Loading summary
Transcript60 lines
- [00:01]
A
Today's markets move fast. Get the insights you need in 10 minutes with the Barclays Brief, a new podcast from Barclays Investment Bank. Through sharp dialogue and scenario based analysis, our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed. Find Barclays Brief wherever you get your podcasts.
- [00:36]
B
Pushkin there's really no two ways about it. US Companies are absolutely crushing it at the moment. We're well into earnings season in the States right now, one of the currently four times of year when listed, American companies tell the world how they're doing. And the answer is very nicely indeed. Thanks very much. A good chunk above 80% of companies in the S&P 500 have beaten what were already pretty lofty expectations for the money they're making. And it's not just in AI today on the show. Heaven knows, it pains me to say it, but it's the Buy America trade. This is unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, busily memorizing the entire Internet in advance of the FT Alphaville Pub quiz tonight. All the way from over there. In the land of bumper earnings, it is the big fella, Mr. Robert Armstrong, who today has been put in a special chair for recording this podcast.
- [01:47]
C
It's true, I'm a bad boy and I move around a lot when I talk. And so our producer Jake has gotten me in a chair that doesn't move so I will sit still. And what if this doesn't work? What restraints are coming next is an open question. Like he's gonna zip tie my wrists to the arms of the chair. Whatever it takes.
- [02:13]
B
Yeah, whatever it takes. This is the start of the fight back against a very wiggly, exactly wriggly Robert Armstrong.
- [02:22]
C
At 54 years old, I'm still the wiggly boy at the back of the class. Sit still, Armstrong.
- [02:31]
B
We digress. Rob, tell me what the hell. What the hell, like earnings season is just like, I've never cray cray.
- [02:40]
C
I have never seen an earnings season like this. Average S&P 500 earnings growth so far is like in the mid-20s percentage range year over year. If you look at a chart of earnings growth, we were kind of bumbling along at like 10, 11% earnings growth the last couple of quarters and then it just took the absolute elevator this quarter and it's been amazing. I'm ashamed. I Didn't see this dramatic change coming. But there are a couple of fairly commonsensical explanations for this we could go through.
- [03:19]
B
Yeah, but just a little bit more on the scale of this thing. So as you say mid 20s percent in the first quarter, year on year, that's like a lot of earnings growth. It puts us at roughly a four year high. And one of the weird things about that is that sometimes you see these explosions in corporate earnings growth when you're coming out of a recession or you're coming out of some sort of shock. Covid is over and the global economy reopens and wahey. Corporate America does incredibly well by comparison with the previous quarter or by comparison with the previous year. Now it's just like we're not in
- [03:56]
C
a recovery, it's just happening. I mean just to put the size of what we're seeing right now in context, over the very long term, the average earnings growth rate for The S&P 500 in real inflation adjusted terms is something like 7, 7.5%. So we're going along maybe tripling or quadrupling the standard rate of growth this quarter. It is like an amazing event we're seeing and it does, it goes a long way to justify the dizzy heights that markets have hit.
- [04:29]
B
Weirdly, it goes pretty much 100% of the way towards justifying the dizzy heights in US stock markets at the moment. So we've talked about this on the pod before, but it is like double weird that you have stock markets like cranking higher but without what we call multiples going higher. So investors aren't paying more for the same stuff, they're just tracking earnings, they're following fundamentals in corporate earnings.
- [04:54]
C
Each dollar of profits costs you the same thing. Right. And so there's just more of the profits.
- [05:01]
B
So more profits. So line go up. So this is like, you know, it's very unusual for markets to trade on fundamentals. Like normally they trade on like, you know, hope and expect and hype and vibes and all this sort of thing.
- [05:13]
C
Yes.
- [05:13]
B
That's actually like not what's happening in the States at the moment. So this is quite, it really is quite extraordinary. So look, AI is a big part of it. Let's talk about like, you know, there's tech companies that are making money handover fist. Fine. I think we kind of expect that's going to be a thing. Right.
- [05:29]
C
But there's also one of the sectors that's growing earnings at a very lively pace this quarter is industrials like these metal banging, real world living in Heavy metal kind of companies are doing great. And part of that I wrote about this in the newsletter last week is there's a handful of them where they're just building data centers and they're like putting in the air conditioners for the data centers and throwing the wires in the ground and putting the building up and et cetera, et cetera. So. So there is a handful of industrial stocks that have just gone bananas because literally they are beyond their capacity to serve the construction needs of the data center industry. You know, you can't put the air conditioners in fast enough. Caterpillar, which makes industrial machinery for mining, construction and such in a characteristically yellow color, also makes generators that produce backup energy. So they'll roll up with a huge backup generator for your data center. They can't sell them things fast enough. And that's been like the best, you know, one of the very best stocks in the S and P has been Caterpillar, earnings wise.
