Summary
Q4 earnings coming in ‘less bad’
US Q4 earnings are on track to give some relief to worried investors and help markets. Its early days with heavyweights AAPL, AMZN, GOOG this week. Companies have managed expectations well so far. But investors are responding more to management guidance. Lower profit margins are a mixed blessing, hurting companies but helping inflation. Europe is off to a strong start, and set for double digit Q4 profits growth.
Strong start to the year continues
Global equities rallied further, taking comfort from US Q4 GDP and some earnings relief. The Bank of Canada led in pausing its rate hikes. Tech sector guidance was cautious, from MSFT to INTC. But TSLA was bullish on 2023 demand and European earnings saw a good start, led by heavyweights LVMH and ASML. Crucial week ahead with the US Fed meeting and big tech Q4 results. See our 2023 Year Ahead HERE. See video updates, twitter @laidler_ben. We are back in January 2023. Happy holidays!
Two messages from the copper/gold ratio
Copper/gold price ratio is a useful barometer of recession risk and long term bond yields. It shows recession fears currently overdone, but further 10-yr bond yield falls limited.
Debt ceiling showdown risk and reward
US has hit its $31.4 trillion debt ceiling. This sets up for a mid-summer market showdown with fear of a 2011 repeat. But could boost short term liquidity and support long bonds.
Learning from Apple
World’s most valuable stock reports Thursday. It may set the tone for market. Has led shift to services, premium pricing, reshoring,
Breaking up ‘big tech’
US brought an antitrust lawsuit against Alphabet’ (GOOG). History, from Standard Oil to Microsoft shows shareholders have little to fear.
Bitcoin leads crypto market cap over $1 trn.
Crypto assets again led global markets up. Bitcoin (BTC) neared $23,000 and the asset class market cap. rose back above $1 trillion for first time since August. The Bitcoin hash rate hit all time high, doubling off 2022 lows. Miners have benefitted. Marathon Digital (MARA) +155% this year and Riot Platforms (RIOT) +80%.
Commodities take a back seat
Commodities held back by US dollar and China closed for New Year holiday. Lumber surged on hope worst behind US housing and after its 70% fall. Industrial metals firm on China reopening. Natgas again led losers on unseasonal weather. Chevron (CVX) announced a huge $75 billion share buyback and raised dividend.
The week ahead: rate hikes and big tech
1) Fed to slow rate hikes to 0.25%, taking to 4.75% (Wed), ahead of payrolls slowdown (Fri). 2) Whilst ECB and BoE (Thu) keep on 0.50% pace. 3) Big tech lead earnings with AAPL, GOOG, AMZN, META, plus XOM, MCD. 4) January ends (Wed), China reopens, and OPEC meets.
Our key views: A clear but gradual recovery
Lower inflation sees near interest rate cycle top. Reopening China cuts recession risk. Lower bond yields drive tech relief. Sticky inflation or higher for-longer Fed mistake the risks. See a gradual recovery with plenty bumps in road. Focus cheap and defensive assets. Higher risk crypto, tech, small cap as inflation fall picks up.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | 1.81% | 2.51% | 2.51% |
| SPX500 | 2.47% | 6.02% | 6.02% |
| NASDAQ | 4.32% | 11.04% | 11.04% |
| UK100 | -0.07% | 4.21% | 4.21% |
| GER30 | 0.77% | 8.81% | 8.81% |
| JPN225 | 3.12% | 4.94% | 4.94% |
| HKG50 | 2.92% | 14.70% | 14.70% |
*Data accurate as of 30/01/2023
Market Views
Strong start to the year continues
- Global equities rallied further, taking comfort from resilient US Q4 GDP and some earnings relief. The Bank of Canada led in pausing its rate hikes. Tech sector guidance was cautious, from MSFT to INTC. But TSLA was bullish on 2023 demand and European earnings saw a good start, led by heavyweights LVMH and ASML. Crucial week ahead with the Fed meeting and big tech Q4 results. See our 2023 Year Ahead View HERE.
Two messages from the copper/gold ratio
- Copper/gold price ratio is barometer of recession risk and long term bond yields. Its predictive power comes from their very different uses. Gold is the longest standing safer-haven financial asset. Whilst copper’s industrial uses seen it nicknamed ‘Dr. Copper’ for its ‘PhD’ in economics.
- The stable ratio is an indicator of GDP resilience. Alongside the European PMI pick up, solid US Q4 GDP, and China’s reopening. This validates the sharp market relief rally and postponement of recession fears. But it may also signal that the big fall in 10-year US bond yields, that have helped growth stocks, has its limits.
Debt ceiling showdown risk and reward
- US recently hit its $31.4 trillion debt ceiling. There are ‘extraordinary measures’ that buy time until a hard mid-summer deadline. But the limit needs to be raised for the US to pay its debts. This has happened 68 times since the 1960’s. But a starkly divided Congress has many investors worried on political brinkmanship and miscalculation.
- The fear is a repeat of 2011’s showdown that shocked investors and risked the $24 trillion US treasury market. But there are also some showdown silver linings. Of more liquidity now and of lower bond long-term yields ahead.
