Summary
Focus: Drivers of the earnings surprise
With valuations under pressure from higher interest rates, our bullish earnings outlook is absolutely key to markets. Company earnings are still delivering, despite high cost pressures. We see profit margins staying near record levels, and driving a further earnings growth surprise. Cost pressures are now easing. Strong GDP growth is more important. Tech sector is driving a new margin reality. Whilst the ‘reopeners’ margin rebound has further to go.
Geopolitical volatility stalks markets
Geopolitics drove global market volatility, despite strong US retail sales and no more hawkish Fed surprises. USD, gold, and bond safe havens did well. Q4 earnings strength was overshadowed by high-profile RBLX, PLTR, SHOP misses. PMI data and US inflation among focus this week. We are positive markets. See latest presentation, video updates, and twitter @laidler_ben.
The brave new investing world
We are in a different investing world, of lower growth, higher rates, and more volatility. We are positive, but different assets will lead markets. Its no longer just about US and tech.
Main Street versus Wall Street stand-off
‘Main St’ is worried on labour pressure but are bullish growth. ‘Wall Street’ on interest rates and recession risk. Both focused on inflation, helping commodities (DJP) and value (IWD).
Insights from burger-nomics
The Big Mac index is a useful short-hand for FX valuation. It shows USD expensive and RUB very cheap. Higher burger prices show wide rising price pressures from UK to Turkey.
Reopener rally versus the ‘WFH’ selloff
Re-opener stocks (BA to MAR) index rebounding on earnings and easing lockdowns. But Workfrom-home (NFLX to PTON) index suffering from high valuations and expectations.
Crypto assets not immune to equity volatility
Crypto pulled back on raised equity volatility, with BTC falling back below $40,000. Colorado to be first US state to allow bitcoin tax payments, as use cases broaden. Metaverse leader RBLX sells off after disappointing earnings. HBAR and AVAX coins added to the eToro platform.
Energy in commodity rally spotlight
Brent crude prices fell back with cross-currents from Russia-Ukraine tension and US-Iran nuclear talks progress. Out-of-favour gold prices are near a 7-month price high on rebounding safer-haven demand. Commodities remain in a rare ‘sweet spot’, up 30% in the last 12-months.
The week ahead: Russia remains in focus
1) President’s Day US holiday (Mon). 2) Global PMI growth and price data, and Fed’ favourite US PCE inflation seen at 5.9%. 3) Overseas earnings focus includes banks HSBC, BCS, RY, CM, miners RIO, VALE, plus BABA, BKNG. 4) US-Russia to hold talks seeking a Ukraine stand-down.
Our key views: Earnings to offset valuations
We see a positive 2022, but with lower returns and higher volatility than last year. Economic growth is strong and earnings forecasts too low. Valuations are the risk as interest rates rise from still very low levels. We focus on cheaper and cyclical assets that have strong growth and offer defence to valuation risks: like Value and overseas equities, and commodities.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -1.90% | -0.54% | -6.22% |
| SPX500 | -1.58% | -1.12% | -8.76% |
| NASDAQ | -1.76% | -1.60% | -13.40% |
| UK100 | -1.92% | 0.26% | 1.75% |
| GER30 | -2.48% | -3.60% | -5.30% |
| JPN225 | -2.07% | -1.45% | -5.80% |
| HKG50 | -2.32% | -2.55% | 3.97% |
*Data accurate as of 21/02/2022
Market Views
Fed and Russia fears stall the markets rebound
- Another volatile week, with rising Russia Ukraine geopolitical risks keeping markets on edge, despite no more hawkish surprises from the latest Fed minutes and rebounding US retail sales. Safer haven assets, from the USD to government bonds and gold all did well. Q4 earnings continue overall strong globally, with S&P 500 up 32%, despite recent painful misses from RBLX, PLTR, SHOP. Focus this week included PMI growth data and US PCE inflation. See Page 6 for our Resources guide of reports, webinars, presentations, videos, and twitter.
The brave new investing world
- We are now in a different investing world. The macro headwinds are greater. With lower economic and earnings growth and higher interest rates. The returns will be lower, with volatility higher. The days of just getting long US and tech are gone. Leadership will be different.
- We see a rare fourth year of good returns, as higher earnings offset lower valuations. But led by cheaper sectors and overseas markets, in contrast to the past decade. Think energy (XLE), financials (XLF), Europe (EZU), and China (MCHI). There are many positives in US (SPY) and tech (XLK), but do not expect them to lead as once.
Main St concerns very different from Wall St
- Sharp opinion differences between ‘Main St’ and ‘Wall Street’ are nothing new. But the implications of who is correct now are large. Main St. is worried on the labour market but bullish on growth, which is good for earnings.
- More-forward looking Wall St. is most worried by more hawkish central banks. This is bad for valuations, but now seems well priced. The big common concern is inflation. This is set to ease from current peaks but only slowly. This should keep supporting inflation ‘hedges’ from Value (IWD) equities through to commodities (DJP).
