Chief Investment Strategist
Summary: The technology sector is booming, with companies in health care, IT, and communication services investing heavily in capital expenditures and R&D. This is a sign of improving growth prospects and a potential productivity boost. Netflix and ASML both reported strong earnings this week, with Netflix beating estimates on subscriber growth and ASML reporting strong orders intake. The CEO of ASML said that the semiconductor industry has bottomed and is entering the rebound phase, and that revenue will be flat in 2024. However, he also said that 2025 will be a significant year for the company and that the generative AI boom cannot happen without ASML.
As we explained in our earnings week preview note from this Monday, the Nasdaq 100 companies have seen a significant rebound in operating earnings over the past two quarters supporting the rally we have seen in technology stocks. That does not mean that risks are not building in system. The rally in technology stocks have outstripped recent gains in operating income and thus expectations have per se risen, so it is critical that technology companies deliver on earnings next week.
But one supporting evidence that we do experience a very different environment is that capital expenditures and R&D expenses in the health care, IT, and communication services sectors are growing faster since early 2021 than in the preceding 10 years before the pandemic. This significant increase is showing that growth prospects are improving and that maybe the much talked about productivity boost is for real and will be coming in the years ahead. If this is the case then that is an upward force on real interest rates and something that will prevent interest rates from falling back to unusually low levels seen in the recent past.
Many are pointing towards lack of capital expenditures in the overall US economy, but there are two considerations to make around these arguments. For one, what matters for equity markets are the underlying dynamics of those companies and sectors that are dominating the equity indices. Secondly, economists only focusing on capital expenditures are stuck in the old world of manufacturing. The global economy, and especially value creation among companies, is much more driven today by intangibles and as such you should not ignore R&D spending. In fact, if one wanted to go one step further marketing expenses should be added into this measure as they build brands and reflect confidence in the future, but these expenses are not easily teased out.
In our earnings week preview we highlighted the three most important earnings releases this week being Netflix, ASML, and Tesla. With the first two having reported we will quickly assess the quality of their earnings results, and tomorrow we will follow up with our view on Tesla earnings
In our preview of Netflix earnings we said “Given the momentum in Netflix business our view is that the company is poised to exceed estimates for Q4 boosting sentiment in technology stocks this week.”
Netflix reported Q4 results after the US market close yesterday and it did indeed exceed estimates by reporting Q4 net change in paying subscribers of 13.1mn vs est. 8.9mn, while beating a bit on revenue and missing a bit on EPS. But the real driver behind the 13.2% gain in today’s session is the Q1 outlook with Netflix expecting Q1 EPS of $4.49 vs est. $4.09 as the price hikes and subscriber momentum kicks in. The only negative thing to say about the Q4 results is that Netflix has still not nailed gaming on its platform despite its massive distribution platform. For the long-term investors this opportunity remains a key potential catalyst for the future.
ASML reported Q4 results showing strong orders intake with bookings at €9.2bn vs est. €3.6bn and the CEO saying that the overall semiconductor industry has bottomed and is entering the rebound phase. Despite these encouraging signs ASML remains conservative on its FY24 outlook reiterating their from three months ago that revenue will be flat in 2024. The CEO had other interesting comments such as 2025 is shaping up to become a significant year for ASML, China’s share of revenue will decline, and that the generative AI boom cannot happen without ASML. As we wrote in our preview advanced AI chips require EUV (extreme ultraviolet) machines and ASML has currently a 100% market share in those machines so the outlook for the company looks bright. Shares are up 9.3% in today’s session.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
