Equity update: US banks, European earnings, and Apple earnings

Equity update: US banks, European earnings, and Apple earnings

Peter Garnry

Chief Investment Strategist

Summary:  Fed Chair Powell did not imply that US banks had a problem, but the facts are that US regional banks are in trouble and US banks have in general underperformed European banks by 41% since mid-2021. The market is pricing in three rate cuts by the Fed December meeting, but the economy is nowhere weak enough to justify this so the only catalyst that can trigger this is if the US banking crisis spins into something bigger. In today's equity note we also take a look at European earnings this morning that all point to strong performance and solid outlook for the year. Apple is reporting earnings tonight with weak figures expected compared to a year ago and Qualcomm's horrible outlook for the current quarter yesterday is a bad sign.


Implied Fed rate cuts require a crisis

The Fed delivered the expected 25 basis points yesterday and hinted of a rate hike pause committing to be data-driven. The market immediately priced the Fed Funds Rate lower with the current pricing at three rate hikes (or 75 basis points) by the December meeting. As Fed Chair Powell indicated if the US economy slips into a recession it will be mild, and the nominal economy will likely remain strong (US nominal GDP growth is currently 7%) which limits the Fed’s ability to cut the policy rate. So what is the market pricing then?

In our view it is only the banking crisis in US regional banks that can explain the forward curve on the US policy rate with the message we got last night from the Fed. Although Jerome Powell did everything to say there was no banking crisis the facts are instead leaning that way. PacWest and Western Alliance were down heavily in extended trading last night and PacWest said that is weighing strategic options including a sale. JPMorgan Chase has for now been the vehicle by regulators to absorb failing banks with the latest example being First Republic Bank, but the largest US bank is now past the limit of how much deposit they can have; a bank in the US is not allowed to control more than 10% of total deposits. So the three other major banks Wells Fargo, Bank of America, and Citigroup must step up now. The iShares US Regional Banks ETF was down another 2.2% yesterday and this segment will clearly be in focus again today.
iShares US Regional Banks ETF | Source: Saxo

In the bigger picture something remarkable has happened. The long time narrative in the market has gone like this. US structural growth was better than in Europe, the Fed’s policy was more positive for banks than the ECB’s negative rates, and loan growth was better in the US. From this narrative, which was right, investors bought into US banks leading to a significant outperformance relative to European banks from mid-2010 to mid-2021. Since then, US banks have underperformed by 41% relative to European banks in that looks like a stunning reversal of past dynamics. While the US is dealing with a banking crisis that will not die off, Europe has moved past Credit Suisse troubles although funding costs are still on the rise and the risk premium in AT1 bonds past the Credit Suisse shotgun wedding with UBS has not disappeared.

The overall point to understand today is that three rate hikes this year in the US are not coming if we not getting an escalation of the banking crisis. The nominal economy does not warrant rate cuts in 2023.

US banks vs European banks | Source: Bloomberg

Strong European earnings persist into Q1

A consistent theme since Q1 2022 has been the physical world outperforming the digital world and in that process European companies have done better than US companies. Over the past year EBITDA has fallen 7.2% for the S&P 500 while rising 10.5% for the STOXX 600 suggesting very different dynamics between the two regions.

This morning we have got Q1 earnings results from European companies such as  Equinor, AB InBev, VW, BMW, Novo Nordisk, ArcelorMittal, Infineon Technologies, Shell, Maersk, and Ferrari. The red thread among these earnings results is that revenue and operating profits are above estimates, and all the companies are reaffirming their outlooks suggesting the economy is still looking resilient.

Qualcomm earnings was a bad rehearsal for Apple earnings

The next big earnings release is tonight with Apple reporting FY23 Q2 (ending 31 March) results after the US market close. Analyst estimates indicated revenue of $92.6bn down 5% y/y and EBITDA of $30.2bn down from $32.7bn a year ago. High inflation has negative impacted demand for high-end consumer electronics including iPhone and Mac sales. While Intel, Samsung, and AMD are indicating that consumer electronics demand will revert back to growth in the second half of the year, the growth rates are expected to be low. The question for Apple investors is whether the services segment can offset the weakness in device sales.

Qualcomm’s results after the close yesterday were not a good lead into tonight’s Apple earnings as the company is a big supplier to Apple and disappointed the market with its revenue guidance for the current quarter at $8.1-8.9bn vs est. $9.3bn. The driver behind the weak guidance was that the company is seeing no evidence of a meaningful recovery in China leading to expectations that the phone market will be down high-single digit this year. Qualcomm shares are down 7% in pre-market trading.
Qualcomm share price | Source: Saxo

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.