Learning from Apple
- World’s most valuable stock reports on Thursday. It may set the tone for market in more ways than one. Apple (AAPL) is quarter US IT sector, itself S&P 500’s largest. And focus after a strong start to year. Earnings have hangover from pandemic demand, with global smartphone sales -18% last quarter. But valuations seeing relief from lower bond yields.
- Apple so far avoided job and capex cuts of others, after growing more cautiously. It has led a shift to services, premium pricing, reshoring, and not been immune to ESG rise. Its 60% of overseas sales will benefit from the weaker dollar.
Breaking up ‘big tech’
- US Department of Justice (DoJ) brought an antitrust lawsuit against Alphabet’ (GOOGL) adtech business. This follows a similar antitrust suit against its search business. We don’t think shareholders have much to fear. We highlight three points to consider.
- 1) We are in uncharted territory on US antitrust law, that dates from over a century ago, in regulating ‘free’ products. 2) History shows these issues often take decades to resolve. 3) ‘Worst-case’ restrictions and breakups are often a shareholder bonanza, from Standard Oil in 1911 to Microsoft in 2002, as they release value and end uncertainty.
Copper/Gold ratio versus US 10-Year Bond Yield
Bitcoin leads crypto market cap over $1 trillion
- Crypto assets rallied further, leading the global markets up. As the US Federal Reserve nears the end of its interest rate upcycle and recession risks remain contained. Bitcoin (BTC) neared $23,000 and the asset class market cap. rose back above $1 trillion for first time since August.
- The Bitcoin hash rate – the computational power on the network – hit an all-time high last week and has doubled off its 2022 lows. This reflects the rapid return of bitcoin mining capacity.
- Crypto miners have significantly benefitted from the Bitcoin rally. Marathon Digital (MARA) is up 155% this year and Riot Platforms (RIOT) up 80%.
Commodities take a back seat
- Commodity prices took back seat to strong week in other assets. Held back by US dollar stabilising after its 10% fall from highs. And with China’s markets closed for week-long New Year holiday.
- Lumber prices stole the show, surging on hope the worst may be behind the US housing market, and with its prices -70% from highs. Industrial metals prices, like copper and nickel, firm and supported by China reopening hopes. Natural gas again led losers, with US prices now below $3/MMBtu as unseasonal weather continues.
- Chevron (CVX) showed the profits power high-for longer oil prices are giving, announcing a huge $75 billion share buyback and raising dividend.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | 4.00% | 12.29% | 11.08% |
| Healthcare | -0.60% | -1.07% | -1.46% |
| C Cyclicals | 5.97% | 16.00% | 14.75% |
| Small Caps | 2.36% | 9.26% | 8.53% |
| Value | 1.34% | 2.32% | 2.53% |
| Bitcoin | 6.39% | 39.76% | 40.91% |
| Ethereum | -0.81% | 33.13% | 34.74% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: rate hikes and big tech earnings
- US Federal Reserve to slow its interest rate hiking pace. To 0.25% (Wed), and taking to 4.75%. Comes ahead of non-farm payrolls (Fri) growth slowdown to est. 190,000, and wage growth easing to 4.4%.
- Whilst ECB and BoE (Thu) to keep hiking 0.50%, to respective 3% and 4%. Driven by their lower interest rates and higher inflation. Also see lower EU Q4 GDP (est. -0.1% QoQ) and inflation (est. 9%).
- A big-tech led US Q4 earnings week, led by AAPL, GOOGL, AMZN, META, plus XOM, PFE, LLY, MCD. Forecasts are for a ‘less-bad’ -3% growth for S&P 500 EPS growth and +14% for Europe’s Stoxx 600.
- January ends (Wed) after strong markets start. History says often sets tone for year. China reopens after week-long New Year holidays, and ‘Year of the Rabbit’ start. OPEC ministers meet.
Our key views: A clear but gradual recovery
- Consistently lower inflation gives visibility on the interest rate cycle top. Whilst the reopening of China cuts global recession risks. Lower bond yields drives relief for the key tech sector. Sticky inflation or higher-for-longer Fed mistake the risks.
- We see a gradual market recovery with the low in, but plenty of bumps in the road. Focus cheap and defensive assets, from high dividend, to healthcare, and UK. With higher risk crypto, tech, and small cap as the inflation fall picks up and de-risks markets. Overseas markets to lead the US. Commodities and the dollar to take a performance back seat.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -0.46% | -1.06% | -1.06% |
| Brent Oil | -1.65% | 0.26% | 0.26% |
| Gold Spot | -0.01% | 5.33% | 5.33% |
| DXY USD | -0.09% | -1.55% | -1.55% |
| EUR/USD | 0.11% | 1.55% | 1.55% |
| US 10Yr Yld | 3.22% | -36.77% | -36.77% |
| VIX Vol. | -6.75% | -14.58% | -14.58% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: earnings are providing some relief
US earnings are on track for some relief versus low investor expectations, helping markets
With a third of S&P 500 stocks having reported the quarter is following our ‘less bad’ narrative, providing some relief to investors, and supporting the market. Earnings are the focus of investor worries. Profits have been resilient but now face a catch up from last year’s interest rate hikes, with the economy slowing. S&P 500 earnings are on track to fall 3%, down for the first time since third quarter 2020. Sales are rising 4%, but this compares unfavourably to the nominal GDP run rate near 10%. But it could have been much worse. Investor expectations had been slashed, and company reports are ‘beating’ (see chart) this lowered bar. Reactions to results misses are also relatively modest. This fits the ‘pain trade’ narrative. Cautious and cashed-up investors are using any stock weakness as an opportunity to add to their low positions.
