Head of Equity Strategy
Summary: The Q3 earnings season will not get much help from the financials, energy, and technology sectors as all three sectors are facing headwinds and US financial earnings last week and Bank of America yesterday have proven this hypothesis. Tonight Netflix will kick of the earnings season for the technology and media segment of the market with focus on input costs and its upcoming ad-tiered business model. Tomorrow, two giants from Europe and the US will report earnings in the form of ASML and Tesla with the latter being extremely important for US equity sentiment among technology and growth stocks.
Q3 earnings will get no help from financials and energy
The earnings season is slowly kicking into gear this week. Major US financials have already reported Q3 earnings with Bank of America surprising yesterday against estimates and delivering better results compared to a year ago against its peers. As we have written many times, we expect the Q3 earnings season to show margin compression and that earnings will be under pressure. The chart below shows the quarterly EPS for the S&P 500 financials sector showing that earnings are down 2% q/q and 9% y/y, and with weak earnings q/q from the energy and technology sectors it will be difficult to lift aggregate earnings in Q3.
Netflix headwinds persists
The video streaming giant Netflix reports earnings tonight after the US market close and analysts expect revenue growth of 5% y/y and EPS of $2.22 down 23% y/y as rising input costs are pressuring Netflix’s business. The strong demand during the pandemic has disappeared, competition has increased significantly, and content production has been weak running at higher costs than estimated. The key upside factor for Netflix is the new ad-tiered business model which will enable a new revenue stream and reduce the risk of subscribers cancelling their subscriptions due to the cost-of-living crisis.
The semiconductor party is coming to an end for ASML
ASML, the world’s largest and most important semiconductor equipment manufacturer, reports Q3 earnings tomorrow morning before European trading opens. Revenue growth is expected to decline to just 1.6% y/y from 35% y/y in Q2. While we believe ASML will meet expectations for operating income and revenue we are more worried about orders as the ongoing tensions between the US and China over semiconductors are negatively impacting the industry. The US has imposed several export restrictions on semiconductors and equipment to China and the full-speed realignment of semiconductors will hit industry growth in the short-term. We have recent seen negative outlook on semiconductors from Samsung and Micron Technology. As the ninth largest European publicly listed company this earnings release will be important for sentiment in European equities.
Tesla is confronted with lithium issues and high electricity prices
There is probably not a more important stock than Tesla when it comes to sentiment in the technology and growth segments of the equity market. The EV-maker reports Q3 earnings tomorrow night after the US market close. Estimates are looking for revenue growth of 61% y/y and EPS of $1.02 up 106% y/y as EV adoption has accelerated this year despite supply constraints, price hikes on EVs and high electricity prices. Tesla recently missed estimates on Q3 deliveries and the main focus will be on lithium supply and prices, and to what extent it is impacting Tesla’s margins. We are also curious to see Tesla outlook given the high electricity prices.
Car sales has recently stabilised in the US and Europe, and in China growth is coming back. However, the news flow from Chinese EV-makers has recently been negative and that might be a warning sign on the outlook. Tesla has moved from being a premium brand to an average brand when judged on average selling price as Tesla is now firmly in at the same average price as Ford and GM in the US. Its gross margin when factoring out R&D costs of cost of goods sold for other carmakers is also only the 11th best. The question remains whether Tesla can continue to command a high equity valuation, but as the fifth largest publicly listed company in the US this earnings release is the most important earnings release this week.
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
