber security, and India to reduce sensitivity to US interest rates.
PayPal shares down 17% in pre-market
The biggest negative surprise amid the earnings optimism was PayPal Q4 earnings showing lower volume and the Q1 guidance was a massive negative surprise with EPS of $0.87 vs est. $1.17 and the guidance on EPS for FY22 was $4.60-4.75 vs est. $5.23 spooking the market. At the same time the company abandoned its 2025 target on 750mn accounts. Part of the slowdown for PayPal is that the former parent company EBay is moving more and more payments away from PayPal, but people returning to physical stores is also reducing growth in e-commerce payments. The bulls on the stock will point to a lot of new account services such as high yielding accounts, pay-now-pay-later functionality, trading in cryptocurrencies etc., but for now PayPal has lost some confidence from investors sending the shares down 17% in pre-market trading. In Europe, the fast growing payments company Adyen has recently been hit by the slowing growth of PayPal which has made some investors questioning whether Adyen is also hit, but judging from investors’ reaction today to PayPal’s result suggest confidence in Adyen’s growth numbers is coming back.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
