In the midst of the earnings season, what may lie ahead?
Reflecting on the past month, Jeremy Richardson, Senior Portfolio Manager, Global Equities, RBC Global Asset Management (UK) Limited explores;
Better-than-expected results due to margins rather than revenues
Fears for the resilience of the U.S. consumer vs hopes of falling interest rates
Renewed dalliance with AI as demand outstrips supply
Uncertainty caused by elevated inflation continuing to dissipate
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Transcription
Hello, this is Jeremy Richardson for the RBC global equity team here with another update. I'm speaking to you in the midst of the current earnings season. Always an interesting time to hear what companies have to say about what's going on in the world. And we're getting discordant themes coming through this earnings season, the first one we've mentioned is a is a continuity of something we saw last quarter, which is that companies results are tending to come in slightly better than expected, but it's how they're getting that earnings beat that seems to be, preoccupying people's minds.
It's not because of revenues, typically, it's because of margins. And if you asked most investors which one they would prefer, they'd like a bit of both, I'll be honest; because if you've got growing revenues, then it tends to underwrite the margins in the future. If you've got margins without the revenues, then investors inevitably will worry about the sustainability of those profits.
And that's kind of where we are at the moment. The second thing that we're seeing is a tension between fears of the sustainability of the US consumer, who's been so resilient for so long, but now at last show is showing signs of actually fading under the weight of increasing prices, on the one hand, versus the optimism, and hope that interest rates may be roughly near a peak and may begin to fall.
And so, this is actually leading to some somewhat perverse, share price responses on results. In fact, we've seen a number of instances where companies with good results have been greeted with share price falls and others which have been somewhat disappointing. And I've actually seen share prices rise. So it seems to be all about the expectations. And then the final thing to say is this sort of, renewed dalliance with artificial intelligence, which was such a big part of the story earlier this year, and for a moment it looked as though the market was beginning to worry about the level of capital expenditure plans, which were from the large cloud computing companies, which was going to be really creating the revenue opportunities for all the semiconductor, designers and manufacturers. and with that level of concern that maybe the capital expenditure plans may be peaking, it caused a little bit of profit taking in some of these semi stocks, and that has not been terribly helpful for the overall level of the market.
As you may recall, we've spoken about it before. Narrow market performance really driven by large cap tech stocks, including a lot of these semi companies has been what's been driving the market forward. So any concerns over capital expenditure plans sort of removes one of those, supporting props from the market. Well, as we've gone through a little bit further into the reporting season, more news is beginning to emerge of those capital expenditure plans.
And it looks as though, at the time of speaking at least, that, there is still more demand than supply, that the cloud computing companies are seeing lots of interest from companies and they're building capacity in order to meet that interest. And that's leading to more revenues for the semiconductors and, many designers and manufacturers. So, a little bit of a relief is creeping into market sentiment at the moment in some of these tech stocks.
So actually, maybe, some of the fears of the sky falling on our heads, is not actually warranted. I should stress though, that we are only about half way or so through the earnings season. And so, you know, how we navigate things from here, to the end will continue to be of great interest, but that's kind of a snapshot of what we're seeing at the moment.
The broader picture, the 10,000ft view, I think very much remains the same in that the level of overall market uncertainty caused by, elevated inflation last year continues to dissipate. And it is somewhat encouraging that it is fundamentals that we are now once again engaging with and talking about as investors that I think is very much a positive dynamic.
And long may it continue, because the more the fundamentals drive share prices, the more opportunity there will be for fundamental investors such as ourselves. I hope that's been of interest, and I look forward to catching up with you again soon.