So far this season 84 companies in the S&P 500 have reported Q1 earnings and we've had positive surprises on both revenue (2%) and earnings (7%). We've also had very strong growth numbers on revenue (10%) and earnings (25%) as companies have enjoyed the tailwind from a stronger macro economy. As we've discussed on our morning calls
lately, sentiment is currently weak so strong earnings could provide a short-term relief rally in global equities lasting a couple of weeks. As earnings season fatigue sets in investors will again closely watch macro, which is turning for the worse as Q2 progresses.
Is TSMC the canary in the coal mine?
Going against the positive trend on earnings was TSMC's report yesterday where the Q2 revenue prediction from the chip manufacturer and one of Apple's most important suppliers, came in much lower than expected. In addition, TSMC lowered its semiconductor market growth to 5% from 5-7%. This added to existing nervousness over the smartphone market, which declined 5.6% y/y in Q4
for the first time ever with the timing of iPhone X sales making their mark. Regardless of the interpretation of their numbers, investors are already clearly showing that they are reducing strategic exposure in an industry that has been one of the best performing this year. Potentially, the TSMC guidance is the first warning shot that the global economy is slowing down faster than expected. The main question is then whether this is the beginning of a secular trend or is this just short-term cyclical effects.
Banco Santander: first glimpse of Europe's slowdown
Spain's largest bank, Banco Santander, reports Q1 earnings on Tuesday before the open and the consensus is looking for EPS €0.13 up 6% y/y and revenue €12.1bn up 1% y/y. On the positive side, Brazilian and Mexican businesses are improving while UK is a negative.
But the key thing to watch on Tuesday is any sign that Santander is confirming what the macro numbers in Europe have been showing the past three months. Europe is clearly slowing down with car sales dropping for the first time in more than five years and weaker real estate markets in many key cities. Santander has a negative rating in our equity model, driven by a large negative score on the momentum factor highlighting the fact that the stock has greatly underperformed the global banking industry the past year.
Facebook: good earnings are not enough
There has probably not been a more talked about company in Q1 than Facebook. Consensus opinion still expects strong numbers, with EPS $1.69 up 24% y/y and revenue $11.4bn up 42% y/y, when the company reports Q1 earnings on Wednesday after the market close.
The Cambridge Analytica scandal has catapulted Facebook to the hot seat over the use of private data and the #deletefacebook has potentially had a negative impact on its user base. However, we do not expect to a large impact on the business from the current data scandal and Facebook's big changes to its News Feed until the Q2 numbers are released in July. It is our expectation that Q1 numbers will be strong, driven by an acceleration in the contribution from its Instagram asset.
Despite strong numbers, investors will likely hesitate to make it an excuse for buying the shares as tougher regulation is coming in Europe and potentially in the US over users' private data. This regulation could materially slow down the plans for monetising WhatsApp and Messenger. In addition, Facebook is likely to increase expenses on controlling its Facebook platform which could hurt profit margins more than what is already priced into the stock price. Facebook's stock has a positive rating in our equity model driven by a high quality score, highlighting that Facebook still has some of the strongest financial numbers in its industry.
Amazon: Prime and AWS to fuel growth
Amazon is world's third largest company on market value but the largest on enterprise value at $768bn and is thus naturally the most watched stock in the world. The company reports Q1 earnings on Thursday after the market close with the consensus looking for EPS $3.09 up 22% y/y and revenue $49.9bn up 40% y/y.
The key drivers of Amazon's strong growth are its Prime business that has now crossed 100 million members globally and AWS that grew 45% y/y in Q4 despite being a business with a run rate of $20bn. Other growth drivers that could make numbers surprise to the upside are Whole Foods, Alexa and their fast growing ads business.
Trump's latest negative views on Amazon and talks about hiking US postal fees could in the medium term be a negative for the stock price. But if logistics fees are hiked it will just force Amazon down the road of doing more of their own logistics. Our equity model has a positive rating on the stock driven by recent weakness relative to the industry which has been driven by President Trump's comments and then a more stable downside volatility factor score.
The table below shows the most important earnings next week including their estimates.
Source: Bloomberg and Saxo Bank
– Edited by Clare MacCarthy
Peter Garnry is head of equity strategy at Saxo Bank