Weekly market recap: tech trounces expectations

Sterling joins US equities in reclaiming growth, reaching closer to their prior 2020 heights.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 31st July 2020

Those who know me will know I like a good conspiracy story, so I was rather amused when I saw that Egypt’s international co-operation minister invited Elon Musk to visit the country after the billionaire tweeted aliens “obv” built the pyramids.

US equities have resumed their stellar run and are back within reach of record highs as we roll through a corporate earnings season. Asset class returns are below; as well strong performance by the S&P 500 we note that last week was also a good week for sterling which continued to climb to 2020 highs.

 

Figure 1: Asset class total returns, local currency

Source: Bloomberg

Figure 2: Asset class total returns, GBP currency

Source: Bloomberg

Last week was a mega-week for corporate earnings in the US with 37% of S&P 500 constituents reporting Q2 results. As with other Western countries, the White House only starting to respond to the coronacrisis towards the end of March this year meaning most of the economic damage occurred during Q2 rather than Q1. Nevertheless, corporate managers were quick to express the level of uncertainty they faced going into Q2 by pulling guidance for 2020 results, beginning to either raise fresh equity or drawing down on revolving credit facilities to shore up balance sheet strength, and cutting dividend and share buy back programmes to preserve cash. But with the market seemingly bracing for the economic impact, one CEO’s comments stood out for us. In his Q1 earnings call, Microsoft CEO Satya Nadella said they had seen “two years’ worth of digital transformation in two months” as the world went into lockdown.

Figure 3: Last week saw the highest concentration of S&P 500 companies reporting earnings

Source: Bloomberg, EQ Investors

Given this comment, it is perhaps no surprise that in the same week the US Bureau of Economic Analysis announces a 7% contraction in US GDP for Q2, four of the largest US technology companies announced a cracking set of results which trounced analyst expectations. This happened just one day after the CEOs of these four companies (Amazon, Apple, Alphabet and Facebook) appeared at a congressional antitrust hearing which took aim at the sheer scale and potential anti-competitive practices uncovered by the committee. The strong financial performance of these leading technology companies with such a backdrop will be sure to do anything but allow the companies to keep a low profile.

Across the rest of the market, economically sensitive sectors such as Consumer Discretionary (CD), Energy (EN) and Industrials (IN) have seen marked declines in both sales and earnings in Q2. Figures 4 and 5 show the spread of individual company results (blue dots) broken out by economic sector with the median growth rate indicated by the pink bar. What’s interesting is how significant the dispersion of results is within each sector which should be a supportive environment for active fund managers.

Figure 4: While sales growth for most sectors was on average flat for the quarter… Figure 5: …a number of more defensive sectors saw modest increases in their bottom lines despite the economic shock
Source: Bloomberg, EQ Investors Source: Bloomberg, EQ Investors

While the earnings season continues to roll through, we have noted that corporate managers are more optimistic than this time three months ago, and that while uncertainty remains high, some are expecting the worst of the crisis to be behind us. That said, we are carefully monitoring new cases of Covid-19 which have the potential to push countries back into lockdown causing further economic pain.

STAT OF THE WEEK: 80% – the fall in the volume of oil spilled in the sea since 1980 (Our World in Data).

DATA CORRECT AS AT: 31/07/2020

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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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