Summary
Bracing for the Q2 earnings test
Global Q2 earnings is a bigger test now than ever, with recession risks rising but full year S&P 500 profits growth expectations still rock solid at +10%. Q2 expectations are reassuringly low, but guidance is a big risk. JP Morgan unofficially kicks off Q2 earnings season July 14. Cyclicals energy, industrial, and materials sectors set to lead. But without Energy index earnings would fall. Watch profit margins, earnings guidance, and strongly asymmetric market reactions. A -20% profits recession is the big risk to markets.
Reality returns to markets
The relief rally faded with recession fears rising after weak US consumer data but oil firm. EU energy crisis deepened with Uniper bailout. US 10-yr bond yields <3% and commodities fell. Saw end of terrible Q2 and 1H. Good news saw China cut entry rules and US banks hike dividends. See U-shape recovery. See latest presentation, video updates, and twitter @laidler_ben.
A long, hot summer ahead
Q2 and 1H market performance was terrible, with few places to hide. S&P 500 fell 16% and bitcoin more than halved. 2H is a race between peaking inflation and a recession.
Europe’s ‘fragmentation’ risk
‘Fragmentation’ is one of many risks ECB faces as readies to raise interest rates. Plans to cool divergent country funding costs positive for EUR and equities. See @EuropeEconomy.
Rising labour unrest as wages lag
Many countries face a ‘summer of discontent’ as labour strikes build, with wage growth now lagging well behind surging inflation. See @RemoteWork and @GigEconomy.
‘Sweet tooth’ commodities sit out rally
Our soft commodity ‘Breakfast index’ well off April highs, but sugar and cocoa long sat out rally giving relief for sweet tooth consumers and stocks from BARN.ZU to HSY.
Crypto pressure returns
Crypto price pressure returned driven by weaker equities, the 3AC liquidation, and Grayscale ETF denial by SEC. The BIS and EU both accelerate the crypto regulation push, helping to build institutionalization. TBanque adds OXT, SKALE, BAND tokens , taking total to 76 now.
Commodity pullback deepens
Broad Bloomberg commodity index now -15% from highs on recession risks. Oil resilient after OPEC meeting. Whilst US natgas falls on rising inventories. Cotton led decliners on recession fear and rising supply. See continued medium term commodities ‘sweet spot’.
The week ahead: jobs report focus
1) US July 4th holiday anchors a shortened week. 2) Latest Fed and ECB meeting minutes highlight hawkish central banks. 3) Friday’ US jobs report likely mixed, with slower jobs growth but very low unemployment. 4) Further PMI data showing China’s reopening growth rebound.
Our key views: Recession fears in driving seat
Biggest sell-off since 2020 covid crash. Recession and earnings risk drive markets, with valuations slumped and bond yields peaked. Recession not inevitable, on resilient corporates and consumer. But recovery U, not V shaped. Focus defensives. To be invested in ‘new’ world but manage high risks. Value, like healthcare, defensive styles like dividend yield, and UK to China.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -1.28% | -5.48% | -14.42% |
| SPX500 | -2.21% | -6.89% | -19.74% |
| NASDAQ | -4.13% | -7.37% | -28.87% |
| UK100 | -0.56% | -4.84% | -2.92% |
| GER30 | -2.33% | -11.39% | -19.34% |
| JPN225 | -2.10% | -6.58% | -9.92% |
| HKG50 | 2.75% | 3.69% | -6.57% |
*Data accurate as of 04/07/2022
Market Views
Reality returns to markets
- Relief rally faded with recession fears rising after weak US consumer data and firm oil. EU energy crisis deepened with Uniper bailout. US 10-yr bond yields below 3% and commodities fell. GM (GM) and Micron (MU) issued profit warnings. Marked end of a terrible Q2 and 1H. Some good news saw China ease entry rules and US banks hike dividends. See U-shape recovery.
A long, hot, summer ahead
- 1H market performance terrible, with few places to hide, and plunging into bear market. Driven by one-two punch of high inflation and recession fear. S&P 500 plummeted 16% in Q2 and bitcoin more than halved. Bonds and commodities fell. Only US dollar and China rose, of big markets.
- Q3 will be a race between peaking inflation and recession, and may make for a long, hot summer. We are cautiously optimistic, despite weakest average seasonality of year.
Europe’s fragmentation risk
- ‘Fragmentation’ one of many risks ECB faces as readies to raise interest rates. It risks triggering financial instability with one-size-fits all interest rate, and EUR, vs distinct country situations. Funding costs, like 10-year yields, have soared.
- The ECB’s anti-fragmentation plans could help cut risk of a yield blowout like seen 10-yrs ago, give room to raise interest rates, underpin EUR, give relief to hard-pressed eurozone equities.
Key events to watch in third quarter 2022
- Italian equities, from Enel (ENEL.MI) to Intesa (ISP.MI) borne brunt of fragmentation fears, despite being Europe’s cheapest. But outperformance of other ‘periphery economies’, like Spain (ESP50) show upside. See @EuropeEconomy.
