Profit slowdown coming: "ignore at your peril"

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STOXX Europe 600 down 0.1%

Spain govt calls snap election

U.S. reaches debt ceiling deal

London, New York closed for holidays

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Earnings growth surprised to the upside in the United States and Europe, but for Michele Morganti, senior equity strategist at Generali Investments, caution on the outlook is warranted.

Europe Inc and Corporate America should see both negative profit growth in the range of 1-3% this year and investors should be wary, as macro surprises turn negative, lending standard tighten and confidence weakens.

"Ignore at your peril," reads a note by Generali Investments. "A slowdown in profit growth is looming ahead".

Against this backdrop, Morganti has cut his overweight of euro zone stocks relative to the U.S. to a very slight one, saying he is most cautious on value and cyclical stocks.

Current valuations look stretched in the short term, he believes, but on a 12-month horizon Generali sees mid-single digit total returns, favouring ex-US indices.

U.S. earnings growth in the first quarter slowed to 4.6% year-on-year from 8.3% in the previous three months, although surprises were 5% higher.

EU figures were even better. EPS growth was 11% and surprises were at 8%, both better than in the previous quarter.

(Lucy Raitano)



Earnings season surprised to the upside in the U.S. and Europe, but Michele Morganti, senior equity strategist at Generali Investments, caution on the outlook is warranted.

"...a slowdown in profit growth is looming ahead," he writes.

For median U.S. stocks, first quarter U.S. earnings growth is at 4.6% year-on-year, versus 8.3% in the final quarter of last year, with surprises higher in Q1 2023 at 5% compared to the previous quarter.

"EU figures are even better: yoy EPS yoy growth is at 11% and surprises are at 8%, both better than in the previous quarter," writes Morganti in a note.

But with macro surprises in contraction territory, inflation decreasing, lending standards tightening, and confidence indicators weakening, his cheery tone might not have staying power.

"Our models see -1%/-3% yoy growth in 2023 for both the US and EMU, with a recovery thereafter."

His view is more cautious than consensus, by 4% this year, 5% in 2024 and 9% in 2025.

For equities, he is most cautious on value and cyclical stocks. Valuations are stretched in the short term, he says, but on a 12-month horizon Generali sees mid-single digit total returns, favouring ex-US indices.

They reduce their overweight on European Economic and Monetary Union versus the U.S. to a very slight one.

(Lucy Raitano)



With reporting season in Europe now almost behind, us it's time to draw conclusions.

Bernstein says a 10% earnings growth corresponds to an aggregate beat of 14% and that has led to a 2.3% upgrade to full-year consensus expectations. Margin estimates have come out stronger, too, from the reporting season, with forward margin estimates up 15 basis points since the end March.

Yet Bernstein strategists Mark Diver and Sarah McCarthy believe investors should prepare for things to deteriorate.

"Despite the strong earnings quarter and upward revisions to earnings and margin estimates, our view remains that full year earnings estimates for 2023 and 2024 are still too high given challenging macro conditions and the likelihood of a slowdown or recession in the latter stages of 2023 or in 2024," they write.

"Therefore, we expect analysts to resume downgrading earnings estimates in the second half of the year," they add say in a note published on Friday.

(Danilo Masoni)



The pan-European STOXX 600 .STOXX is 0.1% up this morning, having earlier traded as much as 0.3% higher, on optimism surrounding an agreement on the U.S. debt ceiling reached over the weekend.

But trading is thin on the ground, with UK and U.S. markets, as well as some European markets, closed for holidays.

On a sector basis, real estate .SX86P is doing well, up 0.4%, as is oil and gas .SXEP also rising 0.3%. Only a few sectors are in the red, with travel and leisure .SXTP and media .SXMP both down 0.1%. Here is your opening snapshot:

At the bottom of the index are shares in Swedish gaming company Embracer EMBRACb.ST, dropping 5.8% after having jumped over 13% in Friday's session.

SBB SBBb.ST shares are the top risers, 8.4% higher after the Swedish real estate group said it is broadening a strategic review to include the options of a potential sale of the whole company or some of its business segments.

(Lucy Raitano)



Investors are breathing a collective sigh of relief this morning, sending Eurostoxx futures higher, after news that a deal was struck to extend the U.S. debt ceiling. Though many remain logged off due to holidays in the UK, United States and parts of Europe.

After weeks of uncertainty, U.S. President Joe Biden on Sunday finalised a budget agreement with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025, and said the deal was ready to move to Congress for a vote.

Eurostoxx futures STXEc1 and Germany's DAX futures FDXc1 are both up around 0.3%.

Sunday also sawTurkey's President Tayyip Erdogan extend his two decades in power in elections, winning a mandate to pursue increasingly authoritarian policies which have polarised Turkey and strengthened its position as a regional military power.

(Lucy Raitano)



Optimism and relief are likely to be the dominant emotions for investors on Monday, giving markets in Asia a lift as lawmakers in Washington reached a tentativeagreement on the U.S. debt ceiling, thus removing the risk of acatastrophic default.

Trading and market liquidity in Asia will be lighter than usual, however, with U.S. and UK markets closed for holidays, opening up the potential for outsized market moves.

If so, they are likely to be outsized gains, certainly across risk assets - Wall Street rallied strongly on Friday, particularly the Nasdaq and mega tech stocks, and the news from Washington over the weekend will only be seen as positive.

After weeks of tough negotiations Republicans and Democrats reached a tentative agreement to suspend the $31.4 trillion debt ceiling, which now must get through the Republican-controlled House of Representatives and Democratic-led Senate before June 5 to avoid a crippling first-ever default.

Both sides are confident it will pass.

It could be a double-edged sword for Asian markets, if not on Monday than in the days and weeks ahead. A debt limit deal gives the Federal Reservemore room to tighten policy, which could push up U.S. bond yields and strengthen the dollar - not usually a good mix for emerging markets.

The dollar is already on a tear, reaching a two-month high on an index basis last week and six-month peaks against the Japanese yen and Chinese yuan above 140 yen and 7.00yuan, respectively. Japanese and Chinese policymakers are facing different challenges though.

Inflation in Japan is high and sticky, and the Bank of Japan is under pressure to tweak or abandon its ultra loose 'yield curve control' monetary policy. Tokyo may quietly prefer the yen to strengthen from here.

Beijing, on the other hand, might like the yuan to fall further. The economy's post-pandemic lockdown recovery has been weaker than expected, to put it mildly, and inflationary pressures are evaporating. Barclays economists predict 10-20 basis points of policy rate cuts and 25-50 bps of reserve requirement ratio cuts over the next six to ninemonths.

Japanese equity markets open on Monday near the 33-year highs reached last week, while Chinese stocks are languishing near six-month lows. So is the Hang Seng tech index, struggling under the cloud of rising U.S.-Sino trade tensions rather than benefiting from the U.S. tech boom.

Perhaps that changes on Monday, if only briefly.

The Asian economic data and events calendar is light on Monday but fills up later in the week, with the focus turning to Japanese unemployment on Tuesday,India's first quarter GDP and Thailand's interest rate decision on Wednesday, andSouth Korea's Q1 GDP on Friday.

Purchasing managers index reports for several countries are scheduled for release too, with China's May data on Tuesday and Wednesday likely to be the biggest market-movers.

Here are three key developments that could provide more direction to markets on Monday:

- Market reaction to U.S. debt limit deal

- Follow-up reaction to Nasdaq rally

- Thin trading conditions due to U.S., UK holidays

(Jamie McGeever)


U.S. vs Chinese tech

Dollar index

stocks sectors opener


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