Earnings season to test growth versus value stock strategy

It’s a big week for earnings, and the market will be focused on results from Goldman Sachs, Morgan Stanley, Proctor & Gamble, United Airlines and Netflix to name a few. Earnings this week could be an important test of the popular equity market strategy of selling the tech sector, or growth stocks, and buying the cyclical sector, or value stocks. Earnings season will be a key test to see if this strategy is working and if cyclical companies are truly outperforming their peers in the tech world. Elsewhere, some key economic data is also out this week, including the UK CPI, and the dovish end of the central banker spectrum will be in focus with ECB minutes and a Bank of Japan meeting on Tuesday.

Cyclics should shine

S&P 500 companies are expected to post 20% year-over-year earnings growth for 2021, however, there is greater disparity than normal due to the underperformance of one key sector: technology. For example, the S&P 500 technology sector is expected to see 11% earnings growth, while consumer discretionary (excluding online sales) is expected to grow 30%, the materials sector is expected to grow 60% and industrials are also expected to post earnings growth of more than 50% for the past year. So while the 11% earnings growth for the tech sector is a decent increase, there are better gains to be made elsewhere, which is why we still like the value versus growth story. as we enter the first quarter.

Resilience to inflationary pressures is key

A key value sector, financials, did not get off to a good start when some of their biggest names posted earnings last week. Although JP Morgan beat earnings estimates, its shares fell more than 6% on Friday. Citigroup, a US banking stock that we believe will outperform its peers this quarter, also fell, but was down only 1.25%. Investors didn’t like JP Morgan’s earnings forecast for the first quarter of 2022 and beyond. Wage growth and a higher cost base were among the top concerns. We think JP Morgan is highlighting a key theme for investors this earnings season: inflation. The US CPI hit an annual rate of 7% last month, the highest level in nearly 40 years. As we mentioned, companies that can weather inflation and supply chain issues will be rewarded, those that can’t will be sold, and brutally in the case of JP Morgan. That’s why we love the airline business in the US and Europe right now. Firstly, 2021 versus 2020 annual revenue comparisons will be favourable, and while airlines will be impacted by inflation, particularly jet fuel costs with the average gallon of jet fuel up 11% in Q4 vs. Q3 2021, we believe that the increase in leisure travel in the West this year will be enough to offset these concerns. That’s why we think traders should pay attention to United Airlines’ earnings report on Wednesday the 18th after the US market close.

BOJ and UK CPI to boost FX flows

In the FX space, UK inflation for December and the BOJ meeting are the big events to watch this week. Tuesday’s BOJ meeting is not expected to see any change in policy, however, this could be a more interesting BOJ meeting than what we are used to. Inflation has started to climb, with higher wholesale prices increasing the risk that the BoJ will change its outlook from biased downward price pressures to a more balanced outlook for price pressures, highlighting the fact that Japan is not immune to the global inflationary impulse. USD/JPY saw a strong sell-off on Thursday and Friday, however, this pair managed to recoup some losses prior to the start of the week, even though US stock markets were closed. Any shift in the BOJ’s stance towards a more “hawkish” view of inflation could see the yen rise further, sending USD/JPY back to Friday’s low of 113.50.

GBP/USD retreated from $1.3750, last Thursday’s high. The UK CPI is due out on Wednesday and is expected to show that the annual CPI rate hit 5.2% in December, which would be the highest level since October 2011. There is a risk that inflation will edge down Due to a drop in the price of clothing and footwear, however, food prices are expected to have risen sharply last month. Along with labor market data, which is expected to tighten for another month, we believe this will lead to an increase in the likelihood of another rate hike from the BOE at their Feb. 3 meeting. A speech by Andrew Bailey at 14:15 GMT on Wednesday could also indicate whether the BOE will take a more aggressive approach to rate hikes and raise at every meeting for the foreseeable future until inflation returns to more acceptable levels. We think GBP/USD could be paralyzed around the $1.3650 mark, so we prefer EUR/GBP, which has been range-bound since the start of this year around 0.8350, a support level long-term. A drop below this key support zone could pave the way for a 6-year low at 0.8000. However, for such a large break in support, we think the ECB will need to maintain its strict adherence to the “temporary” inflation phenomenon, and the BOE will take an aggressively hawkish stance and hint that rates will rise at every meeting. If that happens, a break down for EUR/GBP is likely, otherwise we could remain constrained in this pair over the medium term.

The link between crypto and technology

The broad crypto space is lower on Monday, with Bitcoin down more than 3% at the time of writing. The decline in crypto reflects the selling of technology, however, the selling of crypto is of a much greater magnitude than the selling of technology. So, if we see tech stocks failing to deliver this earnings season, we could see more pain for crypto.

Garland K. Long