"Over-earning" stocks

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As the first busy week for Europeans earnings kicks off, Morgan Stanley strategists have identified stocks that they think have been "over-earning" and "hence potentially most at risk from mean reversion".

With margins now correcting, some transport, semis, construction materials, energy and autos "have potentially been over-earning", they say.

Falling inflation hurts the relative performance of energy stocks, while for autos, growing pricing pressures and higher credit costs will undermine margins going forward.

Single stocks that are enjoying "high profitability" and that Morgan Stanley underweights include Hexagon HEXAb.ST, Remy Cointreau RCOP.PA, Nibe Industrier NIBEb.ST, Shell SHEL.L and OMV OMVV.VI.

"Strong 1Q results are already in the price and the EPS backdrop looks tougher from 2Q onwards," Morgan Stanley adds.

(Joice Alves)



High-quality bonds are likely to offer a better risk-reward than broad U.S. equity indexes given the various potential outcomes for the economy, according to UBS Global Wealth Management's CIO Mark Haefele.

Writing in a daily note, Haefele and his team say bonds should perform well even in the case of a steep U.S. downturn.

And even if inflation rears its ugly head again - which would spell bad news for both asset classes - bonds would still fare better than the U.S. growth equities that have performed strongly this year.

"We therefore continue to prefer high-quality bonds, including high-grade (government) and investment-grade bonds," write the UBS strategists.

Hopes for disinflation have buoyed U.S. growth stocks in 2023 so far, with the broader S&P 500 .SPX up 7.7% year-to-date despite economic headwinds and March's banking turmoil.

Haefele said there could be a "goldilocks" scenario, in which contracting bank lending, along with previous Fed rate hikes could stop the economy from overheating, while an absence of another market shock could mean no aggressive cooling. But he thinks this might be optimistic and instead sees an uncertain picture for growth, earnings, and inflation.

On a positive note, UBS believes China’s stronger-than-expected economic recovery will support emerging market equities.

(Lucy Raitano)



European shares are flat on the day as investors await earnings from some of the highest-valued U.S. companies, along with major European banks and consumer companies.

In the meantime, shares in Medica Group MGPM.L surged 32.5% and those in Software AG SOWGn.DE rose 50% after separate take-private offers from private equity firms IK Investment and Silver Lake, respectively.

The pan-European STOXX 600 index .STOXX is flat on the day, with oil and gas shares .SXEP falling the most by 0.7%, tracking oil prices, which fell more than 1% on concerns about rising interest rates. The European financial services .SXFP sector is up 0.8%.

Also supporting the STOXX index, the healthcare sector is up 0.3%, after Dutch health technology group Philips NV PHG.AS shares jumped 12% on better-than-expected first-quarter results.

Investors will closely monitor results from European major banks and retail companies, as well as U.S. tech giants Microsoft Corp MSFT.O, Google parent Alphabet Inc GOOGL.O and Amazon.com Inc AMZN.O this week.

Bed Bath & Beyond Inc BBBY.F BBBY.O Frankfurt-listed shares fell 47% on Monday after the U.S. home goods retailer filed for bankruptcy protection.

(Joice Alves)



European futures point to a negative start to the day for stock markets across the region, ahead of a week packed with earnings from the tech giants in the U.S. and major European banks and consumer companies.

Dozens of companies will report earnings this week. While concerns are growing that tightening credit will dent the global economy, investors say, they expect first quarter earnings to be better than feared.

Big banks Barclays BARC.L, Santander SAN.MC, Deutsche Bank DBKGn.DE, UBS UBSG.S and embattled Credit Suisse CSGN.S and Nestle NESN.S, Durex-maker Reckitt RKT.L and Unilever report results this week.

(Joice Alves)



It's been a subdued start to a busy week studded with tech earnings and major data from both sides of the Atlantic.

Microsoft, Meta, Amazon, Google and Intel all report this week. Just five tech stocks have accounted for two-thirds of the S&P 500's gains this year, so a lot is riding on the outcome.

Analysts at Wedbush Securities are tipping upside surprises from the tech majors, with an accent on cost cutting and job shedding across the industry.

"We also believe a major narrative of tech earnings season will be the AI arms race and each Big Tech player updating investors on their own AI ambitions/monetization strategy as Redmond battles Google and other tech stalwarts for the AI trophy case," they write.

Data includes the first reading on U.S. GDP which is forecast to slow to 2.0% for the March quarter, from 2.6%, though the Atlanta Fed's trusty GDP Now tracker is picking 2.5%.

The employment cost index and core personal consumption expenditure measure of inflation will help refine expectations for next week's Federal Reserve meeting. Futures price a quarter-point hike at 89%, suggesting the market would move more on a soft outcome in either figure.

The surprising strength in business surveys in Europe suggested EU GDP might also beat forecasts for 0.2% q/q growth in the first quarter.

An unwelcome omen for inflation was a rise in wheat prices after Russia threatened to terminate a grain deal allowing Ukrainian exports, raising concerns over world supplies.

Another risk bubbling away in the background is the U.S. debt ceiling with the House set to vote on the Republican plan to extend the debt limit in exchange for spending cuts.

Even if passed, it is highly unlikely to get past the Democratic-controlled Senate, and analysts are starting to get antsy the government will run out of money earlier than expected because of weak tax payments.

The cost of insuring exposure to U.S. sovereign debt rose to the highest level since 2011 last week.

Spreads on U.S. five-year credit default swaps widened to 51 basis points USGV5YEUAC=MG, more than double the level they stood at the start of the year.

One-year CDS have climbed to around 100 bps, well above the 82 bps seen during the 2011 U.S. sovereign debt downgrade.

BofA analyst Michael Gapen warns the risks of violating the debt ceiling are worse than in 2013 because the deficit is bigger as a percentage of GDP and the economy may already be in a recession.

He assumes the damage that can be inflicted by not raising the ceiling will most likely lead to a deal, but the risk is that it takes a selloff in equities and a widening of credit spreads before that happens.

Key developments that could influence markets on Monday:

- French central bank chief Francois Villeroy de Galhau speaks on the role of central banks in relation to climate change at finance event in London

- Dallas Fed manufacturing activity survey

(Wayne Cole)



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