Global Equity Investor insight | August 2024

Aug 13, 2024

In the midst of the earnings season, what may lie ahead?

Reflecting on the past month, Jeremy Richardson explores;

  1. Better than expected results due to margins rather than revenues
  2. Fears for the resilience of the US consumer vs hopes of falling interest rates
  3. Renewed dalliance with AI as demand outstrips supply
  4. Uncertainty caused by elevated inflation continuing to dissipate

Jeremy Richardson

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.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.

This document is a marketing communication and it may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (BBFM S.A.), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany, Italy, Spain and Netherlands the BBFM S.A is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by RBC Global Asset Management (UK) Limited (RBC GAM UK), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts at the registered office of the Swiss representative or at the registered office or place of residence of the investor shall have jurisdiction pertaining to claims in connection with the offering and/or advertising of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), the Packaged Retail and Insurance-based Investment Products - Key Information Documents (PRIIPs KID), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Asia, by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong. In Australia, RBC GAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. RBC GAM UK is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits RBC GAM UK to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. In the United States, by RBC Global Asset Management (U.S.) Inc. ("RBC GAM-US"), an SEC registered investment adviser. The entities noted above are collectively referred to as “RBC BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of RBC BlueBay by the respective licensing or registering authorities. Not all products, services or investments described herein are available in all jurisdictions and some are available on a limited basis only, due to local regulatory and legal requirements.

This document is intended only for “Professional Clients” and “Eligible Counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) or the FCA); or in Switzerland for “Qualified Investors”, as defined in Article 10 of the Swiss Collective Investment Schemes Act and its implementing ordinance, or in the US by “Accredited Investors” (as defined in the Securities Act of 1933) or “Qualified Purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer.

Unless otherwise stated, all data has been sourced by RBC BlueBay. To the best of RBC BlueBay’s knowledge and belief this document is true and accurate at the date hereof. RBC BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. RBC BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only.

No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of RBC BlueBay. Copyright 2023 © RBC BlueBay. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management (U.S.) Inc. (RBC GAM-US), RBC Global Asset Management Inc., RBC Global Asset Management (UK) Limited and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated corporate entities. ® / Registered trademark(s) of Royal Bank of Canada and BlueBay Asset Management (Services) Ltd. Used under licence. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. RBC Global Asset Management (UK) Limited, registered office 100 Bishopsgate, London EC2N 4AA, registered in England and Wales number 03647343. All rights reserved.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.