Institutional vs retail investors, bubble stocks meltdown, earnings preview

Ark Invest at the center of the bubble stocks meltdown

As we have said multiple times recently, the Ark Innovation ETF is the most liquid expression of our bubble stocks basket and the speculative growth stocks segment that retail investors like. The five-year weekly correlation between our bubble stocks basket and the Ark Innovation ETF is 0.85 and on daily observations the past year it is 0.90, so essentially the two baskets overlap a lot. Our bubble stocks basket is down 51% from the peak in February 2021 and Ark Innovation ETF is down 49%, the worst drawdown in the fund’s history eclipsing the 35% during the pandemic led selloff.

The Ark Innovation ETF closed below $80 yesterday and is at a critical level technically and if we were to guess what is happening it is two things. Firstly, the rotation from growth or high duration assets into lower duration and value/cyclical stocks have intensified among large investors driving a big change in exposures and flow. That is hitting Ark Innovation ETF big time. Secondly, a lot of hedge funds are likely smelling blood in the water and are aggressively shorting these types of high duration assets. As we have been writing in our equity updates since New Year the selloff is intensive and given that the US 10-year yield is only up 23 basis points this year it would imply that bubble stocks have a duration of 60, or things being equal, which is not the case, so if we assume markets are efficient it is likely reflecting lower revenue growth and operating margin profiles of these speculative growth companies. That is why the earnings season could become a short squeeze minefield if some of these companies continue to deliver strong revenue growth and signs of improving operating margins (although coming from negative values).

Earnings preview: ASML and Netflix are the first technology stocks to be judged

The earnings season is under way this week and we have got good mixed earnings with Fast Retailing disappointing on revenue and Philips issuing a profit warning, while companies such as Delta Air Lines and Chr Hansen were positive stories with upbeat CEOs and better than expected figures. Today we will get earnings from Wells Fargo, BlackRock, JPMorgan Chase, and Citigroup with consensus looking for Q4 EPS to decline q/q (except for BlackRock) due to lower market activity mimicking Jefferies’ earnings on Wednesday, but we expect these companies to sound quite upbeat on the outlook driven by rising interest rates.

Next week we will get more earnings, primarily from the US, but it will not be until the week after that we will get the real action from earnings.

Next week’s earnings releases:

• Tuesday: Goldman Sachs, PNC Financial Services, Truist Financial, Bank of New York Mellon, Interactive Brokers
• Wednesday: ASML, EQT, UnitedHealth, Bank of America, Procter & Gamble, Morgan Stanley, Charles Schwab, US Bancorp, Kinder Morgan,
• Thursday: Sandvik, Netflix, Union Pacific, Intuitive Surgical, CSX, SVB Financial Group, CSX, Travelers
• Friday: Investor, Schlumberger, IHS Markit

From next week’s earnings releases the three earnings we would highlight are ASML, Netflix, and Schlumberger.

ASML is the biggest manufacturer of semiconductor equipment and given the outlook yesterday from TSMC, the world’s largest semiconductor foundry, investors are still bullish on the industry. Analysts expect Q4 revenue to rise 20% y/y and EPS to rise 15% y/y signalling continued strong growth for ASML. The capital expenditures planned over the coming years will keep the growth rates high. The recent decline in the share price has increased the spread between the consensus price target and the current price to 20%.

Netflix is a company that has faded a lot among the technology stocks with so many new IPOs within technology stocks and video streaming is no longer seen as something and Netflix is not unique with many companies that have entered the business (Apple, Amazon, and Disney). Analysts expect revenue to increase 16% y/y and EPS to decline 49% y/y as capital expenditures are rising again following a production drought due to the pandemic.

Schlumberger is of the world’s largest oil services companies and stands to win from the high oil and gas prices as they should incentivize integrated oil and gas companies to soon begin lifting their capital expenditures although they have lately been reluctant to communicate that message to the market. Analysts expect revenue growth at 10% y/y and EPS to rise 79%.