Head of Equity Strategy
Summary: Amazon's e-commerce business is under massive pressure from rising input costs and overinvestment during the pandemic. Amazon's two segments North America and International posted operating losses that will only get worse in Q2 according to the guidance. This outlook could weigh on equity sentiment today. Apple and Caterpillar results were strong yesterday, but Apple hinted of $4-8bn revenue risk from Chinese lockdowns and Caterpillar said Chinese demand for construction equipment was weaker than in 2019. Finally, we highlight the main conclusions from the Q1 earnings season and the most important earnings next week.
Amazon is under massive pressure from input costs and overinvestment
As we wrote yesterday, Meta’s revenue growth will likely go negative in Q2, and Amazon’s growth was slowing to the lowest levels in 20 years as we wrote in February in relation to their Q4 earnings. In our equity note on Amazon in early February we highlighted that the company had overinvested and that turned out to be the ghost haunting the company in Q1 on top of all the rising input costs. Amazon delivered revenue of $116.4bn, in line with estimates, up 7.3% y/y and based on its guidance for revenue in Q2 revenue growth will slow to 4.8% y/y. The growth stocks of the world are seeing their growth grinding to halt while the value stocks (energy, mining, financials etc.) are beginning to see their revenue and profits growing faster with Exxon Mobil expecting 47% y/y revenue growth in Q2.
What really spooked investors was Amazon’s massive miss on operating profits in Q1 of $3.7bn vs est. $5.4bn and the guidance of $-1bn to $3bn vs est. $6.8bn. How can equity sell-side analysts be so wrong on the underlying business, it is embarrassing. The EBIT margin has already rolled over for Amazon and is now below the pre-pandemic levels. It is also quite amusing to see Amazon saying that demand is not softening when in fact their revenue growth is declining and below many other retailers; in fact it cannot keep up with inflation. The scary story about Amazon is that it generated operating income of $6.5bn in AWS while losing $1.6bn and $1.3bn in its North America and International business segments.
Apple and Caterpillar comments are not good signs on China
Apple earnings for the previous fiscal quarter were as expected with no hiccups, but the outlook for the current fiscal quarter was more uncertain with a potential revenue hit of $4-8bn from Chinese lockdowns impacting supply and potentially also demand in its Chinese market which generated around $18bn in revenue for the previous quarter.
Caterpillar, the world’s largest maker of construction equipment, delivered strong Q1 results beating on both the top and bottom line, but the company is still not providing any guidance which is a legacy from the pandemic, but also something it plans for change going forward. However, in its earnings call with analysts the company said Chinese construction activity weakened in Q1 and that China demand is slightly lower than in 2019.
A louder echo of Caterpillar’s concerns in China was seen in an article in the FT in which private equity firm PAG founder Weijian Shan said that China’s zero-covid policy has resulted in a deep economic crisis saying it is in its worst shape over the past 30 years saying sentiment on Chinese equities is very weak. In the interview he says that China in 2022 feels a bit like Europe and the US in 2008. The chart below showing market to total assets of large banks in the US and China has long been one of our favourite charts to point out the weakening credit cycle in China. Chinese banks continue to extend a lot of credit (increasing assets), but market values continue to grow at a slower pace indicating that investors are worried about credit quality.
Another major week ahead for Q1 earnings
Around a quarter of S&P 500 market value is reporting next week with around 300 companies in our reporting universe on the line. Earnings are down q/q in Q1 while revenue growth is flat based on the data we have now suggesting a real impact from inflation. It is unlikely that next week’s earnings will change that and the outlook for Q2 has so far been mixed to negative from many companies. The key risk for earnings in Q2 is China and to what extent China imposes further lockdowns impacting global supply chains even more.
The most important earnings releases are highlighted below:
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
