At last we returned to a more constructive backdrop for risk assets last week, as sentiment settled and then improved. It was not hard to identify the two principal catalysts:
1. Earnings, with 159 S&P 500 companies reporting, including four of the seven “Mag 7”, and
2. Economic data, most meaningfully from the U.S., with the data sufficiently mixed that it kept concerns regarding inflation – the most bothersome problem – within the guardrails.
Last week was the first decent week for risk assets in the last four, as US equity markets in particular have been under pressure since mid-March. Friday’s session also ended positively, hopefully setting the stage for a more constructive week ahead.
Most global equity markets were better on the week, with the FTSE 100 in particular closing Friday at a record high as energy and mining companies continue to shine.
US Treasury yields ended modestly higher (again) at the intermediate and long end of the curve, pushing total returns on bonds for the year further into negative territory.
As equities regained their footing, corporate credit spreads tightened slightly with high yield bonds continuing to demonstrate remarkable resiliency and showing no indication of credit concerns on the horizon.
The price of gold fell, oil prices firmed, the U.S. dollar gained, and the Yen gapped wider on Friday following the Bank of Japan’s monetary policy decision.
You can find return data on a variety of asset classes tracked by EMC in the section below "The Tables".
Volatility in the US stock and bond markets also settled, with the VIX closing at around 15 on Friday following a recent intraday high of over 20 just one week ago. The MOVE index (volatility index for bonds) also declined throughout the week even though late-week inflation data was slightly worse than anticipated.
WHAT MATTERS THIS WEEK
An additional 175 S&P 500 companies will release earnings in the coming week, including Mag 7 members AMZN (Tues after close) and AAPL (Thurs after close). The upcoming week also includes earnings releases for a slew of well-known consumer companies like SBUX, KO, MCD, CLX, MA, MAR, and BKNG, as well as several utilities, insurance companies, etc. The earnings calendar for next week can be found here.
The FOMC meets this week with the committee’s monetary policy decision being released on May 1st (Weds). Although the direction of the Fed seems clear, investors will – as usual – be hanging on every word of Chairman Powell during the post-release interview. The Monetary Policy Meeting for the Bank of England will be the following week (May 9th), with the ECB not meeting again until early June (when it is expected to reduce its policy rates by 25bps).
WHAT MATTERED LAST WEEK
Earnings, earnings, earnings
Last week, 159 S&P 500 companies reported earnings, and a slew of European companies also released their results. You will find a good summary of the overall trends for the S&P 500 earnings so far from #Refinitiv/LSEG and from #FactSet, and it is worth scanning through one or the other since we are nearly half way through this earnings season. My general observations are:
Both top- and bottom-line results have generally beaten consensus expectations, but
What is quite rightly taking on more importance this round of earnings is not how a company performed in the last quarter, but what management expects in the future (i.e. forward guidance). This makes perfect sense, in that the past is the past, and stocks largely reflect future earnings streams, and
The run up in stocks since mid-October, most notably in the US, has meant that stocks are priced for perfection. Any slight miss as far as consensus expectations, or any moderation of future guidance, causes high-valued stocks to get punished. Perhaps none are more vulnerable than some of the expensive tech stocks.
What happened with the Mag 7 names that reported this week?
Four of the so-called Mag 7 stocks reported earnings last week, including Tesla (TSLA), Meta Platforms (META), Alphabet (GOOG) and Microsoft (MSFT). TSLA missed consensus expectations and the stock rallied, whilst META blew away its consensus top- and bottom-line expectations and got hammered. Both MSFT and GOOG reported solid results across all segments, beating on the top- and bottom-lines, and both stocks registered gains. The movements in share prices of META and TSLA were bizarre following their earnings. Below is my take on these four companies and their results for the quarter ended March 2024:
Tesla: TSLA missed consensus expectations on the top- and bottom-lines, with revenues falling for the third consecutive quarter. This is due to a combination of greater competition, especially in China, and slowing growth for EVs globally. In addition, the stock remains expensive in my opinion, carrying valuation multiples more akin to the other Mag 7 stocks and far away from those of other global automotive manufacturers, some of which are several times the size of Tesla. These trends suggest further headwinds ahead. However, TSLA shares surprisingly rose strongly after their poor earnings were announced, which can be attributed to CEO Elon Musk making a convincing case on the analyst call that the company would re-energise its growth by introducing lower priced models in 2025 and continuing to develop self-driving cars. I don’t really understand why the shares rallied, because lower priced cars means lower margins, and autonomous cars seem a long ways off. Admittedly, I am not a Tesla shareholder or Elon Mush disciple, so I reckon I just don’t get it. The shares ended the week up 14.4%, although they are down 32.3% YtD.
