Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Earnings Watch and the great start for e-commerce
Peter Garnry
Chief Investment Strategist
Summary: In today's equity update we go through next week's earnings releases which will include the first Q4 earnings starting with US banking earnings from Bank of America, JPMorgan Chase, and Citigroup. Analysts expect US banks to show another quarter of negative earnings growth before returning to earnings growth in Q1. We also dive into our theme basket performance in the first week of trading highlighting the e-commerce basket up 7% this week on three divers across falling container freight rates, robust consumer, and cost cutting driving the strong performance.
US banks saw earnings decline in Q4
The Q4 earnings season starts next week with major US banking earnings most notably from Bank of America, JPMorgan Chase, and Citigroup. Analysts remain muted on US banks with earnings expected to show another quarter of negative earnings growth compared to a year ago. The interest rate shock has been bad for banking earnings and activity levels across the investment banking division. As credit portfolios have an average maturity of around seven years banks will slowly begin rolling their assets into higher interest rate levels which will begin to accelerate their net revenue figures improving profitability over time. If the US economy just experience a shallow recession in real terms and strong nominal growth then US banks should be considered as a good tactical trade over the coming years.
For the overall Q4 earnings season we expect to see more industries experiencing margin compression than industries experiencing expanding margins. This will continue to be a headwind for earnings growth. Back in May last year we inserted analyst estimates of S&P 500 earnings for Q2- Q4 2022, and it is interesting to see how realized earnings have disappointed against those expectations. Analysts did not see the margin compression and judging from current estimates they have not materially revised down their expectations. That means that the Q4 earnings season and beyond could be paved with more disappointments.
The list below shows the most important earnings releases next week.
- Tuesday: Albertsons
- Thursday: Fast Retailing, Seven & I
- Friday: DiDi Global, Aeon, Bank of New York Mellon, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, UnitedHealth, BlackRock, Delta Air Lines, First Republic
Could e-commerce stocks be the big positive surprise this year?
The best performing equity theme basket so far this year has been the Chinese consumer & technology basket because of the sentiment shift in China over the reopening policy, intentions to stimulate, bailout real estate developers, and finally the green light for Ant Group (Alibaba’s financial arm) to raise more share capital which could pave the way for an IPO later this year. While China is still a difficult trade the other strong performer in the first week of trading which is our e-commerce basket is more interesting.
The e-commerce basket (see constituents below) is up 7% this year which is in stark contrast to last year’s horrible performance. There are likely three drivers behind the positive performance and they can all continue throughout 2023 making potentially e-commerce the big positive surprise this year.
- Container freight rates are almost back to the lows levels from before the pandemic started taking costs and supply chain delivery times back to normal levels. This improves profitability and customer satisfaction.
- Resilient households in the US and Europe despite inflation and lower real incomes. Consumer companies surprised on revenue growth during the Q3 earnings season and those consumer companies that have reported for fiscal quarters ending in October and November have extended this trend.
- Cost cutting among e-commerce companies will also significantly improve profitability this year and beyond the wage costs online advertising prices have also come down reducing customer acquisition costs.
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