Head of Equity Research
Carlsquare weekly market letter: Time to find shelter
17 apr 2024
- We warned that higher oil prices and inflation would return in a second wave. Here we are and it is high time to review portfolios
- On the positive side, the indices are already oversold. We are entering the earnings season, which is usually a good time for the stock market. Today’s trading could be very telling. The bears will be looking for a third leg down, but the bulls will be hoping for a morning star to save the trend. And with the market oversold, we will at least see a test to the upside today. In any case, we are entering a market with higher volatility, as is usual in the spring.
- All in all, this is a traders’ market!
When it comes to stormy waters, it is an old adage that it is often too late to take action and seek shelter. As they write in Yachting Monthly:
Headlines focus on the war in Ukraine and Israel-Palestine, as well as better-than-expected macro data.
But as we have said repeatedly over the past month, watch out for a new wave of inflation from higher oil prices. Looking at the timeline, Ukraine’s drone bombing of Russia’s refining capacity coincides with the global spike in gas and oil prices. Yesterday, Jerome Powell of the Fed added to the worries when he said that interest rate cuts were likely to come later than expected…
When you see a potential change in the weather, such as a new low pressure system coming in that could bring stormy weather, you don’t need to delve into the details. Just get a quick overview and prepare for the worst. If it’s a market crash and you’re a trader, you’ll find opportunities to buy into assets that are being sold off. And if it is a false alarm, you can flip the coin and get back in.
Let’s take a quick look at the charts.
It all started at the beginning of the year when oil prices started to rise again. The move has not been rapid, but it has been steady. Higher oil prices lead to higher inflation because energy is a component of all products and services.
Expectations of higher inflation have pushed yields higher, closing the door for central banks to cut interest rates. The 10-year yield is now back in a parabolic move. This needs to break before we can see calm in the equity market.
One of our best leading signals is high yield corporate bonds. They are in free fall at the moment… The way to read this is that the fastest moving capital is leaving the market, fast.
The S&P 500 has broken out of the wedge we talked about. The MACD on the bottom gives a sell signal. Although the market is already oversold, the bearish pattern can continue. A more likely scenario is that the bulls can recapture the MA50 line and we can have a decent market during the earnings season. More logical would be a lower high followed by a prolonged period of weakness. This would provide another opportunity to rebalance the portfolio.
But with higher volatility, options expiring on Friday and huge moves in the bond market, it is very difficult to give accurate guidance on the equity market. Better to be safe than sorry.
German DAX index tests MA50.
There are several reasons why gold should continue to rise, not least as a safe haven and a hedge against inflation. However, it may be overbought in the short term. Gold tends to follow the gold miners.
Gold miners are represented here by the GDX ETF. As you can see from the chart, the GDX is heading south and has the ability to take gold with it. From a long-term perspective, we are still positive on gold, so this can be seen as noise if you are not an active trader.
Happy trading!
Q1 2024 earnings season
What can we expect from the Q1/2014 reports? Over the past year, industrial demand has been held back by subdued private consumption, destocking and a lower propensity to invest. This has been particularly pronounced in the euro area, where German industrial orders, for example, fell by around 10% year-on-year in both January and February 2024. It should be noted that both new orders and production have held up well in the US and even in China in recent months.
US, THE EURO ZONE AND China PMIs APRIL 2022 TO MARCH 2024
After an earlier decline, the PMI has started to recover since the fourth quarter. Demand in the US has been stronger than in the euro area and China over the past two years. In contrast to the US and China, demand in Europe seems to have remained weak in Q1 2024.
China is giving a very mixed picture of economic conditions in the first quarter of 2024. There are signs of improvement in private consumption and short-cycle industries are improving. On the other hand, investment demand (especially from the construction sector) seems weak. One of the most interesting questions in connection with the Q1 2024 reports will be what trends companies see in China (which represents 15-25% of sales for many Nordic companies, and on average somewhat less for US companies, which derive some 60-65% of their sales from North America).
Product prices in the industrial sector are expected to be broadly stable in Q1 2024. Lower commodity prices are likely to be largely offset by higher wage costs. For companies with long order backlogs from 2023, margins on new orders should make a positive contribution to profitability.
From a US perspective, the quarterly reports of the “magnificent seven” (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) will have the greatest impact on any index price movements. Excluding the Magnificent 7, the S&P500s earnings growth is minus 2.6% year-over-year (compared to 0,9% including the Magnificent 7).
