Too calm, too quickly? Too calm, too quickly? Too calm, too quickly?

Equity outlook, sticky inflation, and banks earnings preview

Peter Garnry

Chief Investment Strategist

Summary:  The expected real rate return for equities looks more attractive than that offered in global bonds and as such investors should still be allocating to equities. The underlying momentum in the economy and cash flows from companies suggest at this point that it is only a recession that can derail the equity market. In today's equity update we also reflect on yesterday's US inflation report and how the fragmentation game and labour shortage will continue to underpin inflation dynamics. Lastly, we go through the expectations for tomorrow's banking earnings from JPMorgan Chase, Wells Fargo, and Citigroup.


Only a recession can derail equities

Global equities have overcome the shock from higher interest rates and the low level of debt in the corporate sector means that the equity market will do fine during a refinance of debt at higher interest rates. Nominal growth remains strong post the pandemic and with the Chinese reopening gathering pace a recession might not happen in 2023, or if the economy slows down it may be a shallow and short-lived contraction. Total shareholder payout (dividends and buybacks) is at an all-time high for the MSCI ACWI Index (developed and emerging markets) with the total payout yield currently at 3.5%.

We add long-term expectations of 2.2% global real GDP growth then global equities have a long-term real rate return expectation of 5.7% annualised. For comparison the benchmark on global bonds offer a nominal yield-to-worst yield of 3.5% which after subtracting the 10-year inflation expectation of 2.5% provides you with a 1% expected real rate return. If we adjust for expected volatility the expected real sharpe ratio is a bit more attractive for equities than bonds. Historically it is only recessions that ends the uptrend in equities and this time is no different.

The fragmentation game leads to sticky inflation

The US March CPI report yesterday gave yet again the signal that core inflation remains stubbornly high with the US services CPI excluding energy at 6.6% annualised rate using the average m/m figures for the past six months. This figure will continue to come down but as we have said so many times before the question is where inflation settles. We remain in the camp that inflation will remain more sticky than the current pricing and that core services inflation rate in the US could settle around 4% or above.

The fragmentation game that we described in our Q2 Outlook is essentially a roadmap for what to expect as regions fragment across the three pillars of technology (computing power), energy, and defense. Fragmentation means higher costs because it is the opposite dynamic of globalisation and ever expanding supply sides and with the labour force stagnating, or even declining in some countries, there will continue to be pressure on wage costs which at this point must be the single biggest risk and concern for companies as that component is the most important going forward for operating margins.

Earnings preview: What will banks tell investors tomorrow?

The Q1 earnings season is on with Delta Air Lines reporting Q1 results that disappointed a bit against estimates but Q2 guidance on EPS at $2-2.25 was well above estimates of $1.61 suggesting airliners are seeing no slowdown in pricing or demand despite fears of that due to high inflation hitting consumers. But tomorrow is when the earnings show really starts with Q1 earnings (reporting time in GMT) from JPMorgan Chase (11:00) , Wells Fargo (11:00), and Citigroup (12:00). Analysts expect Q1 EPS (y/y growth) of $1.13 (+28%) for Wells Fargo, $1.67 (-31%) for Citigroup, and $3.38 (+21%) for JPMorgan Chase.

The trade in banking stocks was driven by rising net interest margins with regional banks seeing the biggest tailwinds, but with the recent banking crisis funding costs are on the rise for banks and the trade has died for now. JPMorgan CEO Jamie Dimon wrote in his recent shareholder letter that the banking crisis is not over yet and it is still a bit unclear how the crisis has impacted different banks. One thing do know from Federal Reserve is that deposits overall in the US banking system has continued to decline with the latest data point from 29 March at $17.2bn down 5.3% from 13 April 2022.

We expect major US banks to have benefitted from the crisis on the funding side as their size and SIFI label have provided them with safe-haven inflows of deposits while smaller banks are likely to show pressure on the funding side. We also expect the outlook to be mixed with US banks highlighting the resiliency of households and corporates but also acknowledging rising funding costs and tighter lending standards leading to lower loan growth and earnings growth over the next year. The 12-month forward EPS growth in the S&P 500 banks index is -0.6%

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.