In this week’s market update: earnings season gets into full swing; ESG dominates fund flows; and Brexit continues to squeeze trade in Europe
The main focus for investors this week is the most important driver of stock markets - company earnings. A couple of weeks into first quarter earnings season, this week sees a step change in the rate of announcements.
The most important set of results, because of the weight of the companies in the index but also thanks to their high profile, will be the flood of tech stock announcements. This week brings results from Google-owner Alphabet, Microsoft, Apple, Facebook, Amazon, Tesla and Twitter.
These are the stocks that drove the market higher during the first phase of the post-pandemic recovery as investors bet on their durable earnings during lockdown. Alphabet’s revenues rose 13% last year despite advertising revenues falling 20% as a whole, for example.
The shift to working from home helped hardware and software sales for both Microsoft and Apple. Amazon saw growth in its Prime subscription service and beat expectations over the Christmas period.
Tech stocks have not performed so strongly since the re-opening trade began in earnest in November. Investors are less in need of earnings safe havens and the threat of rising interest rates reduces the perceived value of the future cashflows from these long-term growth stocks.
So, this week’s results could shine some useful light on whether the recent rotation back to growth from the cyclical value plays which have enjoyed their moment in the sun over the past six months has further to run.
On this side of the Atlantic a big focus will be financials. Lloyds, NatWest, Barclays, HSBC and Standard Chartered will all unveil trading for the first quarter as will Deutsche Bank in Europe and Visa and Mastercard in the US.
With AstraZeneca having been in the headlines for much of the past year thanks to the Oxford vaccination, its results will be in the spotlight this week alongside GlaxoSmithkline and Merck.
Energy, one of the other value sectors to have bounced back in recent months is in focus as ExxonMobil, BP and Shell report. Oil companies are viewed negatively in a world focused on the drive towards net zero carbon emissions but this is priced into stocks which also offer investors high dividend yields.
Meanwhile, what I have called the middle child syndrome stocks that don’t fit into either the growth or cyclical categories are well represented this week. High quality consumer staples businesses like Colgate-Palmolive, Unilever and Reckitt Benckiser will update on their first quarters. These kinds of shares have been largely ignored by investors because they have been seen as beneficiaries of neither the work from home/lockdown theme that dominated the first six months of the pandemic, nor the reopening trade that has played out since November.
Earnings are particularly important a year into the recovery because the stock market has already priced in plenty of good news. That is what markets do. They anticipate improvements well before they show up in the numbers. Which is fine if better times actually arrive, but it does raise the risks of a correction or pause for breath if numbers disappoint.
Looking back to 2010, a year after the market bottomed out in March 2009, investors suffered a 17% correction and fears are growing that this summer may see something similar. As the saying goes in investment it can be better to travel than to arrive.
The good news is that earnings estimates have risen strongly since the start of earnings season and the full year growth expectation is now 28%. Before results started to be announced it was 21%. That upwards revision has helped maintain the US market at close to its all-time high.
The other key driver of the market, of course, has been fiscal and monetary stimulus. This week brings an interesting insight into the Fed’s thinking on interest rates and other stimulus measures like bond buying or quantitative easing. In the weeks since the Fed’s last meeting in March, the US jobs market has strengthened and retail sales in March were the strongest in 10 months with 37% of Americans now immune either because they have had Covid or received a vaccination. That is leading to a robust re-opening of the American economy.
This might put pressure on chair Jay Powell to restate the Fed’s lower for longer message, although the recent fall in 10-year bond yields from 1.75% to 1.55% suggests that he is winning that battle.
The message on the fiscal front is more nuanced. Although the market has warmed to expectations for more infrastructure spending, not to mention plans to boost education, health and childcare and the recent stimulus cheques, attention has started to shift to how all this will actually be paid for.
President Joe Biden has given a hint in the past week, with a proposal to hike capital gains tax for the very richest (those earning more than $1m a year) from 20% to nearly 40%. Unsurprisingly this was greeted by outrage from those likely to be impacted but it is hard to argue with a measure that will only hit the top 0.3% of earners and which aligns the tax on unearned income with that on salaries.
It will be interesting to see whether Rishi Sunak takes his lead from Biden later this year. In that regard it is interesting that the Chancellor’s announcement on corporation tax followed a similar proposal in the US. Unpopular measures are easier to push through if they look aligned with those in the world’s biggest economy.
The Chancellor faces a more challenging economic backdrop than his counterparts in the US, however. Although the UK has also been successful in rolling out a vaccination programme more quickly than most other countries, we face the twin challenges of Covid and Brexit here in Britain.
On that front, the news is less encouraging. Post-Brexit bureaucracy continues to hit the important food and drink export sectors with sales to Europe down 40% in February compared to a year earlier. Small businesses, in particular, are grappling with new veterinary and customs checks introduced at the start of the year.
Food and drink exports to the EU were under £600m in February, down from £1bn last year and there was only a relatively small offset from higher sales, about £50m, to non-EU countries.
On the other side of the channel, the bigger concern remains Covid, with lockdowns still very much the norm in Europe. As a result, a second technical recession in a year looks certain, with falling output in the first quarter of this year making it four out of the last five three-month periods to have experienced declining activity. GDP data is due on Friday for the Eurozone.
In the rest of the world, too, the strength of the recovery is far from guaranteed. Friday also sees manufacturing sector data for China. This comes on the back of the big 18.3% recovery in GDP in the first three months of the year. That gain was flattered by particularly favourable year on year comparisons and the quarter on quarter rate of growth was a lot less impressive at just 0.6%.
And finally, the dramatic upsurge in interest in sustainable investing in the past couple of years passed another milestone this week as flows into ESG-related ETFs exceeded those into all other types of ETF for the first time in Europe.
In the first three months of the year, $25.8bn dollars was taken by ESG-focused ETFs in Europe, compared with $22.3bn for non-ESG funds. Just two years ago, ESG funds accounted for just a sixth of the total. An interesting comparison can be drawn with the US, where ESG ETFs are just 3% of the market.
One of the key drivers has been a shift in the widely held view of ESG performance in the stock market. Whereas investors used to think that sustainability was a bull market luxury, the link between good ESG credentials and stock market performance was cemented by the resilience of sustainable stocks during both last year’s down and up markets.