Head of Equity Strategy
Summary: The Q3 earnings season is fast approaching which will be a nerve-racking experience and an earnings season that will prove or disprove whether operating margins under pressure as we believe they are. In the meantime, there are still other interesting earnings releases worth watching with especially Nike earnings next Thursday being next week's highlight. Nike is facing mounting headwinds from inflationary pressures and a consumer that is facing lower disposable income which lowers demand for consumer discretionary goods such as those Nike is selling.
Nike is in a leading position as the cost-of-living crisis intensifies
One of the themes we have been writing about lately is how the cost-of-living crisis driven by higher energy costs are lowering demand for discretionary consumption. This sector of the economy has been the hardest hit in financial markets in Europe over the past week. Nike is part of the consumer discretionary sector and have had to first deal with global supply chain disruptions and later input cost pressure. Until now, Nike has been dealing with all the uncertainties better than its competitors although last quarter saw revenue decline 0.9% y/y and the EBITDA margin declining to 13.5% from 17.1% the year before.
Nike reports FY23 Q1 (ending 31 August) earnings on Thursday with analysts expecting revenue growth of only 0.6% y/y and the EBITDA margin rebounding to 15.8%. The expectations of its operating margin rebounding is probably the biggest potential downside risk going into the earnings release. Given the ongoing demand destruction among consumers and the strong USD it is likely that revenue could disappoint again and that margins cannot bounce back. One key competitive advantage that Nike has over its competitors is that it is doing much better on digitalization and direct sales of its sports goods which is good long-term for margins. One looming threat to its growth is Lululemon Athletica which is a strong brand among women and has successful expanded its categories from being only about yoga earlier on.
Declining margins and recession incoming?
The Q3 earnings season starts in three weeks from now and the key battleground for investors will be operating margins. They had a startling comeback in the Q2 earnings due to cost cutting and higher prices lifting revenue, but the signals we are getting from more and more companies are that wage pressures are increasing and that they will have to eat into margins. The US retailer Costco reported strong earnings yesterday, but also said on the earnings call with analysts that the biggest input cost pressure is now coming from labour.
Yesterday, we got leading indicators on the US economy for the month of August and they were unfortunately a bad appetizer ahead of the Q3 earnings season. The 6-month average on US leading indicators m/m was now at levels not seen since the darks days of the Great Financial Crisis, if we exclude the dip during the early days of the pandemic, which is increasing the probability that the US economy will find itself in a recession with the next 6-8 months from now. Some parts of the economy is probably already in a recessionary state.
The most important earnings releases next week are listed below.
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
