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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Technology meltdown and mixed Alphabet earnings
Peter Garnry
Chief Investment Strategist
Summary: Risk-off was intense in US technology stocks yesterday with severe carnage outside the Nasdaq 100 index as investors are reevaluating portfolio amid inflation and lockdowns in China. This week is all about whether technology companies can defy inflation and preliminary data suggest that technology companies are doing better than the average company. We also take a look at last night's earnings releases from Microsoft, Alphabet, and Visa.
It is getting serious in equities
We have flagged for over a week on our daily podcast that things were crumbling underneath equities with massive moves in currencies across USD, JPY, and CNY responding to the worsening situation out of China with its Covid lockdowns. DSV’s CEO said this morning in relation to Q1 earnings that the logistics company had never seen anything like what they are seeing in China with around 500 container ships waiting for docking in Shanghai ports. The war in Ukraine and Russia cutting gas to Poland and Bulgaria are raising the stakes in Europe which is already under pressure from an unprecedented cost of living crisis which is increasing the risks of recession in Europe. At the same time the market is pricing in a more aggressive Fed as more and more signs are suggesting that inflation is not transitory but stickier at a higher level than imagined.
The full effect of all of the above was channeled into US equities in yesterday’s session with Nasdaq 100 futures declining as much as 5.5% dropping below the 13,000 level before bouncing back and close above 13,000 and the rebound trade is extending in early European trading hours. Some of the broader equity indices are masking the carnage that is happening below the tier 1 companies (high quality and high margin businesses) with 37 stocks with a market value above $5bn being down more than 50% this year. Many of the names are recognized as the winners during the pandemic but frothy expectations are being prices out completely in these stocks reminding us of the collapse after the dot-com bubble. Our theme basket performance this year is also showing the long tail of losses in growth segments of the equity market. It is a good opportunity to remind investors what works during inflation which are real estate, commodities, gold, defence, cyber security etc.
Technology earnings a mixed bag with Alphabet disappointing
On Monday we wrote that US technology earnings this week would be a major test of the equity market and basically decide whether US large cap technology stocks would get the label inflation hedge. In order to get this label they must demonstrate minimal impact from inflation on margins and growth. It is too early to conclude anything but the preliminary earnings data suggest that technology stocks are doing better than the general company (see below). In Q4 technology companies grew earnings faster than the MSCI World and S&P 500 and the pattern seems to be repeating in Q1 with MSCI World actually down 5% q/q based on current Q1 figures as rising input costs are eating the profitability of companies.
The three most important earnings yesterday were from and below are our takes on those earnings releases.
Microsoft: Solid results across all business segments while growing revenue by 18% y/y and all segments hit earnings and revenue consensus estimates. Xbox was a little better than feared due to more supply but the lockdowns in China is a key risk going forward for PC sales and Xbox supply.
Alphabet: The first reaction was that it was a very bad earnings release due to a big miss on YouTube relative to expectations (8% miss) indicating advertising weakness and more competition from TikTok and something also observed last week in Snap’s earnings. But the rest of the Alphabet business looks solid on revenue vs expectations although it is disappointing to see the operating loss widen in the cloud segment. Despite talk of a weak earnings release revenue was up 23% y/y.
Visa: Significant beat on revenue and EPS as cross-border volumes in constant currency were up 38% suggesting travelling is coming back fast from pandemic lows and the company is guiding revenue growth of 15-20%.
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