Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Twitter’s Trump fight, earnings optimism, Renault’s way out of darkness
Peter Garnry
Chief Investment Strategist
Summary: Trump's executive order targeting Twitter is mostly political theater according to experts so investors should stay calm; the real risk is related to Q2 earnings. Talking about earnings the current consensus estimates are suggesting that the S&P 500 earnings will be back to new all-time highs by Q1 2021 which we find almost ridiculously optimistic. Finally we focus on Renault as the European carmaker is announcing today that it's laying off 14,600 employees to preserve profitability.
Twitter’s fight with Trump over fact-checking labels has got a lot of attention with Trump’s executive order yesterday calling for new relation under section 230 of the Communications Decency Act potentially revoking social media companies of their liability shield for third party content if they are censoring political content. Twitter’s shares are down 7% over the past two trading sessions and definitely be in focus again today. Legal experts are already calling a political theater as his move will have no legal impact. Another irony of removing the liability shield is that it would force social media platforms to be even more aggressive on removing third party content that could cause liabilities and thus potentially limit free speech even more. In the end this is all noise for shareholders at Twitter and Facebook. The real important events are the impact on online advertising spending in Q2.
As we have been saying for more than a month the equity rally is not founded in fundamentals. Our view is that the Q2 earnings season could be the real shock for the market as investors and analysts will be shocked of the earnings impact. Wall Street analysts expect S&P 500 EPS in Q2 to decline only by 15% and then return to aggressive growth again in Q3 taking EPS to new all-time highs already by Q1 2021. Regularly readers and listeners of our podcast know that we are often highlighting the dividend futures markets and they continue to signal that it will take multiple years for corporate profitability to return pre COVID-19 levels.
Renault shares are down 5.5% despite news that the carmaker is laying off 14,600 employees globally which would reduce costs and preserve profitability. The CEO also said that the carmaker’s strategy in the near term will focus on profitability streamlining its car production across fewer platforms instead of focusing on volume. Renault’s shares are down 76% from the highs in 2018 but this week has seen a significant breakout higher and the best week in many months. The European carmaker has been free cash flow positive since FY 2009 and has a history of managing its operating margins well. If the carmaker can stabilize free cash flow at 50% of previous years the stock is valued at an impressive 20% free cash flow yield. At one point some long-term investors might consider the risk-reward despite the outlook for the industry.
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