Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Earnings update, bond yields, and Adyen Investor Day
Peter Garnry
Chief Investment Strategist
Summary: The big winner in the Q3 earnings season has been technology companies with Nasdaq 100 companies such as Amazon, Airbnb, MercadoLibre, Meta, and Alphabet significantly increasing their earnings compared to a year ago. Yesterday's move higher in the US 10- year yield might suggest that falling yields are not a one-way street lower. Adyen is facing its most critical test since going public as the Dutch payments company is hosting its Investor Day updating the market on its mid-term financial targets since the catastrophic first-half results in August.
Key points in this equity update:
- The Q3 earnings season has been supportive for equity markets and the big winner has been the technology sector seeing strong earnings growth coming companies such as Amazon, Airbnb, MercadoLibre, Meta, and Alphabet.
- US bond yields have rebounded this week and maybe it is too early to call for a sustainable move lower. US growth seems robust and South Korea exports seem to suggest the global economy is accelerating again. This could mean higher bond yields again.
- Tomorrow is a big day for Adyen shareholders as management is finally going to provide the much needed update on its financial targets since the big blowup in August when a horrible miss on volume and the EBITDA margin scared investors.
The Q3 earnings season has been supportive
Around 84% of S&P 500 companies have now reported Q3 earnings and the overall conclusion is that companies globally are doing better than expected and their outlook is supportive for equities. Operating income (EBITDA) has been stable for S&P 500 and STOXX 600 companies compared to Q2 while technology earnings have increased significantly in Q3 on the back of stronger than expected revenue growth in technology and efficient cost focus. Examples of technology companies that have increased earnings a lot in Q3 are Amazon, Airbnb, MercadoLibre, Meta, and Alphabet.
Can long-end US bond yields rise again?
The US 10-year yield rebounded yesterday and has stayed firm today. The big risk-on move last week was driven by Powell’s remarks bolstering the ‘peak policy rate’ narrative as Powell said the higher long-end bond yields had done most of the tightening needed. In an almost comical move long-end bond yields plunged with equities rallying. BlackRock recently said that 5.5% level in the US 10-year yield would be consistent with the underlying inflation dynamics, term premium etc. and JPMorgan CEO Jamie Dimon warned that inflation might be stickier than what most think and that the Fed could be forced to hike 25, 50, or eve 75 basis points more and said that the US 10-year yield at 5.5% to 7% was not unusual.
Recent export figures from South Korea suggests that the global economy might be accelerating and the JPMorgan GDP nowcast figures are still suggesting that the US economy is growing around 1.5% annualized in real terms. In other words, the global economy seems to be robust at the moment. Should US bond yields rise again we could quickly see equities be sold off again.
It is the moment of truth for Adyen
The payments industry in Europe has been rocked twice this year by first Adyen and later Worldline as we have written about in our research notes Quick take: Payment stocks plunge on Worldline outlook and Risk-off, Nvidia earnings, and Adyen’s sudden collapse. Adyen lived a quiet life in public markets until August of this year when the company announced H1 2023 financial results missing on volume and EBITDA due to cost pressures related to its North American business – revenue was up 21% y/y and EBITDA was down 10% y/y making investors questioning Adyen’s EBITDA margin target of 65% as the EBITDA margin plunged to 43%. It did not make things better that management delivered a horrible explanation in financial news and the quiet approach subsequently made things worse. The recent Worldline revenue growth outlook then made investors questioning Adyen’s mid-term forecasts of 25% revenue growth.
Tomorrow’s Investor Day presentation is key for Adyen shareholders but management to reset expectations. Adyen is valued at a premium to its nearest and most comparable competitor Block, so there is still downside risks to Adyen if they cannot better explain what happened to costs and present a plan for get costs under control. But even more importantly for the long-term value of the business, what is the long-term expected revenue growth rate?
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