- [06:43]
B
Yeah. So in fairness, you did call this one. Banks have been doing very well as well.
- [06:49]
C
Yeah, they've been great. So two things working in banks favor. One is if you're a bank that has a trading desk, so you're one of the big global banks. It's been a volatility playground out there. A trading desk doesn't need markets to go up, they need them to go zigzaggy because you make money on the zig and the zag. And so it's been a volatility carnival in the first, going into the second quarter. So they're feeling great. The yield curve is still positive, which means short term rates are lower than long term rates. That helps banks that borrow short and lend long and, you know, the economy is good enough that loans are growing. So financials are growing their earnings at 20%. You know, it's a good look for them. So that gets you two big sectors right there. Industrial's good, financial's good. Before you even started talking about technology
- [07:47]
B
on that point, about the zigzags in markets, I was talking to some fund managers last night and they were saying the whole zigzag thing is absolutely doing their head in. So like you've got like a portfolio of stocks and one of them will just like dump 15% in a day for like no reason, like on some like random headline out of Iran. And they're left thinking, what's going on? Has something changed? Should we be selling this stock? Should we be buying the dip? What should we be doing? And then like two hours later, oh, it's recovered now, fine, it's nothing. And so that I guess goes a long way towards explaining why the vibes are not that great, but the earnings growth is doing well enough to keep markets supported. Is that like fund managers are just sitting on their hands saying, this is a nightmare. I don't know what's going on. But the zigzagging thing is perfect for bank earnings.
- [08:37]
C
Sure. For the traders, it's great. For the fund managers, for the people like us who are paid to make sense of what the hell is going on, this is very difficult. But for the traders, they're like, great. You want to sell a stock down or up 15% for no particular reason, I'm here for you. And by the way, the bid ask spread on that stock will be high. So that, that goes straight into my pocket. Thank you very much. Thank you for playing the stock market.
- [09:04]
B
Thank you for playing the stock market.
- [09:06]
C
We should talk about the demand for tech services. So there's this whole AI story running in the background, but all the kind of normal stuff the big companies do. Google sells ads, Microsoft sells software, et cetera. On down the line Meta runs ads against social media sites. All that part of the economy is doing well. So while they're spending all this money on AI data centers, the big companies are earning loads of money just doing the thing big tech companies do. So that part that, that's probably the strongest growth story is the, you know, the, the technology growth story. There are exceptions here. You know, there's all these worries about certain software companies will get murdered by AI and et cetera, et cetera. But the basic background in demand for digital services is very strong.
- [09:59]
B
Let's spend a little while on a phrase I'm told that I use too often, which is fun sponges. So that's true. There are people out there who are like, I just can't bring myself to believe that everything is as rosy as it looks. One organization out there that's saying that is Hussman Global Advisors, I think is their full name.
- [10:22]
C
They are in the fun sponge business and have always been.
- [10:24]
B
They are in the business of soaking up fun.
- [10:27]
C
Yeah.
- [10:27]
B
And a pretty reliably kind of Debbie Downers about market direction. But as they pointed out in a little note they did the other day, it was is weird to have this level of earnings growth when you're not coming out the other side of some sort of recession or shock. That is legitimately actually quite weird.
- [10:44]
C
Yes.
- [10:45]
B
And also it sort of assumes that AI won't come and kill certain sections of the Stock market. So when you've got like a decent spread of companies that are doing well, no one's pricing in this possibility that the AI could end up chewing them up. So they're kind of reasonable, ish pushbacks, I think. But you just can't, you can't fight the, the direction.
- [11:09]
C
It's true. And so the issue you just raised is the issue of sustainability. Like where, you know, there, there is a case to be made that this is a bit of a sugar rush, that all this stuff can't go on forever. You know, the oil companies are an example of this. Right. Not so much in the first quarter, but in terms of what they're talking about, how it's going now in the second quarter, there's a shortage of the stuff that they make. They're going to print it. Right. But yeah, one day, as the guy in Apocalypse now says, this war is going to end, at which point oil prices are going to go down. Right. So that's a temporary phenomenon. And I guess if you wanted to be a Debbie Downer about the United States in particular, you might say the consumer is not quite what the consumer used to be. So we saw that in the first quarter GDP report that the rate of growth of consumption is slowing. It's gently kind of returning towards trend. And in the other scenario in which the war doesn't end and oil prices go up, that's likely to get worse.
