Summary
Coming Q2 earnings the next market test
US banks kick off Q2 global earnings season on Friday. Look for some validation to the dramatic first half rally. Valuations driven markets up so far, with the hope earnings relief can now take the reins. But a long haul, with S&P 500 earnings seen at trough -6% YoY on lower profit margins, ahead of Q4 rebound. Tech set to lead up, with focus on AI trends, with commodities lagging. Europe set for similar earnings falls, but on lower revenues and resilient profit margins. See Page 4
Markets start the second half lower
Markets down in US shortened week on profit taking after a strong 1H, with US-China tensions rising, and strong US services PMI and jobs data stoking Fed hike fears and taking 10-year bond yields back over 4%. TSLA up after beating sales forecasts. META as launched Twitter competitor Threads. While French retailer CO.PA plunged on default risks. See our NEW Q3 Markets Outlook HERE and twitter @laidler_ben. See Page 2
The Prime Day consumer test
The June 11-12 ‘Prime Day’ is test for resilient US consumer; slowing online, electronics, apparel growth; and AMZN big rally this year. 60% of US adults have Prime. See $13bn+ sales. See Page 2
A broader view of luxury
5% consumers power luxury performance, which broadens from traditional leather good, clothing, beauty, watches, to cars, spirits, sports, and reorders industries. @LuxuryGoods. See Page 2
Currency interventions back in fashion
China, Japan (JPY), Switzerland (CHF) have world’s largest FX reserves and are starting to flex these muscles to manage their currencies. See Page 2
A more expensive BBQ grilling season
Live cattle (beef) prices hit all-time-highs as drought and grain prices hit supply in time for ‘grilling season’. Lean hogs (pork) a winner for cost-conscious consumers, for now. See Page 2
Bitcoin holds at $30,000 as volatility returns
BTC held on to its $30,000 level, up 80% this year, as volatility returned to broader markets. Gains were led by LTC, as approaches August 2nd 4-year ‘halving’, and BCH, as was listed on new TradFi crypto exchange EDX. Blackrock’s CEO Fink said crypto could ‘revolutionise finance’, after it filed the first BTC spot ETF application. See Page 3
Commodities helped by oil and ag prices
Brent oil supported as world’s top-2 exporters, Saudi Arabia and Russia, surprisingly cut oil production. Ag again top performers, led by oats, OJ, sugar, on weather-driven supply disruption. SZUG.DE rode higher sugar prices and raised its guidance. China announced export curbs on rare earths key for both Semis and EV’s. See Page 3
The week ahead: Q2 earnings, inflation, Prime
1) JPM and US banks kick off Q2 earnings season (Fri). 2) Inflation watch with est. 12th US fall to <4% (Wed), plus ECB minutes, and China c.0% price rises. 3) AMZN Prime Day consumer test as one of the biggest spending days of year. 4) World watching UK wages and GDP. See Page 3
Our key views: A positive markets breather
Markets due a breather after the strong 1H, with weaker seasonality, low volatility, and coming growth slowdown. But fundamentally positive on lower inflation and coming rate cuts. Focus on defensive growth and long duration assets from healthcare to big tech. Cautious growth exposed cyclicals, commodities, and banks.See Page 5
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -1.96% | -0.42% | 1.77% |
| SPX500 | -1.16% | 2.33% | 14.57% |
| NASDAQ | -0.92% | 3.03% | 30.52% |
| UK100 | -3.65% | -4.04% | -2.61% |
| GER30 | -3.37% | -2.17% | 12.06% |
| JPN225 | -2.41% | 0.38% | 24.12% |
| HKG50 | -2.91% | -5.28% | -7.16% |
*Data accurate as of 26/06/2023
Market Views
Markets start the second half lower
- Markets lower in a US shortened week on profit taking after the strong 1H, with US-China tensions rising again, and strong US economic and jobs data stoking Fed rate hike fears and taking 10-yr bond yields back over 4%. TSLA rose after beating sales forecasts. META as it launched its Twitter competitor Threads. While French retailer CO.PA plunged on default risks. See NEW Q3 Outlook HERE. See Page 6 for resources and videos.
