Head of Saxo Strats
While equity markets have regained their footing a bit despite the fact that US tariffs on $34bn worth of Chinese goods went into effect on Friday, investors are still nervous over a potential trade war escalation. The equity market lacks good upside catalysts to push the S&P 500 through the 2,800 resistance level. However, many investors are hoping that the Q2 earnings season – starting tomorrow – could be their salvation. On an individual basis the earnings season can carry certain pockets higher amid strong earnings growth with most likely industries being Software & Internet, Health Care, Retailing and Energy. On an aggregate level, we believe the earnings season will fail to become the fuel necessary for new highs.
Slow start with US banks as the starter
Our coverage of global equities includes around 2,000 companies and 29 of these report earnings this week as the season is always slow for the first two weeks. This week’s biggest event is the three US banks JPMorgan Chase, Citigroup and Wells Fargo all reporting Q2 earnings on Friday. Analysts are most bullish on JPMorgan Chase, expecting net revenue to increase 6% y/y with only 4% y/y expected for Citigroup. Wells Fargo is still suffering from their scandal that broke in late 2016 revealing that millions of client accounts had been involved in fraudulent actions by some employees. Analysts expect Wells Fargo to see net revenue decline 4% y/y next to expected 7% EPS growth y/y. However, Wells Fargo’s EPS growth pales in comparison with JPMorgan Chase (est. 30% y/y) and Citigroup (est. 23% y/y). US banks are in general enjoying the tailwind from a strong US economy and rising yield curve, lifting interest income and lending margins. Our Equity Radar model has a positive rating on JPMorgan Chase (0.12) driven by the value and momentum factors. Citigroup has a slightly negative rating (-0.04) driven by a low yield and recent strong price momentum. Wells Fargo has a negative rating (-0.10) driven by recent strong price momentum and low yield/quality.
The largest companies reporting earnings this week
Aker BP to provide first glimpse of energy rebound
One of the best performing sectors in Q2 was the energy sector which rode the rising wave from higher oil prices as the US walked away from the Iran deal and supply was getting squeezed from other oil producing countries. The MSCI World Energy sector is up 14.6% since Q1 compared with only 4.4% for the MSCI World, but as the five-year chart illustrates, the energy sector has been a disastrous investment over a five-year period, delivering only 6.2% vs 55.4% for global equities. Looking at the Q2 numbers we expect strong results across the board in the energy sector and Norwegian Aker BP is the first energy company to report Q2 earnings on Friday.
Analysts expect EPS to increase by 146% from a year ago and revenue to be up 62% to $962mn in Q2. The strong expected result is seen as driven by record production and new fields on track for production, including continuous exploration success around current operating fields with Q1 highlighting new finding in the Alvheim field. Aker BP is an E&P company with oil exploration and production activities on the Norwegian continental shelf. Our Equity Radar model has a positive rating (0.12) on the stock driven by a very high momentum score.
MSCI World (black) vs MSCI World Energy (orange) on total return in % since March 31, 2018
Five-year comparison:
2024: The wasted year
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.
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.