- [12:23]
B
Yeah.
- [12:23]
C
I think, by the way, the US consumer is doing fine right now. McDonald's earnings just to grab a consumer company out of the air were fine. They saw, you know, real terms sales growth in the United States.
- [12:38]
B
But how much of that was down to you?
- [12:41]
C
15%. My son. My son accounted for 20% of U.S. mcDonald's sales this quarter. They have like a concierge following him around. Anytime he gets hungry, they just put a Big Mac in his hands.
- [12:58]
B
Yeah, you can't go wrong with teenage boys and Big Macs. But I guess another thing that's going on here is that the US is kind of sucking growth out of the rest of the world to some extent. So, you know, Europe and Asia, as we've discussed on this podcast pod several times before, like we're on the sharp end of the energy shock and you keep hearing these warnings. So, you know Robin Wigglesworth who was on this pod the other day, he was writing about this the other day on Alphaville. There's like plenty of analysts out there saying, okay, oil prices are kind of bobbing along at the moment, but there is a Risk that one day we walk into the Office and it's $20 higher or it's 50 higher. Like this thing doesn't have to move in a smooth fashion. It can just hockey stick higher. And then surely we have a problem with the US Consumer then. And surely we have a problem with, with corporate margins then it is true.
- [13:52]
C
But to get to your US sucking the growth out of the rest of the world, if you are a US industrial company that uses natural gas as a feedstock, so you make chemicals or you make fertilizer or you make whatever it is you make, you are at a massive competitive advantage to your peer company in Europe because we got gas coming out of our ears locally here. You know, we're trying to send it away as fast as we can. And so that, that goes directly to your point of the energy shock hitting different regions of the world differently. And you know, America is just lucky that we discovered that we're basically floating on a huge pool of natural gas in this country. Or at least in Texas, Pennsylvania, we are. And so that's something really compelling. But look, you know, to your point, we're not going to grow earnings at 20 plus percent forever. This is a blip, surely, you know what I mean?
- [14:53]
B
Surely. Yeah, yeah, yeah, yeah. But we still have this thing where like the stock market is like, yay, everything is awesome and the energy market is like, hell world, hell world, be afraid.
- [15:05]
C
And there is, to Robin's point, winter is coming. There is a moment if we don't get. There is going to be a moment if we don't get the Strait of Hormuz open, where inventories simply run dry in the world.
- [15:20]
B
Right.
- [15:21]
C
You know, Malcolm Moore did a great piece about this for us a couple of days ago. We are drawing down inventories still. And so, and at some point, maybe it's in September, you know, as one Street Energy analyst said, it was sometime in September, inventories go as low as they can go. And so the only flexibility left in the system is demand destruction. At that point, you just have to use less of the stuff. And we are seeing some demand destruction in energy in Asia right now, some in Europe, none in the United States. But if we get to that day in September where, as Malcolm pointed out, you can't run the system on zero inventories. You know, like the pipe has to be full of something. You know what I mean? You can't run the tanks dry. There has to be some gas in the cars at any given time. I mean, I would say you've put your finger on the terrible scenario is that the whole situation is predicated on the strait being open sometime in June, say. Right. Just wide open in June. If it's closed shut in September, what do you call it? Squeaky bum time at that point it's squeaky bum time.
- [16:33]
B
Yeah. One thing that I think is interesting here is the hype and hope has kind of been knocked out of stock markets and it's just the earnings that are doing the heavy lifting. I wonder how much higher we would be if we had the good vibes on, on, on top of the earnings, you know, so things look great, but they, they could look a lot greater.
- [16:51]
C
Yes, but what we should be glad. Katie, let me interrupt you. We should be glad it's not. Right. The market is in a sustainable place right now and that's something to be celebrated. Bad vibes plus good earnings is a market I want to own. Right. Because good vibes turn to bad vibes. Right. And you can't predict when. So if the vibes are only so so and earnings are good, that helps me be calm.