The Prime Day consumer test
- Consumers been key to US economic resilience. With labour markets strong, falling inflation, resilient housing and stock prices, and not all pandemic savings spent. But they are spending differently, with a shift back to physical sales from online, and services from goods. Is challenge to this week’ June 11-12 ‘Prime Day’, that is one of the biggest spending days of the year.
- Strength would calm consumer spending fears and support Amazon’ (AMZN) 55% rally this year. Overall forecasts for 4-6% US retail sales growth this year, down from last’s 7% but above long-term average 3.6%. @ShoppingCart. See Page 2
A broader view of luxury
- It has strongly outperformed this year, with its valuations rerating with resilient consumer demand and strong pricing power. Also benefits from broadening luxury definition. ‘Narrow’ traditional luxury stocks, selling leather goods, clothing, beauty, watches, jewellery being joined by ‘broad’ luxury plays including cars (like TSLA and RACE), spirits (RI.PA), and sportswear (NKE).
- This broader luxury industry is looking ahead to Chinese buyers now regaining their pole position atop of industry demand, whilst increasingly important younger demographics drive tech-enabled, experiential, and online luxury sales trends. @LuxuryBrands. See Page 2
Currency interventions back in fashion
- FX interventions back in fashion from Japan (JPY) to China and Switzerland (CHF). They are a part of the policy toolkit, but chance of success varies. All three are looking to bolster their currencies and starting from position of strength, with world’s largest FX reserves. Swiss and Chinese have highly controlled ‘crawling peg’ currencies whilst Japan’ Yen is freely floating and among the world’s cheapest.
- Direct currency intervention is not without costs, from moral hazard and encouragement of risk taking, to potential inconsistency with loose monetary policy. And unless backed by broader policy support, like higher interest rates, its impact can often be only fleeting. See Page 2
A more expensive grilling season
- Live cattle (beef) and lean hogs (pork) prices are up double digits YTD, in contrast to fall in broad commodities. Cattle prices at all-time-high $1.80/lb, whilst lean hogs near one year high $1.00/lb. Has stretched cattle price premium vs hogs to 80%, and record 200% vs competition nemesis chicken.
- High prices hurting beef demand for cost-conscious consumers. But helping cheaper pork, whose own supply problems may just be starting. See Page 2
Bitcoin holds at $30,000 as volatility returns
- BTC held onto the $30,000 price level, up over 80% this year, even as volatility returned to broader assets on higher interest rate forecasts
- Altcoin SOL saw double-digit gains, rebounding from recent weakness. But gains were led by LTC, as it approaches its August 2nd 4-yearly ‘halving’, and by BCH, as it was listed on new crypto exchange EDX, founded by Tradfi stalwarts.
- Blackrock (BLK) CEO Fink called crypto an ‘international asset’ that could ‘revolutionise finance’ after the world’s largest asset manager filed to launch the world’s first spot BTC ETF.
Commodities prices boosted by oil and ag
- Commodity markets gained, led by oil and agriculture, with US jobs and services PMI data strong and the dollar weakening further. Brent crude held over $75/bbl. after the world’s top two exporters surprisingly cut production. Saudi Araba extended its voluntary 1mbpd production cuts by a month and Russia agreed to cutting its exports by 500kbpd. Ag commodities again top performers, with oats, orange juice, and sugar seeing further gains on weather disruption. Sugar producer SZUG.DE beat earnings forecasts and raised guidance. China announced export curbs on rare earths gallium and germanium, key to semis and EV’s.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -1.16% | 4.66% | 37.73% |
| Healthcare | -2.79% | -0.25% | -4.01% |
| C Cyclicals | -0.47% | 6.05% | 26.26% |
| Small Caps | -1.27% | -1.26% | 5.87% |
| Value | -1.35% | 1.00% | -0.64% |
| Bitcoin | -0.82% | 13.27% | 82.15% |
| Ethereum | -3.46% | -0.57% | 55.22% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Q2 earnings, Inflation, Prime Day
1.JPM and big US banks kick off global Q2 earnings season (Fri). Forecast for -6% trough S&P 500 EPS growth. Europe’ Stoxx 600 is similar. Commodities to lead the fall, with focus on outperforming tech.