Rising labour unrest as wages lag
- Many countries face a ‘summer of discontent’ as labour strikes build, with wage growth lagging well behind inflation. But these stoppages are still a small fraction of those seen in 1970’s and likely shorter-lived with Central Banks now on front foot.
- But the workforce has changed, accelerated by the pandemic. With less unionisation now and more flexible working, driving investment opportunities. Profit margins have benefitted. See @RemoteWork, @GigEconomy, and @5GRevolution.
‘Sweet tooth’ commodities sat out the rally
- Our soft commodity ‘Breakfast index’ is well off its April highs, giving some relief to both food inflation and hard-pressed emerging market (EEM) consumers. Demand concern is rising along with recession fear, whilst agriculture supply is adjusting quicker than for longer-cycle oil and metals.
- But sugar and cocoa prices have long sat out the broad rally out, providing some rare good news for both ‘sweet tooth’ consumers and food companies already facing big headwinds from inflation (‘shrinkflation’) to ESG (‘sugar taxes’). Is helping big users from Barry Callebaut (BARN.ZU) to Hershey (HSY) and Nestle (NESN.ZU).
Key events to watch in third quarter 2022
| Date | Country | Event |
| July 12-3 | US | Amazon ‘Prime Day’ one of largest consumer events of year |
| July 14 | Global | JP Morgan (JPM) kicks off Q2 corporate earnings season |
| July 21 | Europe | European Central Bank (ECB) 1st interest rate hike since 2011 |
| July 27 | US | Fed policy meeting. Futures say 4th hike, by 0.5% to 2.25% |
| July 28 | US | Q2 GDP. NOWCast -2% vs Q1 -1.5%. Close to technical recession |
| Aug 2 | US | 6 states vote in primaries before Nov 08 Midterm elections |
| Aug 25-7 | US | Federal Reserve ‘Jackson Hole’ Economic Symposium |
| Sept 08 | Europe | European Central Bank (ECB) seen hiking rates at least 0.25% |
| Sept 11 | Europe | Swedish general election. Incumbent Social Democrats lead polls |
| Sept 16 | US | ‘Quadruple witching’ US futures and options expiry |
| Sept 21 | US | Fed policy meeting. Futures say 5th hike, by 0.5% to 2.75% |
Source: Refinitiv. For illustration purposes only.
Crypto pressure returns
- Crypto assets again under pressure, with Bitcoin (BTC) below $20,000, as equity volatility returned, the 3AC crypto hedge fund liquidated, and the US Securities and Exchange Commission (SEC) rejection of Grayscale Bitcoin Trust application to convert to a bitcoin exchange traded fund (ETF).
- Crypto regulation momentum continued with both European Union and the Basel (BIS) committee of global bank regulators launching new proposals. The BIS report includes a 1% cap on bank bitcoin holdings as percent of capital.
- Orchid Network (OXT), SKALE (SKALE), Band Protocol (BAND) were added to TBanque platform, taking total crypto assets available to 76.
Commodity pullback continues
- Broad Bloomberg commodity index now -15% from June highs on rising recession fears. Brent oil slipped modestly as OPEC kept to its modest supply increase plan, with little future guidance.
- Price weakness focused elsewhere in commodity complex, with US natgas prices slumping. They are -40% from recent highs, as inventories build and Freeport LNG plant (2% demand) reopening further delayed. But soaring EU prices forced a German bailout of gas utility Uniper (UN01.DE)
- Cotton led weekly price declines, down over 20%, on recession risks for fabric demand and supply rising at same time from big producers India/US.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -4.86% | -7.94% | -29.60% |
| Healthcare | 0.19% | 0.53% | -10.74% |
| C Cyclicals | -3.97% | -8.15% | -31.42% |
| Small Caps | -2.15% | -6.85% | -23.05% |
| Value | -0.73% | -6.64% | -12.42% |
| Bitcoin | -8.47% | -35.88% | -59.26% |
| Ethereum | -12.74% | -41.51% | -71.56% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: focus on jobs report
- Shortened trading week with Monday’ US Independence Day celebrating its Declaration of Independence from the UK on July 4, 1776.
- Latest Central Bank views with minutes from latest US Fed (Wed.) and Europe’s ECB (Thu.) meetings. ECB slated to start hiking at July 21st meet, and Fed a 5th rise, by +0.5%, on July 27th.
- Much depends on pace of easing of US jobs market. Friday’s payrolls report may see lesser 310k new jobs, but unemployment near record low at 3.2%, and wages growth stable at 5.2%.
- Flash China PMI focus as world’s 2nd largest economy increasingly only engine of the global economy. See rebound from recessionary 42.
- Only LEVI of US earnings ahead of unofficial July 14 Q2 earnings season start (see ‘special’).
Our key views: Recession fears in driving seat
- Saw biggest sell-off since the 2020 covid crash. Recession and earnings risk drive markets, with valuations slumped and bond yield peaked. See the fundamentals stressed but secure, with recession not inevitable, on resilient corporates and consumer. But recovery U, not V, shaped.
