Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access all our platforms from a single account.
European pain, cyber security realities, and earnings watch
Peter Garnry
Chief Investment Strategist
Summary: Europe's economic growth declined significantly in May adding to concerns already mounting among economists that the global economy could enter contraction. The cyber security industry is undergoing strong and Crowdstrike lifted its fiscal year outlook for revenue and earnings, but despite 35% expected revenue growth this year investors are sending its shares down by 7%. Finally, we take a look at next week's earnings where we focus on a smaller French semiconductor company called Soitec.
Key points in this equity note:
- Europe’s economic growth experienced a significant decline in May confirming the worsening outlook driven by a decline in industrial production.
- Despite strong growth outlook and an upward revision to both revenue and earnings, investors were still not satisfied with Crowdstrike’s earnings result sending the cyber security shares down 9% in pre-market trading.
- The AI hype has mostly benefitted US technology stocks and a few European stocks. But next week Soitec, a small hidden French gem in the semiconductor industry, will report earnings.
An ugly May in Europe increases the risk for equities
The year started with a growth rebound in Europe following a severe contractionary levels back in the second half of 2022 as penalizing energy prices negatively impacted companies and households. The growth rebound combined with hopes of a Chinese recovery story led European equities higher outpacing US equities and especially luxury stocks were pulling the European indices higher. Economic growth hit positive level in January but since then growth stalled despite tighter labour market dynamics and we can now see that May was an ugly month for Europe according to the euro-coin growth indicator, which is a real-time GDP tracker in the euro area. This data point aligns well with the German economy being in a recession and the negative developments reflects a decline in industrial production and other qualitative indicators on business activity.
With the probability increasing of both the US and European economy slipping into a period of real GDP contraction the risks for equities are going up. The good thing for European equities is that equity valuations are much more benign than in the US equity market, read our equity note from yesterday on valuation risks in US equities, which has recently been fueled by the AI-driven frenzy.
Crowdstrike growth of 35% is not enough for investors
Cyber security is a red-hot equity theme and one of the best equity themes since Russia’s invasion of Ukraine that has lifted demand for cyber security solutions from high to very high levels. The strong underlying growth dynamics have pushed expectations a lot higher for many cyber security stocks and they have constantly been bolstered due to strong earnings exceeding estimates in many cases. Yesterday’s earnings from Crowdstrike were better than expected and the fiscal year outlook on both revenue and EPS were lifted from previous statements. The company is projecting 35% revenue growth this year. One would think that such an announcement would cause stock price to rally, but instead Crowdstrike shares are down 7% in today’s trading.
This is a lesson for investors that even strong earnings results can hit a roadblock called excessive expectations. But for long-term investors it is important to let the price action be what it is – namely just noise. Focus on the secular growth theme in cyber security stocks and tune out the hiccups on the way to more revenue and profits in the future. Earnings Watch: Is a hidden gem in France drowning in the Nvidia hysteria?
AI hype has been the dominant factor in equity markets this year and went in overdrive mode with Nvidia’s insane revenue outlook. Many US-based companies related to AI have responded to the AI hype but only a few European companies have felt the tailwinds from AI winds across the Atlantic outside of course ASML which investors are betting will see an order increase as higher demand for AI chips will mean more demand for EUV machines for producing the chips.
But underneath the technology giants related to AI there is a little French semiconductor company called Soitec that will report earnings on Wednesday. Soitec is French-based semiconductor company with a market value of €4.6bn and revenue of €863mn in the past year up 48%. The company has 2,000 employees with 20% of those people working in R&D. Shares in Soitec are down 15% this year reflecting a very different development than what we have seen in US semiconductor stocks.
Analysts are very positive on the company expecting revenue to grow to €1.9bn in the FY26 (ending 31 March 2026) with EBITDA growing from currently €276mn to €731mn as the operating margin expands. Analysts have a price target of €189 compared to the current price of €130 (45% upside potential). The company has a patented engineering substrate solution that allows for precise layering of wafers later used for chip manufacturing. Its Smart Cut technology makes use of both implantation of light ions and wafer bonding to define and transfer a thin single-crystal layer from substrate to another. It basically works as an atomic scalpel.
Next week’s earnings releases:
- Monday: Science Applications International
- Tuesday: J M Smucker, Thor Industries, Ciena
- Wednesday: Campbell Soup, Brown-Forman, Smartsheet, GameStop, Voestalpine, Inditex, LXI REIT, Soitec
- Thursday: Toro, Vail Resorts, DocuSign
Latest Market Insights
Quarterly Outlook
-
-
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... -
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 ... -
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... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
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... -
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... -
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... -
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 ... -
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...