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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Unwinding, Tesla charging payoff, and Adobe earnings
Peter Garnry
Chief Investment Strategist
Summary: This week was more dramatic than what most investors would think. There was considerable unwinding of technology mega caps vs US small caps in a sign that some big funds are repositioning themselves in the market. One explanation could be that the US debt ceiling resolution has improved the economic outlook and that technology valuations have become too excessive. In today's equity note we also discuss Tesla's big win in EV charging and Adobe's earnings release next week.
Key points in this equity note:
- A big unwind in positions in US equities likely happened this week with selling of technology mega caps and covering of shorts in small caps.
- Tesla shares are up 4.5% in pre-market after a strong session yesterday as GM is following Ford in adapting its EVs to Tesla’s charging stations.
- Adobe is our earnings focus next week with solid revenue and operating income growth expected. Investors will focus on Figma acquisition and pickup in outlook from recent product updates.
Unwinding of mega caps and covering of economic sensitive small caps
This week was rather dramatic as we have highlighted in several of our equity notes with the VIX Index plunging to new lows for the pandemic cycle and the VIX forward curve signaling calm and expectations of extended momentum. But underneath the surface of equity indices the long tail of stocks are underperforming mega caps overlapping with previous periods of significant tipping points.
Since the US debt ceiling was resolved the Russell 2000 has been on a tear as small caps are the most sensitive stocks to changing economic conditions. As we came into this week both small caps and technology stocks rallied together but starting Tuesday and accelerating into Wednesday before petering out by Thursday, US small cap stocks rallied hard while technology stocks declined. Measured over a 2-day period ending on Wednesday, Russell 2000 stocks rallied 4.5% while Nasdaq 100 stocks declined 1.7%, which is a pretty significant move when looking over the past five years (see chart below). One possible explanation is that some bigger funds engaged in an unwinding of positions leading to selling mega caps and covering shorts in small caps, maybe due to the US debt ceiling solution improving economic conditions.
Tesla’s EV charging bet paid off
Tesla shares rose 4.6% yesterday and are indicated up another 4.5% adding close to $70bn in market value after the announcement that GM is following Ford in adapting its EVs to Tesla’s Superchargers making them effectively the US standard for EV charging. The move will put pressure on the entire car industry to adopt Tesla’s charging standard as the global standard. This will of course means higher utilisation of Tesla’s charging network adding more cash flow for Tesla shareholders. For GM the deal means $400mn in annual savings. The initial phase will include adapters for GM EVs and from 2025 new EVs will have the Tesla charging port as a production standard. Tesla CEO Elon Musk says that Tesla cars will not be prioritized at the supercharger stations.
Is Adobe riding the AI hype?
Adobe is our key earnings focus next week reporting FY23 Q2 (ending 31 May) earnings on Thursday after the US market close with analysts expecting revenue growth of 9% y/y and EBITDA of $2.36bn up from $1.74bn a year ago. Adobe has increased its profitability focus following the 2022 slowdown and blow to equity valuations following the rising interest rates.
Investors will focus on the Figma acquisition which could still hit a roadblock from regulators over competition concerns. While investors and the equity market would likely celebrate of the deal falls through longer-term it could negatively impact revenue growth. Adobe has recently be riding some of the AI hype and recent product updates have incorporated several AI-related functionalities exciting the content creation industry. It will be interesting to see if this excitement carries into the outlook.
The most important earnings releases next are listed below:
- Monday: Oracle, Vantage Towers
- Tuesday: Ashtead Group
- Wednesday: Lennar
- Thursday: Adobe, Kroger, Jabil, Halma
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