Head of Saxo Strats
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.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
