Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Earnings Watch: Two different worlds
Peter Garnry
Chief Investment Strategist
Summary: The earnings season so far shows the US outperforming and Europe lagging, but a turnaround on Chinese stimulus feeding into the real economy could change this circumstance into 2019.
With almost 20% of S&P 500 companies having reported Q3 earnings, a clear picture is emerging. US companies are doing well, showing robust revenue and EBITDA growth up 8.6% year-on-year and 6.5% y/y respectively. On the other side of the pond, however, European companies are yet again stuck in the mud.
While it’s early days in the European earnings season, preliminary results see EU firms showing negative revenue and EBITDA growth (see charts) as the region is obviously impacted by the slowdown in emerging markets and most notably China. Because of this weakness, though, we think European equities could be tactically interesting. As we pointed out in our recent Q4'18 Outlook, US equities are overvalued relative to both developed and emerging market equities.
When China’s stimulus feeds into the real economy, investor sentiment and the macro dynamics out of China will change. We expect the effects to start in Q1'19; due to the deep export links from Europe to Asia, we expect China’s rebound to lift European assets as well.
While it’s early days in the European earnings season, preliminary results see EU firms showing negative revenue and EBITDA growth (see charts) as the region is obviously impacted by the slowdown in emerging markets and most notably China. Because of this weakness, though, we think European equities could be tactically interesting. As we pointed out in our recent Q4'18 Outlook, US equities are overvalued relative to both developed and emerging market equities.
When China’s stimulus feeds into the real economy, investor sentiment and the macro dynamics out of China will change. We expect the effects to start in Q1'19; due to the deep export links from Europe to Asia, we expect China’s rebound to lift European assets as well.
Technology is on the menu
This week sees major US technology companies reporting earnings. This could potentially be an important lifeline for wobbling equity markets.
Microsoft (reports FY'19 Q1 on Wednesday after the close): Analysts are still bullish on Microsoft with EPS estimates up 5% in the past six months. Consensus estimates are expecting 14% y/y EPS growth and 14% y/y revenue growth as Microsoft is closing in on Amazon in the cloud infrastructure business. The biggest drivers of expected strong growth will come from high growth in cloud infrastructure and software on top of a potentially significant impulse from the PC segment where businesses are likely upgrading from Windows 7 to Windows 10.
Amazon (reports FY'18 Q3 on Thursday after the close): While strictly not a technology company measured on revenue (its more of an internet retail firm), the majority of Amazon's EBITDA comes from its cloud infrastructure business called AWS. Analysts remain extremely bullish on Amazon with estimates on Q3 EPS up 46% in the past six months and analysts are expecting EPS growth of 189% y/y and revenue growth of 30% y/y. On the conference call, analysts will likely focus on the international expansion of Amazon’s internet retail business and especially the latest minimum wage hike in the US. This could potential weigh on profit growth in the short term but with profit engines ranging from ads, cloud business, and third-party sellers on Amazon, the company can most likely mitigate the majority of the wage hike. This is likely in sharp contrast to its retail competitors that will have to match wages but with no other businesses to absorb the pressure; the retailing industry could bleed profits going forward.
Alphabet (reports FY'18 Q3 on Thursday after the close): The parent company of the world’s most dominant search and online ads business (Google) is still delivering growth but analysts have soured lately with estimates on Q3 EPS down 1% in past six months. However, consensus is still looking for 9% y/y EPS growth and 23% revenue growth y/y but the divergence in top and bottom line growth is the key focus for investors. Alphabet has significantly increased capital expenditures in the past two years with operating cash flow not growing at the same speed. This is putting pressure on free cash flow generation and investors might soon begin to ask serious questions about capital allocation.
Intel (reports FY18 Q3 on Thursday after the close): The largest chipmaker in the world is beginning to feel the heat from AMD and NVIDIA as its competitors have strong positions in some emerging businesses where Intel has been a late adopter. However, the core business is still solid and analysts’ estimates for Q3 EPS are up 11% in past six months with estimated EPS growth of 14% y/y and estimated revenue growth of 12% y/y. The key growth engine at Intel is the Data Center Group which delivers chip infrastructure to power data centres around the world.
The table below shows the most important earnings releases this week.
This week sees major US technology companies reporting earnings. This could potentially be an important lifeline for wobbling equity markets.
Microsoft (reports FY'19 Q1 on Wednesday after the close): Analysts are still bullish on Microsoft with EPS estimates up 5% in the past six months. Consensus estimates are expecting 14% y/y EPS growth and 14% y/y revenue growth as Microsoft is closing in on Amazon in the cloud infrastructure business. The biggest drivers of expected strong growth will come from high growth in cloud infrastructure and software on top of a potentially significant impulse from the PC segment where businesses are likely upgrading from Windows 7 to Windows 10.
Amazon (reports FY'18 Q3 on Thursday after the close): While strictly not a technology company measured on revenue (its more of an internet retail firm), the majority of Amazon's EBITDA comes from its cloud infrastructure business called AWS. Analysts remain extremely bullish on Amazon with estimates on Q3 EPS up 46% in the past six months and analysts are expecting EPS growth of 189% y/y and revenue growth of 30% y/y. On the conference call, analysts will likely focus on the international expansion of Amazon’s internet retail business and especially the latest minimum wage hike in the US. This could potential weigh on profit growth in the short term but with profit engines ranging from ads, cloud business, and third-party sellers on Amazon, the company can most likely mitigate the majority of the wage hike. This is likely in sharp contrast to its retail competitors that will have to match wages but with no other businesses to absorb the pressure; the retailing industry could bleed profits going forward.
Alphabet (reports FY'18 Q3 on Thursday after the close): The parent company of the world’s most dominant search and online ads business (Google) is still delivering growth but analysts have soured lately with estimates on Q3 EPS down 1% in past six months. However, consensus is still looking for 9% y/y EPS growth and 23% revenue growth y/y but the divergence in top and bottom line growth is the key focus for investors. Alphabet has significantly increased capital expenditures in the past two years with operating cash flow not growing at the same speed. This is putting pressure on free cash flow generation and investors might soon begin to ask serious questions about capital allocation.
Intel (reports FY18 Q3 on Thursday after the close): The largest chipmaker in the world is beginning to feel the heat from AMD and NVIDIA as its competitors have strong positions in some emerging businesses where Intel has been a late adopter. However, the core business is still solid and analysts’ estimates for Q3 EPS are up 11% in past six months with estimated EPS growth of 14% y/y and estimated revenue growth of 12% y/y. The key growth engine at Intel is the Data Center Group which delivers chip infrastructure to power data centres around the world.
The table below shows the most important earnings releases this week.
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