FX and inflation insights from Burgernomics
- The Big Mac index is a useful short-hand for FX valuation, with a decent record. It shows USD strength, after 2021 rally. We see limited room for more, especially after the surge in Fed rate hike expectations. A weaker USD is positive for emerging markets, commodities, and US tech. Data also shows the RUB and TRY extremes.
- Big Macs are also a measure of inflation. Burger prices are up a surprising small 3% in US, but 9% in UK/China, 67% Turkey, 350% in Lebanon.
Reopener rally versus the ‘WFH’ sell-off
- ‘Re-opening’ stocks are up this year (see chart), resilient to omicron and market volatility. They are set to benefit from looser virus restrictions. These have been removed in UK, among most hit, with others to follow. UK lockdown index is half levels in manymajor economies.
- ‘Reopeners’ (BA to MAR) have underperformed by 40% since pandemic, have earnings still half pre-crisis levels, and normalized valuations well below S&P 500. This makes them defensive to headwinds from higher oil, and with much room to recover as economies normalize.
- By contrast, ‘work-from-home’ (NFLX to PTON) suffering from high valuation and expectations.
Work-from-home versus Re-opening stocks* (from 2020)
Crypto assets not immune to equity volatility
- Crypto assets saw a pullback, dragged down by the recent heightened correlation with volatile equities. Bitcoin (BTC) fell back below $40,000, whilst Ethereum (ETH) fell below the key $3,000.
- Colorado is set to become the first US state to accept bitcoin for tax payments, in further sign of growing adoption and use cases. Whilst metaverse gaming pioneer Roblox (RBLX) plunged after missing Q4 earnings forecasts.
- eToro added distributed ledger tech Hedera Hashgraph (HBAR) and smart contract platform Avalanche (AVAX), taking total coins to 51.
Energy prices in the commodity rally spotlight
- Commodity prices held firm, with the broad based Bloomberg commodity index now up 13% this year, the best performing of all asset classes. It is up 30% over the past 12-months.
- Energy remained in the spotlight. Brent oil prices slipped back, but held above the $90/bbl. level. They have been buffeted by cross currents of Russia-Ukraine geopolitical tensions and US-Iran nuclear talks progress. US natgas prices rebounded on low inventories and the cold weather outlook. Gold held near seven month highs, boosted by safer-haven demand.
- We think commodities remain in a ‘sweet spot’ of robust demand, tight supply, and increased investor demand for inflation-hedge assets.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -2.25% | -6.17% | -14.10% |
| Healthcare | -2.61% | -3.31% | -11.12% |
| C Cyclicals | -0.58% | -3.92% | -11.24% |
| Small Caps | -1.03% | -2.59% | -10.51% |
| Value | -1.44% | -2.80% | -4.64% |
| Bitcoin | -5.66% | -3.95% | -15.57% |
| Ethereum | -5.30% | -10.69% | -25.53% |
Source: Refinitiv
The week ahead: Russia stays in focus
- Short US week with Monday’s President’s Day holiday, set up to honour George Washington.
- The macro focus is on a) global purchasing manager indices (PMI) from US, UK, Europe, Japan set to show solid growth outlook and some easing supply chain pressure. Also, Fed’s favourite PCE inflation number (Fri) up to 5.9%.
- The earnings view switches overseas to UK big banks HSBC, BCS and Canada’ RY and CM, plus miners RIO and VALE, travel site BKNG, and China’s BABA. Also US retail HD and LOW. Big annual CAGNY conference sector underway.
- Russia-Ukraine geopolitical tension escalating. US-Russia talks scheduled this week. Will keep volatility raised and commodities on edge.
Our key views: Earnings to offset valuations
- We see a positive 2022, but with lower returns and higher volatility than last year. Earnings forecasts are too low, with GDP growth strong. Valuations should stay supported by still low bond yields and record company profitability.
- US Fed has turned hawkish, with markets now expecting 6+ rate hikes this year to combat 7% inflation. This has been largely priced-in. Q4 earnings reports have been beating forecasts. The January sell-off improved valuations.
- Focus on cheap and cyclical assets that benefit from good growth and stubborn inflation: Value, commodities, crypto. Cautious on bonds.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 1.58% | 5.95% | 12.57% |
| Brent Oil | -1.57% | 6.50% | 20.11% |
| Gold Spot | 2.16% | 3.52% | 3.84% |
| DXY USD | 0.02% | 0.49% | 0.14% |
| EUR/USD | -0.25% | -0.21% | -0.45% |
| US 10Yr Yld | -1.55% | 16.50% | 41.41% |
| VIX Vol. | 1.43% | -3.81% | 61.15% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: Room for more earnings surprises
Company earnings are still delivering, despite cost pressures
Companies have again defied the sceptics, delivering strong growth and near record profit margins despite surging price pressures. We see four reasons this can continue. Along with still-strong economic growth these are the two key ingredients for 10%+ earnings growth this year. With valuations under pressure from tightening monetary policy, this strong profits growth remains the key for our bullishmarkets outlook.