Tech in focus as see AAPL, AMZN, GOOG this week. But Companies have managed expectations well
Only 4 of 11 sectors are seeing earnings growth. Two are traditional defensives, utilities, and real estate, and two typical cyclicals, energy and industrials. ‘Tech’ (IT, Communications, Consumer Discretionary) has been weak with average earnings down 15% and lagging the S&P 500 fall. ‘Beat’ rates are better. 10 of 11 sectors, and 65% of stocks, have beaten expectations. But this has been as high as 87% in recent quarters.
Investors more focused on management guidance than reported profits
Earnings forecasts were cut a lot into the quarter and down a hefty 16% in the last year. Industrials is the only sector to have missed these lowered expectations. What’s really driving stock prices is managements outlook on the future, not the results of Q4 2022. Microsoft (MSFT) set a downbeat tone for the tech sector with caution on growth ahead, driving the stock weaker after initial relief on the report. With Tesla (TSLA) seeing the opposite, as management expressed confidence in the 2023 outlook after its price cuts.
Lower profit margins is a mixed blessing, hurting companies but helping inflation
The S&P 500 is seeing its sixth straight fall in net profit margins. Its 11.4% level is down 100bps the past year., under twin pressures of slowing growth and rising costs. This is the main driver of lower earnings. But the economic silver lining is that this should also take the sting out of inflation and help it fall further.
Europe off to a strong start, and set for double digit profits growth
UK and Europe earnings are off to a strong start. A continuance would underpin its equity outperformance in recent months. Stoxx 600 profits are seen growing +14%. Semis equipment leader ASML signalled at least 25% sales growth this year, whilst EasyJet (EZJ) ‘beat and raised’ on strong tourism travel demand.
S&P 500 fourth quarter 2022 sector EPS VERSUS consensus estimates (%)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Aggressive Fed interest rate hiking cycle and stubborn inflation boosted uncertainty, recession risk, and hit markets. We see this gradually fading in 2023, with global growth stressed but resilient, inflation pressure slowly easing, and valuations now more attractive. Focus on cheap and defensive assets for a gradual ‘U-shaped’ market recovery. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing but resilient GDP and earnings growth. Valuations led the market rout, and now below average levels, and are supported high company profitability and near peaked bond yields. Fast Fed hiking cycle boosted recession risks. Focus on cash-flows defensives, like healthcare and high dividend. Big-tech supported by defensive growth. See gradual ‘U-shaped’ rebound as inflation slowly falls and de-risks market. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. Broader EM needs weaker USD and peak US rates catalyst. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, if global growth resilient and bond yields risen. Japanese equities among cheapest of any major market, benefit from weaker JPY and with low inflation, offsetting 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, consumer discretionary (Amazon, Tesla), dominate US and China. Hurt by higher bond yields and above average valuations. But structural stories with good growth, high margins, fortress balance sheets support some. ‘Big-tech’ attractive new recession defensives. ‘Disruptive’ tech is much more vulnerable. |
| Defensives | Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | Higher risk cyclical sectors, like discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive if see a ‘slowdown not recession’ scenario. Are select but high risk opportunities from energy to financials stocks. With often depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from high bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and with room for large dividend and buyback yields. But can be outweighed by high recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) the least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, 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. Secular growth of Renewables and Disruptive Tech investment themes. |
| Traffic lights* | Other Assets |
| Currencies | USD ‘wrecking ball’ driven by rising Fed interest rates and ‘safer-haven’ bid. Many DM currencies hurt by still low interest rates and struggling growth. ‘Reverse FX war’ interventions ineffective. Strong USD hurt EM, commodities, US foreign earners like tech. But helps big EU and Japan exporters. Stabler USD outlook as near top of Fed cycle. |
| Fixed Income | US 10-year bond yields risen above prior 3.5% peak, as Fed hikes continue aggressively and balance sheet runoff accelerates. Set to ease as recession risks rise and inflation expectations fall. Additionally US has a wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, low productivity. |
| Commodities | Strong USD and rising recession fears hit commodities. But still above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, Russia supply crisis. Oil helped by slow return of OPEC+ supply and Russia 10% world oil supply problems. But commodities not to repeat their 2022 performance leadership. |
| Crypto | In the latest ‘crypto winter’ (16th crash for bitcoin) with dramatic and early asset class sell-off and later specific risk events from Luna to FTX. See long term asset class development with small size under $1 trillion, correlations low, regulation growing, development/catalysts continuing – Ethereum merge to proof-of-stake and coming BTC halving. |
| *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 |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Nordics |
Jakob Westh Christensen |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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