- [17:18]
B
Eventually vibes always chicken out. Listen, one other thing I want to talk about is like the reason why we've got such great earnings out of companies at the moment is that they are reporting earnings, which is a thing they currently do on a quarterly basis. In the States. One of the biggest US financial regulators, the securities and Exchange Commission, the SEC is moving forward with these plans to cut reporting requirements for US companies. So they might only have to report semi annually instead of quarterly. This isn't a done deal yet, but it's pretty close to being a done deal. And the theory behind this is, and I think this is something that you sympathize with, Rob, like is that let's free corporate America from the shackles of writing long tedious earnings reports that nobody reads and this will enable them to do more innovation. I guess my thinking on that is show me the evidence that this is currently hurting.
- [18:16]
C
Yeah,
- [18:18]
B
like, I don't get it. Like, and, and I think like some investors that I speak to say, look, one of the reasons why the US stock market is, is the Mac Daddy. And it's like base is home for a lot of global investors is precisely because it reports every quarter. Doesn't matter what kind of crisis is going on, doesn't matter what war there is where, so help them. US companies always report every quarter. That's not necessarily the case in, in Europe, for example, some of them are less frequent. So I don't know, construct. The argument for me that this makes any sense to remove this requirement?
- [18:55]
C
Well, I wonder how much it really helps investors. At some point the information is just causing a lot of mindless trading on increments of information that actually aren't that important. And to the degree that investors could keep their eyes focused firmly locked on the long term rather than the tiny squiggles that happen in a given quarter, maybe that would be good. I, by the way, I'm sympathetic to your point is like the US Market sure doesn't look broken right now, so why would you try to fix but let me ask you this, Katie. Let me turn the question on you. Those big European companies that report only twice a year and then sort of have mid, mid period sales updates, is that such a bad system? Are you left wanting more by those big European firms?
- [19:49]
B
I'm not necessarily left wanting more, but I do think the context here matters. Right. So in the states at the moment, like regulations are just falling away left, right and center. So it just strikes me that right now, like allowing companies to say less in the States feels like potentially storing up problems. I don't know, I could be worrying about nothing. But I do think the context matters and I do think there's no evidence of harm currently.
- [20:18]
C
So just, yeah, let's just keep going and hope the good times roll.
- [20:22]
B
Yeah, but that's not going to happen. They're going to change it whether we like it or not. Speaking of things that are going to happen whether we like it or not, we are going to have to come back in one sec with long.
- [20:37]
C
Foreign.
- [20:42]
A
Today's markets move fast. Get the insights you need in 10 minutes with the Barclays Brief, a new podcast from Barclays Investment Bank. Through Sharp dialogue and scenario based analysis, our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, Stay briefed. Find Barclay's Brief wherever you get your podcasts.
- [21:12]
B
Okie doke. It is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, we received complaints that we ran out of time for your long short the other day, so well here. So you should go first.
- [21:28]
C
I've got a short for you. I think. Katie, I've reached an age where I am short the open bar. I was at an FT cocktail party last night, an FT weekend event. It was a very nice event, but it's open bar and I have these two vectors of my personality which are likes to drink bourbon and is cheap. And those two lines cross at Open Bar where I'm like, I have to have a couple of extra bourbons because they're free.
- [21:59]
B
Yes.
- [22:00]
C
And this, you know, this was maybe an acceptable situation 20 years ago for me physiologically, but I've got to be short it now. And like, drinking more is not a money saving strategy, as it turns out.
- [22:13]
B
No. No. Okay. Well, I'm so. I'm sorry to hear that. I am. I am long. Dear, Dear. The Economist. The Economist writes to inform us that the British deer population is exploding. Is it led by those. Those cute little muntjacs, one of which he pitched a friend of mine off his bike and knocked him out. Anyway, the Economist tells us that the rise and rise of the deer population is a case of stagflation.
- [22:45]
C
Oh God, that was all worth it. I was like, where's Katie going with this? But we got to stagflation. I just. It was all worth it.
- [22:54]
B
It's pretty clear to me that someone in a newsroom somewhere started with a gag and like worked their way all the way back from that until they could justify writing 450 words about the British deer population. Yeah, I'm not above going with the pun first and coming up with the.
- [23:14]
C
It's a time honored strategy. You can't lean on it too often, but once in a while you can slip that by the desk.
- [23:19]
B
Oh yeah. Anyway, stagflation. Hats off to those boys and girls at the Economist. That's a good gag. Right? O listeners, we are going to be back in your ears on Tuesday, so listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhead. Cheryl Brumley is the FT FT's global head of audio. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening,
- [24:11]
C
Sam.