Four reasons profit margins to stay high, and earnings growth to surprise
1) Our cost-pressures indicator is now starting to ease (see chart), supporting the profits margin outlook. 2) Strong economic growth has historically been more important than cost pressures in driving margins. 4) A bigger tech sector weighting structurally supports S&P 500 profit margins at high levels. 3) ‘Re-opening’ segments, from hotels to airlines, have barely begun to recover weak margins from the pandemic.
What we learnt from the fourth quarter results. Passing on inflation pressures
75% of companies talked about inflation on their conference calls, a record, led by industrials and financials. But they are being successful in passing these prices on, led by industrials, food, and tech hardware industries. This may not be good for overall inflation levels, but it shows the resilience of big corporates in this environment. We proxy this by the difference between producer price rises (costs to make something) versus consumer prices (the costs of selling something). A similar message is seen from forward looking purchasingmanager index data for surging input prices minus output prices.
Tech sector drives new margin reality. Whilst ‘reopeners’ now driving higher
Part of the higher S&P 500 profit margins is structural. The tech (XLK) sector has net profit margins of 25.9% as of Q4 last year. This is the 2nd highest of any, still rising, and tech is the largest US sector today. It has seen its weight rise by around 50% the past decade. Secondly, several ‘reopener’ sectors like industrials (XLI), consumer discretionary (XLY), and energy (XLE) are seeing the sharpest margin recoveries. This is set to continue with their earnings still half pre-pandemic levels. This is especially important in cyclical Europe.
More about economic growth than cost pressures
The data also highlights that profit margins are still cyclical. They are more influenced by the pace of economic activity than by cost pressures. Indeed, this is what we have seen most recently, with strong demand more than offsetting rising cost pressures, and allowing record company profit margins. US GDP growth is seen at 3.7% this year and 2.5% next; both are above long-termaverage growth rates.
S&P 500 new profit margin versus cost pressures (PPI – CPI)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Forecast a very rare fourth consecutive positive year in 2022, with naturally lower returns and more volatility than last year. Main drivers of 1) GDP growth to remain well-above average, and supported by further vaccine-driven reopening. 2) Monetary policy tightening to be relatively gradual from very low levels, and inflation pressures to ease during the year. Focus on reflation and cyclical assets: equities, commodities, crypto, small cap, value. Relative caution on fixed income, USD, and defensive equities. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (55% of total) seeing strongest GDP recovery in 30-years driving earnings upside ‘surprise’, and a rare third consecutive year of 10%+ equity market returns. Valuations at 21x P/E are 25% above historic levels but supported by still low bond yields and strong earnings growth outlook. See further cyclicals and value catch-up, after a decade of underperformance, whilst tech is well supported by its structural growth outlook. |
| Europe & UK | Equity markets helped by 1) a greater weight of cyclical sectors, and lack of tech, 2) 25% cheaper valuations vs US, 3) decade of under performance made under-owned by global investors. Helped by a dovish ECB to hold rates ‘lowfor-longer’, and multi-year €750bn ‘Next Generation’ fiscal support. A weaker EUR helps many companies, with 50%+ company revenues from overseas. ‘4th wave’ virus resurgence may provide additional buying opportunities. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China outlook improving as cuts interest rates (opposite of rest of world) reducing slowdown and property sector risks, focuses on stability ahead of 20th Party Congress, and with valuations now 45% cheaper than US and market heavily out of favour. Will support EM, but is exposed to Fed tightening. China recovery also helps global sectors from luxury to materials. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | Consumer staples, utilities, real estate offer more defensive cash flows, less exposed to economic growth. Makes them more sensitive to rising bond yields. Expect them to underperform in a more cyclicals focused environment with earnings strong and yields rising. Healthcare is more attractive, with cheaper valuations and more growth. |
| Cyclicals | We expect cyclicals – consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, to lead market performance. They are most sensitive to the sharp economic recovery and higher bond yield outlook, with more sensitive businesses, depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Financials will benefit from the GDP growth recovery, with higher loan demand and lower defaults. Similarly, they benefit from higher bond yields outlook, charging more for loans than they pay for deposits. Sector has cheapest P/E valuation of any, and regulators recently giving flexibility to pay large 8-10% dividend and buyback yields. |
| Themes | We favour small cap vs large, on more GDP growth exposure, earnings upside, and domestic focus. Similarly, value over growth on GDP recovery, lower valuations, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | Cross-currents of rising global growth conern on virus fourth wave, and stronger USD. But remain in ‘sweet spot’ of above-average GDP growth, ‘green’ industry demand, years of supply under-investment. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply. Gold hurt by likely rising bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| Italy | Gabriel Dabach |
| France | Antoine Fraysse Soulier David Derhy |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
Research Resources
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