2.Global inflation watch with US headline prices est. to see a 12th fall, to below 4% (Wed). Also, latest ECB minutes for view on further hikes (Thu). And China’s latest outlier c.0% inflation (Mon)..
3.Amazon’s (AMZN) June 11-12th Prime Day is the latest test of the resilient consumer, with online and electronics and apparel sales both under some pressure. Expect overall $13 billion of sales.
4.World is watching UK as combo of sticky inflation and ever higher interest rates is everyone’s worst fear. Latest GDP (Thu) will continue to skate with recession as labour market starts to ease (Tue).
Our key views: A positive markets breather
- Markets due a breather after very strong 1H, with weaker summer seasonality, too low volatility, and the still-coming GDP growth slowdown. But are fundamentally positive markets, with a stronger Q4 and 2024, as economies avoid recession, with lower inflation and coming interest rate cuts.
- Faster slowdown hurts earnings. But lower bond yields helps valuation. Focus on defensive growth and long duration assets, from healthcare to big tech. More cautious on assets most exposed to recession risk, like cyclicals, small caps, and commodities. Or lower yields, like banks.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 0.43% | 0.94% | -9.66% |
| Brent Oil | 3.96% | 4.17% | -9.09% |
| Gold Spot | 0.14% | -2.29% | 5.49% |
| DXY USD | -0.69% | -1.25% | -1.21% |
| EUR/USD | 0.51% | 2.05% | 2.49% |
| US 10Yr Yld | 22.42 | 32.54 | 18.82 |
| VIX Vol. | 9.12% | 7.23% | -31.56% |
Source: Refinitiv. * Broad Bloomberg index. * Basis point
Focus of Week: Entering the earnings no-man’s land
Looking for some earnings season validation to the dramatic first half rally
Global second quarter earnings season unofficially kicks off Friday with JP Morgan (JPM) and big US banks. Forecasts are for similar S&P 500 earnings to last quarter ($53/share) but a growth trough versus the higher year-over-year base (see chart). This will be a double-test for markets that will be looking for some emerging earnings, or at least guidance, validation to the sharp 1H rally that has been near-all led by higher valuations. This is especially true for the tech sectors that have led the rally but saw near 10% profits falls last quarter. A particular focus will be on how far the AI revenues boost extends past NVDA, whose dramatic guidance hike was the standout surprise last season. Overall, we are in a lengthy earnings ‘no-man’s land’ with growth not expected to really recover until Q4 this year – reported in January 2024.
Valuations have driven the rally so far with hope that earnings relief can continue
Near all the stock market gains this year have been driven by higher valuations. The S&P 500 12-month forward price/earnings ratio has expanded by 15% to its current 15x helped by lower inflation and bond yields and outlook for ‘less bad’ earnings. Whilst forward earnings growth expectations have risen 2 points this year to around 6%. This is versus widespread expectations for sharp earnings falls coming into year.
S&P 500 weakness driven by further profit margin falls, with focus on tech and commodity outliers
S&P 500 earnings are seen falling 6% this quarter, with profit margins contracting again off flat revenues. Analysts have been customarily trimming expectations before the season kicks off. These downgrades have been led by the commodity sectors and paced by XOM and CVX. Energy and materials are seen having 30-50% earnings falls from last year’s high base. Whilst the tech sectors have seen the clearest upgrades, led by NVDA and MSFT. Discretionary and communications are seen leading growth versus the prior year, with AMZN, WBD, and TMUS posting the biggest earnings growth contributions.
Europe set for sharper earnings falls, but with lower revenues and more resilient profit margins
Stoxx 600 European earnings are seen falling 8% versus the prior year, or 4% excluding the energy sector. Estimated 7% lower revenues are the main culprit, lapping the strength of 2022 and with Europe now in a technical recession. Yet profit margins are seen holding firm, as European producer price rises have collapsed from over 40% to zero led by lower energy costs. Tech, financials, and consumer sectors are all see growing earnings at double-digit rates this quarter. With weakness focused on the near 50% declines in the materials and energy commodity sectors, followed by real estate. Germany and Italy are seen posting c10% earnings gains. France’s c20% fall leads biggest markets down. UK and Switzerland are around zero.