- Focus on cheap and defensive assets. To be invested in this ‘new’ world, but to manage still very high risks. See Value sectors, like healthcare, defensive styles like high dividend yield, and related markets from UK to China.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -3.45% | 12.47% | 18.11% |
| Brent Oil | 4.97% | -5.76% | 43.03% |
| Gold Spot | -0.61% | -3.17% | -0.96% |
| DXY USD | 0.90% | 2.92% | 9.54% |
| EUR/USD | -1.25% | -2.73% | -8.33% |
| US 10Yr Yld | -24.17% | -4.56% | 138.04% |
| VIX Vol. | -1.95% | 7.70% | 55.05% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: The big Q2 earnings test
Earnings in the spotlight more now than ever as recession risks soar
Global Q2 corporate earnings is a bigger test than ever, with recession risks rising, but S&P 500 earnings growth expectations rock solid at +10%. Q2 expectations are reassuringly low, but guidance is a big risk.
JP Morgan unofficially kicks off global second quarter earnings season July 14
Analysts are looking for 4% S&P 500 index earnings growth versus the same quarter last year. These expectations have eased back slightly (1.5%)over the past three months. This has been driven by rising inflation and recession risks and an increase in the number of companies issuing negative earnings guidance. Revenues (economic health) remain the big driver, seen up over 10%, with lower profit margins (inflation pressure) the focus. Revenues are nominal and being pushed higher by rising inflation.
Cyclical energy, industrial, materials sectors lead. Without Energy index earnings to fall
The energy sector is seen leading S&P 500 earnings growth, given the surge in oil prices and refining spreads. Indeed, excluding the sector, US index earnings would fall around 3%. Airlines lead the Industrial rebound, swinging from their losses last year as the economy reopened and more than offsetting higher jet fuel prices. Materials follows, helped by rebounding commodity prices. By contrast, Financials will lead reported earnings declines, reflecting the over-earning of 2021 as loan loss provisions were reversed. Though underlying fundamentals will improve, with higher loan growth and lending margins. IT earnings are seen flat, with particularly strong recent downgrades, part due to the stronger US dollar.
Watch profit margins, earnings guidance, and strongly asymmetric market reactions
S&P 500 corporate profit margins are forecast at 12.4%, near record levels and companies able to offset much of the rising inflation pressures with price increases or cost cuts. This is not sustainable indefinitely. We would expect continued high asymmetry of market reactions to earnings – and especially forward looking company guidance after GE (GE) and Micron (MU) warnings – as investors recession fears have increased. This will see ‘beats’ as expected and barely rewarded, whilst ‘misses’ will be brutally punished.
Earnings recession remains the big risk to markets
Falling company profits are the fundamental impact of an recession. These peak-to-trough earnings falls have averaged 18% for S&P 500. But there are wide differences depending on the severity of the recession, like in 2007, and different sectors have different sensitivities. The greatest revenue volatility is from energy, communications, materials, with healthcare, staples, having least. See latest recession playbook.
S&P 500 earnings fall during recessions, from prior peak (%)
Key Views
| The TBanque Market Strategy View | |
| Global Overview | Geopolitical risks alongside the Fed hiking cycle is boosting uncertainty and weakening markets. We see this as slowly fading, the global growth outlook secure, and valuations more compelling. Focus on cheap cyclical and defensive assets within equities, like Value, plus commodities, crypto. Relative caution on fixed income and the USD. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing strong c4% GDP growth and resilient earnings growth outlook. Valuations have now fallen back to average levels, and are supported by peaked bond yields and high company profitability. Fed interest rate risks are now well-priced. See cyclicals and value catch-up, after lagging for a decade, whilst big-tech supported by structural growth outlook. See overseas markets leading in global ‘U-shaped’ rebound. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks rising 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 cushioned by greater weight of cheap cyclical sectors, lack of tech, and 25% cheaper valuations versus US. |
| 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. More cautious rest of EM on rising rates and strong USD. |
| 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 | 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 | Cyclical sectors, like consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive in a ‘slowdown not recession’ scenario. Are sensitive to re-opening economies, resilient GDP growth, and higher bond yields, with depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from higher bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and room for large dividend and buyback yields. But is being outweighed by rising recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) 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 themes. |
| 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 | In ‘sweet spot’ of robust GDP growth, ‘green’ industry demand, years of supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply and Russia 10% world supply problems. Gold helped by risk-aversion but held back by rising bond yields. |
| Crypto | Volatility very high, and correlation with weak equity prices risen. Asset class seeing 16th -50% pullback of last decade. Upside from 1) continued Institutionalization of cryptoassets, from allocations, to investment products, and regulation. Also, 2) the steady broadening of the use cases and market development, from Ethereum PoS, to DeFi to payments |
| *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: TBanque
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 |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. TBanque makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
