What is the outlook for global equity as the first quarter earning season concludes?
Reflecting on the past month, Jeremy Richardson explores;
Satisfactory earnings data driven by margins rather than sales
Investors turning to forward-looking statements for guidance
Technology stocks, particularly those related to AI, leading sector performance
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Transcription
Hello, this is Jeremy Richardson from the RBC global Equity team here with another update. We're coming to the end now of the Q1 earnings season. And the results have tended to have been pretty good compared to expectations. But looking at where those results have been coming from, it seems to be driven more by margins rather than by sales. And I think this is due to the caution that was there in the markets at the end of last year.
If you think back to October of 23, there's a lot of anxiety over what the impact of high interest rates would do to the global economy, particularly in the US. And there's a lot of fear about a hard landing, a recession. And if that had arisen, it would not have been a particularly good scenario for corporate profitability. But pleased to say it looks as though the recession has been avoided, we don't have that big downturn.
And yet management teams from that period have been cutting back on costs and generally tightening their belts on the expectation that it could have happened. So now we have a situation where with a recession avoided and costs still very much under control, it's created the conditions for margins to expand. And that's actually been, I think, what's been mostly driving the satisfactory earnings that we've seen this quarter.
But thinking about how the market has responded to that news, we've actually seen quite a differential in performance. It’s not so much the investors have been rewarding the margins and the profits that have been delivered. It's as though the investors have been more tuned into any forward-looking statements or guidance that company managements may have about the balance of 2024. Revealing that there continues to be some level of anxiety about, how the macro economy is working, and in particular, what I would highlight here the health of the US consumer.
There are some indications that the US consumer is beginning to see a little bit of more, in straitened conditions, particularly for that at the lower end of the sort of the income demographics. And that's being played back to us in terms of some of the results we're seeing from some of the retailers. At the moment, but generally, I think the, the way that the market has behaved has been, you know, quite supportive and quite positive.
I think there's the old saying sell in May and go away, but that would have been a mistake. in 2024, when looking at the sector performance, you see that, is a more confident tone, being played back to us in terms of what's been working and what's not. And things coming up towards the top of the list, perhaps no surprise continues to be those areas of the markets, relating to areas of significant investment in artificial intelligence and the technology needed to support that.
So semiconductors, IT stocks and strangely enough, utilities companies. Who would have thought that utilities companies would have been able to develop an artificial intelligence story. But I guess if you wait long enough, something's going to turn up. And a lot of investors have worked out that actually, if you need a lot of power to run these artificial intelligence queries, then actually some of the, particularly the US electricity utility companies are well-placed to, to deliver that.
And that could create a, a profit opportunity for them. But it's not all about the US. I think one of the other things that we've seen in the recent past is how after a long period of dominance by the US market, we are now at least beginning to see other geographies actually catch up and actually do slightly better than the US over the course of the last month or so.
So pockets of Europe are actually doing better. Germany actually did better in US dollar terms in the US market itself over the course of May to date. And China is also making a recovery helped by economic stimulus and a growing sense that the Chinese government is working actively behind the scenes to avoid any, slowdown there.
As investors, I think one of the things, you know, that we draw a lot of comfort from is just how all of these conversations are weaving together. what I haven't had to discuss, over this, call is actually expectations of interest rates or the Fed, and it's such a refreshing change to find that actually, it's about companies.
It's about industries, and it's about what the company results are actually driving and how that’s being received, what companies have to say that's driving share prices. And that I think is a very constructive dynamic shift that we've been that's been continuing over the course of the early part of 2024. And the Q1 earnings season has reinforced. And for a bottom-up stock picking investors like ourselves, that's something that we very much welcome.
I hope that's been of interest, and I look forward to catching up with you again soon.