Weekly market recap – Earnings excitement

US equities advance over 3.5% in local currency terms amidst the earnings season.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 8th May 2020

A German nightclub has taken an imaginative step and bypassed lockdown restrictions by hosting a drive-in rave in its car park. Club Index allowed around 250 cars, each carrying a maximum of two people, to attend the event with Dutch DJ Devin Wild livening up the crowd with car horn-based audience participation.

US equities had their own party last week, advancing over 3.5% in local currency terms as the earnings season rolled through. Asset class returns in sterling and local currency are below; while developed markets notched positive returns, emerging markets have failed to capture the upside in the market rebound from March lows.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

Last week was another week of records (and not good ones at that) as the US Bureau of Labor Statistics released the latest employment data. The two charts below show the astonishing magnitude of the change, with the net change in job figures (right) revealing 20 million workers lost employment and the US unemployment rate (left) now standing at 14.7%. This confirms the scale of the current shock is unmatched by any previous scenario in modern economic history.

Chart 1: The US unemployment rate in Apri

l spiked to the highest level on record as over 20 million workers in the US lost their jobs

Source: Bloomberg

This historic move in employment data hasn’t given th

e market a reason to become any less jubilant with the S&P 500 posting another cracking return last week, in part due to the earnings season currently rolling through. With 434 out of 500 constituents of the S&P 500 having now reported their Q1 results, we can take a moment to decompose the aggregate picture. As we would expect, economically sensitive sectors such as Financials, Consumer Discretionary and Industrials have all suffered double digit declines in their year-on-year earnings, while the more defensive sectors such as Health Care, Utilities and Consumer Staples have seen modest rises.

Chart 2: In the current earnings season, S&P 500 companies have been evenly split leading to an overall year-on-year growth rate in sales of just 1%. Earnings meanwhile have slumped as companies’ margins have declined.

Source: Bloomberg

To us, one area that continues to shine brightly is the US Information Technology sector which has seen its growth driven by Software & Services and Semiconductor related industries. We’ve gained a lot of insight in this area from calls with our fund managers in which we have discussed how underlying companies have been impacted by the economic lockdown. In particular, several of our managers pointed us to comments from Microsoft’s earnings call in which CEO Satya Nadella estimated they had seen “two years’ worth of digital transformation in two months” as companies have embraced everything digital from remote teamworking to critical cloud infrastructure to keep operations running smoothly.

STAT OF THE WEEK: €750 billion – the value of securities bought up by the European Central Bank for its Pandemic Emergency Purchase Programme (ECB).

DATA CORRECT AS AT: 08    /05/20

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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