Earnings update as GBP remains range bound
Markets have been trading in the red for the last couple of days, with the main drivers being corporate earnings and economic data. As we have repeated for most of the last 15 months, this is a fundamental-driven market, and when the data doesn’t impress, we tend to see a risk off environment and stocks fall. This theme has legs, and after celebrating some better-than-expected earnings from the financial sector last week, this week’s earnings disappointments are starting to weigh on stocks. The Dax is leading Europe lower on Thursday, and is currently down some 0.8%, as investors digest some weaker corporate earnings from Germany and the US. However, US shares are also pointing to a lower open later this afternoon. The pound is basically flatlining this week, although it is also lower on Thursday vs. the USD, as investors digest what the higher-than-expected inflation data means for the future of UK monetary policy.
Earnings season disappointment
By now you will have heard about the shock earnings disappointments for the likes of Goldman Sachs, who was the only investment bank not able to capitalise on the recent bout of Treasury market volatility, along with Netflix missing subscriber estimates for the first quarter of this year. Goldman Sachs’ share price staged a mini recovery in line with the broader financial sector on Wednesday, however, on Thursday, the pre-market is predicting a 1% decline for the stock, as risk sentiment drains. The latest update from FactSet, the data analytics groups, points to another ugly quarter for US corporate earnings. It now expects the S&P 500 to report a decline in earnings for the second consecutive quarter in Q1 2023. As of this week, the S&P 500 has recorded a 6.5% drop in YoY earnings for Q1, which would be the largest decline in earnings since Q2 2020 – the peak of the pandemic. This seems to be a trend, over the past three quarters, actual earnings have exceeded estimates by only 2.1% on average, well below the 5 and 10-year averages. However, to counter-act some of the bad news, how earnings growth is calculated can have a big effect on the growth rate. For example, 90% of the 30 S&P 500 companies that have reported Q1 results so far have reported actual EPS above estimates, so positive earnings surprises are trending close to the 5-year average. Thus, if we continue to see earnings beat estimates than the EPS growth rate may start to improve.
Why there could be hope for the future
We are early days in the Q1 earnings season, and we still waiting to hear from the tech big hitters who have massive market share in the S&P 500. If they can beat expectations, then the growth rate could improve. Added to this, due to the low bar for earnings in Q1, and the raft of earnings downgrades from analysts, if earnings can continue to beat expectations, then we could see upgraded forecasts for Q2 and beyond, so it’s not all bad news for earnings, even if there have been some notable misses so far.
Tesla’s new strategy has knock on effect for car sector in Europe
The key thing to remember is that the markets are currently trading on day-to-day corporate news flow, so it is hard to extrapolate an over-arching theme. However, one exception Is the automaker sector. Tesla released earnings on Wednesday, although it has taken great strides in cost cutting and delivered a 4% increase in the number of vehicles produced, its share price fell sharply and is down some 6% in Thursday’s pre-market. This is all down to Elon Musk’s press conference, where he said that the company had been profitable for many years, so now it could cut the price of vehicles and sacrifice margin growth and profits for market share in the electric vehicle market. Cue a big sell off in European car stocks. Renault is down some 7% on Thursday as the market digests news of what Tesla’s strategy means for the overall EV sector. The problem for Renault et al is that you can’t isolate what Tesla is doing because it has huge repercussions for the broader market. Just as years of supply chain issues have finally started to ease, some car makers like Renault had said that they would not be cutting prices, even though consumers are struggling with higher interest rates. However, Tesla and Musk have now blown that strategy apart, so expect European car markers stock prices to struggle to recover as they come to grips with what Musk and co. are attempting.
Are transport stocks telling us something?
Finally, there are three things to watch between now and the end of the week: preliminary PMI data for US, UK and Europe that is released on Friday. The market is expecting a slight increase for the US, but does that mean that economists are too gloomy about the US economy as they predict a 61% chance of a recession in the US? We shall have to see if this data moves the dial for the US economy. GBP/USD is flat this week as the market digests news that the UK’s headline rate of inflation is well above that of the Eurozone and the US, even if core price growth, at 6.2%, is closer to the average for developed economies. Will the UK’s PMI reports show us that inflation is falling? Economists expect a large decline in UK inflation over the coming months due to the sharp decline in energy and electricity prices compared with last summer. The last thing to watch is the chart below. It shows the Dow Jones Transportation Average, which has underperformed the Dow Jones average by 8.3% since February, alongside the Nasdaq 100. Why does this matter? The DJTA is considered a lead economic indicator, and when it’s weaker than the overall market, it historically indicates economic stress. Thus, we need to assess if it will be a reliable lead indicator for a future US recession. We shall have to see, after all the Nasdaq has risen by nearly 5% in the past month alone, so can tech save the day for the US economy, or can the DJTA close the gap with the Nasdaq?
Chart 1:
