Head of Equity Strategy
Summary: US financials will kick off the Q1 earnings season next week with the key US earnings to watch being those from JPMorgan Chase, Wells Fargo, and Citigroup. Despite rising interest rates, US financials have underperformed the S&P 500 since mid-February and the question is whether US banks can improve sentiment through an improved outlook despite many challenges on input costs. Our earnings focus outside the US is on Tesco, Fast Retailing and Ericsson. In today's equity update we are also warming up to the debate on how technology companies will do through inflation in terms of earnings growth and equity valuations.
US financials in focus
The Q1 earnings season starts next week with US financials reporting first. JPMorgan Chase reports Q1 earnings on Wednesday and will set the tone for the earnings season as the US bank is the biggest bank in the developed world. Wells Fargo and Citigroup are both reporting on Thursday are also key to watch due to their consumer and commercial banking exposure, while earnings from Morgan Stanley and Goldman Sachs are typically not moving markets or sentiment.
US financials have had a tough time lately despite rising interest rates (the flattening of the US yield curve has not helped) underperforming the S&P 500 by 8.1% since 11 February (see chart below on relative return between US financials and S&P 500). On a relative basis, US financials are back to the lows from late December. With the latest FOMC Minutes and Brainard’s comments, US financials could soon begin a longer term rally into the summer months. Keep in mind that this is a tactical theme and not a long-term secular theme as financials are facing many structural headwinds.
Outside of US financials, Tesco on Wednesday is an interesting earnings release to watch because of the galloping food prices also seen today with UN World Food Price Index hitting the highest level ever rising 33% y/y. Fast Retailing, the parent company behind Uniqlo, is reporting on Thursday and will give good insights into consumer demand in Japan. Ericsson also reports on Thursday and is expected to see revenue growth accelerate to 7% y/y as investments in telecommunication equipment are going up.
The most important earnings releases next week are:
Technology earnings during inflation is a key outstanding question
Investors are well aware of inflation and to what extent it can negatively impact equity valuations and equity returns, especially in real terms, and many are drawing conclusions from the 1970s. The big difference between the 1970s and today is that back then the profit engines of S&P 500 were companies that generated those profits with significant input costs from commodities. Today, the profit engines of S&P 500 are technology companies which generate profits with very little input from commodities. In theory, technology companies should be able to be able to grow earnings, so the main question is the impact on equity valuations of technology companies from higher inflation. This is a topic will discuss more as the Q1 earnings season progresses as the market’s reactions to technology earnings will give us clues about these dynamics.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
