Growth vs policy rates; earnings and equity valuation Growth vs policy rates; earnings and equity valuation Growth vs policy rates; earnings and equity valuation

Growth vs policy rates; earnings and equity valuation

Peter Garnry

Chief Investment Strategist

Summary:  The equity market is still in an uptrend betting up a cyclical upturn in the economy lowering the probability of a recession. Powell's comments yesterday confirmed the growth outlook saying that the US economy might need more rate hikes. Investors showed an extraordinary ability to look through higher policy rate focusing on the growth momentum and easing financial conditions. In today's equity note we also take a look at earnings from Fortinet, Maersk, Vestas, and Adyen.

Equities are riding the cyclical upturn

Yesterday’s comments from Powell about a strong US jobs market vindicated other signs across transportation, financial services, and semiconductor stocks that the economy is not even soft-landing but rather taking off again. That is at least what the market is betting on. S&P 500 futures rallied on these remarks before briefly turning lower on Powell’s subsequent comments about more rate hikes are necessary to tame inflation despite disinflation is now evident in the goods economy. Those comments aligned the market more with the Fed’s outlook on policy rates judging from Fed Funds futures with expiry December 2023. However, yesterday’s S&P 500 futures session ended higher as the market is removing recession risks from equity valuations in favour of more growth. S&P 500 12-month forward P/E ratio at 19.1x is in the high range over the past 10 years when removing the 2021 levels suggesting the market is priced almost for perfection.

S&P 500 futures | Source: Saxo

Our previous indicated potential low point in the S&P 500 at the 3,200 level seems like a distant future and arguably the probability of this scenario has declined substantially with the Chinese reopening, cyclical turn in the global economy, and equity investors’ relentless willingness to keep the equity risk premium low despite the geopolitical and inflation risks. The key driver behind the optimism in equities has been the easing financial conditions that are now the lowest in almost a year. The market still seem quite relaxed about the long-term outlook for inflation and this poses the biggest downside risk to equities in 2023.

US financial conditions | Source: Bloomberg

Earnings: high growth in cyber security confirmed by Fortinet

The Q4 earnings season is slowly approaching the end and the conclusion is that European companies are the big winner with 4.8% earnings growth q/q and the highest growth rate in revenue q/q compared to US and Chinese companies. European earnings are actually ahead of S&P 500 earnings sine Q3 2019 which seen over the past 12 years is an unusual development. But as we write in our Q1 Outlook, the comeback to the physical world is also a comeback to European equities. The Q4 earnings season also show that earnings are holding up better than we expected despite margin pressures are still an ongoing theme and could intensify during the year.


Fortinet, one of the largest cyber security companies on revenue, reported Q4 revenue and EPS that beat estimates and the FY23 outlook on operating margins and revenue were in line with analyst estimates. It was clear that investors had lowered their expectations below that of analysts as the FY23 outlook hitting estimates led to a rally in extended trading. The outlook on operating margin also confirms that cyber security companies are experiencing little margin pressure.


Maersk is reporting lower than estimates Q4 revenue and EBITDA in line, but the FY23 outlook on EBITDA of $8-11bn vs est. $13.5bn is a big miss and maybe a bit too conservative if the cyclical upturn gathers steam. Maersk is global container trade in 2023 at -2.5% to +0.5% which again is at odds with the market’s cyclical growth bet. Maersk CEO says that a significant inventory adjustment is taking place and that the world is generally moving to a more normal world.


Vestas is reporting a FY23 outlook that signals further challenges and weakness in the wind turbine business with FY23 revenue outlook at €14-15.5bn vs est. €14.8bn and adjusted EBIT margin of –2% to +3%. If the cyclical upturn continues it will most likely put more pressure on industrial metals making it difficult for Vestas to expand the operating margin in 2023. The outlook is at odds with the narrative that Europe is undergoing a boom in green energy as the revenue in 2023 is expected to be the same as in 2020. Judging from analyst estimates it seems growth is expected to pick up in 2024 with revenue growing to €17.9bn. One thing is for sure, the lack of great headlines coming out of wind turbine makers will add steam to the movement and support for nuclear power which seems inevitable as part of the solution toward net zero carbon in 2050.


Adyen, one of Europe’s largest payments companies, reports 2H EBITDA margin of 52% vs est. 59.7% and net revenue during the period missed estimates by 0.5%-points. Adyen reiterated their long-term EBITDA margin goal of 65% but the co-CEO’s comments that the company had not specified what long-term was spooked investors. Adyen is standing out in the technology sector focusing on growth through hiring and higher investments. Shares are down 15% in Amsterdam trading.

Adyen share price | Source: Saxo

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