Meta Platforms: META absolutely smashed top and bottom-line results, blowing away not only consensus analysts’ expectations but also the top end of ranges. It was a “wow” quarter. However, investors seemed to feel that CEO Mark Zuckerberg might be making the same mistake he did in 2022 by deviating away from the company’s core social media platforms. You might recall how META’s shares got hammered in 2022 then when Mr Zuckerberg announced that the company would invest large in the metaverse. The shares eventually recovered and then kept moving higher as the company softened the “metaverse” narrative and began to focus on costs. On the analyst call following this earnings release, Mr Zuckerberg announced that META would go big in AI (by investing more), a statement that has had profound upside effects on many companies’ share prices, but not this time for META. My view is that investors want the company to stick to its core business across its platforms – social media. The company has nearly four billion customers globally – can any other company say that? I think Mr Zuckerberg has shown a unique propensity to bet right, so it is strange investors dissed his investment plans and punished the shares so badly. Personally, the reason I don’t own META is that I fear a combination of government regulation and social blowback at some point for social media platforms, a concern that frankly has proven very wrong to date. The shares ended the week down 7.9%, but are up 25.4% YtD.
Alphabet: GOOG, with its three principal segments in search, video and cloud, crushed top- and bottom-line consensus figures, and announced it would begin paying a dividend. Even though the company, similar to META, said it would increase its investment/capex on the post-earnings analyst call, investors had a more favourable reaction perhaps because the company beat in all segments and seems to be firing on all cylinders. As a shareholder, I admit that I was nervous about this round of earnings, mainly because there is so much discussion about AI making Google (search engine) obsolete. Maybe this will happen over time, but it looks like it will only occur if Alphabet were to underestimate the risk and as a result fail to invest. I just don’t see this happening at all under this management team. And if you have concerns about search, then turn your attention to YouTube, which is a monster unto itself. Starting a dividend broadens the investor base for the shares. As an investor, what’s not to like? The shares ended the week up 11.5%, and are up 23.2% YtD.
Microsoft: MSFT earnings clobbered top- and bottom-line consensus analysts’ expectations too, strong across all of its business segments. As an investor, it is very simple for me to summarise the company – Microsoft is an amazing company active in multiple (albeit three key) segments which it dominates. Importantly, the company also announced on the analysts call that in order to maintain its edge and leadership in its key areas of focus, it would invest more in the coming quarters than had originally been expected. Investors didn’t seem to care, with the shares grinding higher off of the strong results and positive outlook. If you look back a few decades, Microsoft has stumbled in the past and might one day in the future, but this is one stock that has stood the test of time. The stock ended the week up 1.8%, and is up 8.3% YtD.
Economic data in the US
1Q2024 GDP was released before the open on Thursday, with growth coming in well below expectations but the GDP deflator rising more than expected. I found it rather amusing that I was reading the word “stagflation” in a couple of financial press articles after the data was released, a very premature word to toss around given the amazing resiliency of the US economy. It is difficult to put too much weight on retrospective GDP growth, especially when nearly all other metrics – retail sales, job growth, etc. – continue to suggest strong and resilient growth in the US. The GDP deflator was just another indicator that the “last mile” for US inflation will be difficult, and that the Fed’s rate cuts will be both fewer and later than thought just a few months ago. PCE data for March released on Friday morning, more or less in line with consensus, confirmed that getting back to the Fed’s 2% target would take time. According to the CME FedWatch tool, investors are now expecting only one 25bps reduction in the Fed Funds rate this year, in September. That’s a long ways from six reductions expected at the beginning of the year, and explains why US Treasury yields have been on a one-way march higher.
Bank of Japan stands pat
At its Monetary Policy meeting late last week, the Bank of Japan did not change its monetary policy, following its first hawkish pivot the meeting before. Scanning through the “Outlook for Economic Activity and Prices (April 2024)”released on Friday, the BoJ has adjusted its outlook for the remainder of 2024 by raising core CPI expectations slightly (vis-à-vis its last meeting) to a range of 1.7% to 2.1%, which is around half of the actual level experienced in 2023. As far as growth, the BoJ reduced real GDP expectations more sharply (vis-à-vis at the last meeting), to 0.7% to 1.0%/annum. To summarise the 2024-2026 period, the BoJ is expecting real GDP growth of around 1.0%/annum and core CPI of around 2.0%/annum over the same period. Perhaps not surprisingly, the Yen gapped down further following the (non)decision, closing the week at ¥158.30/US$1.00. How and when this will reverberate to Japanese equities remains to be seen. Japanese stocks have had a more difficult start to the second quarter (down 6.4%), although the market remains the best-performing equity market tracked by EMC YtD (+13.4%).
MY TRADES LAST WEEK
I added small scraps in core positions MSFT, GOOG and V last week pre-earnings. I also decided to take a punt on NVDA, as expensive as it is, and started with a small position to monitor / build on weakness. Let’s see which way this heady stock goes. Unfortunately, I had a short calls (covered) / long puts strategy for Friday on GOOG, and got caught out on this when GOOG’s price soared post-earnings on the day the covered calls expired (Friday).
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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