US and Australian equity markets eased in October, ending a five-month winning streak that had propelled markets to record highs. Bond markets declined and yields rose as investors dialed back expectations for substantial rate cuts.
October marked the start of the US Q3 earnings season. As always, outlook statements mattered most as investors sought to determine if analysts’ future earnings forecasts were attainable.
The table below shows the mixed performance of the largest US companies throughout the earnings season.
Earnings season started positively, with large US banks such as JPMorgan, Bank of America, Citigroup and Goldman Sachs all beating quarterly earnings expectations. Their investment banking and wealth management divisions benefited from buoyant capital markets and solid merger and acquisition activity. Global banking stocks have been standout performers this year.
Bank executives spoke about the continued bifurcation of the US consumer, where high—and moderate-income (and asset-rich) consumers are still spending a lot, and low-income consumers are under pressure.
If employment holds up, people feel secure in their jobs, and wages grow faster than inflation, the consumer will continue spending, which is good for the economy. Citicorp commented, “Consumers are broadly healthy and resilient but more cautious”. Bank of America noted, “Consumers are wary of the cost of living, worried about higher rates and other matters….but overall, activity is fine”.
Beverages giant Coca-Cola agreed, adding, “…there’s a lot of variables out there that are still uncertain, but at the root of it all, [consumers] continue to spend.” Global payments giant Visa also spoke of US consumer resilience “Consumer spend across all segments from low to high spend has remained relatively stable.”
A key hope entering earnings season was broadening earnings growth beyond mega-cap technology companies. Cyclical companies, whose prospects are closely linked to the economy’s trajectory, are expected to benefit from ongoing economic growth, easing inflation and lower interest rates.
On the positive side, many companies discussed a “bottom” in the business cycle, which may signal an inflection point for cyclical company earnings.
However, there’s still much uncertainty about the magnitude and durability of any earnings recovery. For example, Caterpillar, the world’s largest construction and mining equipment manufacturer, has downgraded its revenue outlook, citing uncertainty surrounding the US election and ongoing growth issues in China.
Strong demand for cloud services aligned with the Artificial Intelligence (AI) boom was again the primary driver. Alphabet reported an impressive 35% lift in Google Cloud revenue from a year ago, ahead of Microsoft’s 33% increase in Azure and Amazon Web Services’ 19% growth.
Microsoft provided some details about its AI business, stating that its current annualised revenue is relatively small, at approximately US$10 billion. This accounts for approximately 4% of total revenue, and it is expected to rise as software products like CoPilot see greater adoption.
Dwarfing this number, mega-cap companies continue to individually spend US$10 billion-plus per quarter on AI-related infrastructure (e.g. data centres and servers). On monetisation, there is still little visibility over future demand or earnings uplift.
But this is not dampening their enthusiasm. Take Amazon CEO Andy Jassy, who commented on the company’s plans to spend US$75 billion on capex in 2024: “It is a really unusually large, maybe once-in-a-lifetime opportunity We feel good about this long term, that we’re aggressively pursuing it.”
Tesla CEO Elon Musk was as upbeat as ever, “Tesla is focussed on the future of energy, transport, robotics and AI…if we execute on our objectives, and I think we will, my prediction is Tesla will become the most valuable company in the world, probably by a long shot”.
Finally, Warren Buffett-led Berkshire Hathaway’s recent financial report shows it has sold US$133.2 billion of equity securities over the past nine months, compared to just US$5.8 billion of purchases. Berkshire’s equity holdings now represent less than half of its investment portfolio.
Berkshire favours low-risk, short-dated US Treasuries as it waits for better value to emerge in equities.
Finally, Warren Buffett-led Berkshire Hathaway’s recent financial report shows it has sold US$133.2 billion of equity securities over the past nine months, compared to just US$5.8 billion of purchases. Berkshire’s equity holdings now represent less than half of its investment portfolio.
Berkshire favours low-risk, short-dated US Treasuries as it waits for better value to emerge in equities.
A monetary policy mistake.
Israel-Iran conflict escalates.
A Contested US Election result.
Long Term Investment Objectives Is Key
Australian Equities
International Equities
Property and Infrastructure
Fixed Income
With a deep understanding of our client’s objectives, we provide tailored solutions to assist clients in achieving their financial goals.
New Horizon Wealth PTY Ltd ACN 632 726 222 is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd
AFSL No. 229892
ABN 23 065 921 735
Keep up-to-date with the latest trends and tips and tricks in the current market.
Copyright 2024. All rights reserved. Proudly designed and managed with ♡ by Interact Digital
You’re in! Thanks for subscribing.
Keep an eye on your inbox for exciting updates, offers, and news!
"*" indicates required fields