Australia Strategy: Global leaders update - 1Q US reporting themes

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

02 June 2022, 9:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Our Asset Allocation Update – Q2 2022 details our recommended 22% exposure to international equities for investors with a balanced risk profile.
• First quarter reported US earnings were slightly better than expected overall, but were mixed among the mega-caps, and weren’t strong enough to overcome the macro-economic themes dominating investor attention.
• Several global franchises are now trading at 20-35% discounts to consensus estimates of intrinsic value, offering opportunities for long-term portfolio investors.

Global shares versus an uncertain backdrop

The S&P 500 has fallen over 13% in 2022 to date, while the technology-heavy Nasdaq index has fallen by ~23%. Faster-than-expected rises in the interest rate outlook is the key driver, with the US economy navigating the highest inflation in over 40 years.

Conflict in Europe (energy markets) and lockdowns in China (supply chains) exacerbate some of these forces and current uncertainty.

Key themes from the US 1Q earnings season

Overview: Mixed results from some US mega-caps (including Amazon, Walmart) dampened an otherwise better-than-expected earnings season. Roughly 80% of companies reported earnings above analysts’ estimates, beating the long-term average (66%) but below the 83% rate seen in the last year.

Tech themes: Tech companies have been able to prioritise long-term growth over profitability, but these priorities need to shift with the rising cost of capital. This has triggered a de-rating in tech multiples, with the re-opening of the economy post-Covid also a headwind for some.

However, the long-term structural themes for the tech leaders remain intact, and the fact that businesses weren’t seen to be cutting IT budgets in the 1Q supports this outlook.

Consumer sentiment: Surprisingly, US consumer spending has so far only been moderately affected by higher inflation and falling markets. Consumers still have pent-up demand post-Covid (travel, entertainment) with savings bolstered by pandemic era stimulus. However, spending is likely to slow with the real economy.

Supply chain linked inflation: 1Q results didn’t give a clear direction of supply chain problems, with mixed comments from corporates, although most believe supply chains aren’t worsening. Inventory dynamics will be an important area of focus in the coming quarters.

Historically in inflationary periods, customers over-order to secure key components, where this becomes a risk should demand decline, leading to an inventory glut.

Taking a long-term view

Several global franchises are now trading at 20-35% discounts to consensus estimates of intrinsic value, offering opportunities for portfolio investors. Several risks are in play, implying patience and a long-term view is required.

We think it is notable that in May, insider buying (by corporate executives and board members) outweighed insider selling for the first time since March 2020, which is an important momentum indicator for those looking at “timing” this market.

Figure 1: International shares bearing the brunt of macro-economic uncertainty

Source: Morgans Financial

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.