Source: Refinitiv. For illustration purposes only
Key Views
| The eToro Market Strategy View | |
| Global Overview | Aggressive Fed interest rate hiking cycle, stubborn inflation, financial sector and debt ceiling concerns accelerating our 2023 view. Of a quicker GDP slowdown, lower inflation, and a peaking Fed interest rate cycle. Will pressure earnings further but also lower bond yields and take pressure off de-rated valuations. We are invested, believing Oct 2022 was the low, and focus on cheap and defensive assets for a faster ‘V-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 rebound this year and are supported high company profitability and peaked bond yields. Focus on cash-flows defensives, like healthcare and high dividend. And Big-tech supported by defensive growth, cost cutting, and AI. See gradual ‘U-shaped’ rebound as inflation slowly falls and de-risks market and boosts tech and crypto appetite. |
| Europe & UK | Favour defensive and cheap UK (‘Economies not stock-markets’) and continental European equities. Recession risk easing with lower natgas prices and reopening China with high ‘buffers’ of rising fiscal spending (defence and refugees) and weak Euro (50%+ sales overseas). Even as ECB hikes aggressively. Equities cushioned by lack of big tech sector and 30% cheaper valuations vs US. Banks better capitalised and regulated but loans/GDP much higher. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive China as economy reopens, supports property sector, eases tech regulation pressure. Valuations 30% cheaper than US and markets out of favour. Recovery helps global sectors from luxury to materials. EM needs weaker USD and peak US rates catalyst. |
| Other International (JP, AUS, CN) | Canada and Australia have benefitted from strong equity market weight in commodities and financials, as global growth resilient and bond yields risen. Now could be becoming headwinds. Japanese equities among worlds cheapest with own and China-proxy growth and governance improving but threats of tighter monetary policy and stronger Yen. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, consumer discretionary (Amazon, Tesla), dominate US and China. Expect better performance as 1) lower bond yields take pressure off valuations and 2) high profit margins and fortress balance sheets make defensive to recession risks. 2) Cost cuts and AI add to growth. ‘Disruptive’ tech much more vulnerable. |
| Defensives | More attractive as recession risks rising and bond yields have peaked. Consumer staples, utilities, (some) real estate attractive with defensive cash flows, less exposed to rising economic growth risks, and with robust dividends. Healthcare is the most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | High risk cyclical sectors – like discretionary (autos, apparel, restaurants), industrials, energy, materials, and small caps – have cheap valuations, many with depressed earnings, and have been out-of-favour for many years. But they are significantly exposed to rising recession risks. Some especially cheap (energy) or see growth recovery (airlines). |
| Financials | Current stresses likely individual not systemic. Post GFC reforms boosted capital and size/speed of authority’s response. But outlook for 1) less GDP growth, 2) lower bond yields and interest rates, and 3) valuation sensitivity after recent surprises, worsens outlook. Insurance and Diversifieds (like Berkshire Hathaway) more defensive. |
| Themes | Dividends and buyback themes attractive with resilient cash flows, rising pay-outs, and investor search for defensives. Power of compounding dividends under-estimated, at up to 1/2 of total long-term return. Small caps pressured by rising recession risk. Secular growth of Renewables and Disruptive Tech investment themes. |
| Traffic lights* | Other Assets |
| Currencies | USD ‘wrecking ball’ driven by Fed interest rates and ‘safer-haven’ bid. DM currencies hurt by still low interest rates and struggling growth. Strong USD hurt EM, commodities, US foreign earners like tech. But helps big EU and Japan exporters. See a stabler USD outlook in 2023 as near top of the Fed cycle and global risks remain high. |
| Fixed Income | US 10-yr bond yields supported around 4% by higher Fed rate hike and stickier inflation expectations. Set to ease as recession risks slowly build and inflation expectations gradually fall. US has widespread to other market bond yields, and headwinds of high debt, poor demographics, and low productivity. 5% bill yields an attractive cash alternative. |
| 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+. But commodities not to repeat their 2021 and 2022 performance leadership. Gold benefits from safer haven demand. |
| Crypto | Potential ‘surprise’ after 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 $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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