On Monday 15th April it was announced that Apple’s global smartphone sales fell by around 10% in the first quarter of 2024 (January-March). US tech earnings season kicks off next week with Verizon on Monday 22 April, followed by Alphabet, Microsoft and Tesla on Tuesday 23 April. Tesla has announced a cost-cutting programme, including job cuts. US tech earnings reports continue on Wednesday 24th April with AT&T and IBM.
US banks have managed to beat earnings estimates for the first quarter of 2024 for a variety of reasons, ranging from lower credit costs and trading revenues despite lower-than-expected interest income (JP Morgan) to better trading and investment banking revenues (Goldman Sachs). JP Morgan forecast almost flat interest income for the full year, so basically the US banking sector seems to be doing quite well.
As of Friday 12 April 2024, around 30 S&P 500 companies (6% of all companies) have reported their Q1 2024 results. 83% have reported positive earnings surprises and 53% have reported positive revenue surprises. Earnings growth in Q1 2024 is 0.9%, while revenue growth is 3.4%. Overall, companies are reporting earnings that are 12.4% ahead of estimates, which is above the ten-year average of 6.7%.
The best performing sectors in terms of earnings growth to 12 April are Utilities, followed by Information Technology and Communication Services. The three worst performing sectors in terms of earnings growth are Health Care, Materials and Energy.
The following table shows 13 major US companies that reported quarterly results last week, along with the actual and expected EPS, the percentage deviation and the post-announcement price movement. Banks dominate so far. Although Friday’s trading was weak and dominated by events other than Q1 2024 earnings, the discrepancy between the positive surprises in the US banks’ reports and the negative price movements following the reports is remarkably large. However, the Q1 2024 reports from Goldman Sachs, Charles Schwab and Morgan Stanley on Monday 15 April and Tuesday 16 April were better received by the stock market.
The average earnings per share surprise is 12.5% and the median is 7.8% for 13 reporting companies since 11 April. The post-announcement price movement for US companies is minus 0.5% on average and minus 0.4% on median for all 13 quarterly reports.
Week Ahead
Reports and event on Wednesday, 17 April: Volvo, Platzer, NEL, Tryg, Abbott Laboratories, ASML Holdings, CSX, Prologis and US Bancorp.
At 1.50 CET, Japan will release its March Trade Balance. This is followed by the UK’s March CPI and PPI at 8.00 CET. Three hours later, the eurozone will release its March CPI. From the US, weekly oil inventories (DOE) are due at 16.30 CET and the FED’s Beige Book at 20.00 CET.
Reports on Thursday, 18 April: Nordea, ABB, Tele2, EQT, Kinnevik, Vitec, Vitrolife, Investor, Arjo, Fastpartner, Mycronic, Nokia, Elkem, Blackstone, Elevance Health, Infosys, Intuitive Surgical, Marsh & McLennan Companies, Netflix and Taiwan Semiconductor.
From the euro area we get the current account balance and construction output for February at 10.00 CET and 11.00 CET respectively. From the US, the Philadelphia Fed index for April, weekly jobless claims and existing home sales as well as leading indicators for March will be released.
Reports on Friday, 19 April: Avanza, Dometic, Elisa, Alma Media, Norske Skog, Uponor, American Express, Procter & Gamble and Schlumberger.
The day starts with Japan’s March CPI at 1.30 CET. UK retail sales and German PPI for March follow at 8.00 CET. 45 minutes later, we learn about French industrial expectations for April.
Reports on Monday, 22 April: Sandvik, Getinge, Cadence Design Systems and Verizon.
From the UK, the CBI industrial trends for April are due at 12.00 CET. From the US, the Chicago Fed National Business Activity Index for March will be released at 14.30 CET. This is followed by the euro area household confidence indicator for April at 16.00 CET.
Reports on Tuesday, 23 April: Munters, Norion Bank, Wihlborgs, Boliden, Cibus, Corem, Epiroc, Hemnet, JM, Nordnet, Afry, Alleima, Beijer Ref, DNB, Atria, Embla Medical, Entra, Finnair, NEL, Novartis, Alphabet, Chubb Limited, Danaher, Freeport McMoran, GE Aerospace, General Motors, KimberlyClark, Lockheed Martin, Moody’s, NextEra Energy, Pepsico, Philip Morris, Sherwin-Williams, Spotify, Tesla, Texas Instruments, UPS and Visa.
Tuesday’s macroeconomic agenda is dominated by April PMIs from Japan, France, Germany, the Eurozone, the UK and the US. From the US, we also get weekly Redbook retail sales, March new home sales, the April Richmond Fed index and weekly oil inventories (API).
Disclaimer:
The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.
The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be distributed to such persons. The analysis is not intended for natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.
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