This week with Sadiq

Earnings season: winners and losers

November 25, 2024

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Market recap

  • Equity markets pushed higher again this week as the bull market runs ahead. The S&P 500 rose 1.7%, led by materials and energy, while banks and consumer discretionary lagged.

  • Earnings results continued to roll out, and the reporting season is proving to be a solid one. Just over 76% of S&P 500 companies have now topped expectations in Q3, and growth is on track to push near 10% year-over-year—that's a very sturdy performance.

  • While we’ve seen a mixed bag of individual results—a solid print from NVIDIA, a miss from Target and job cuts at Ford—one can’t argue with the underlying sturdiness of corporate profits.

Nvidia

Last week, Nvidia announced its Q3 results—and as expected, it was the earnings event of the season. Entering this quarter, we were concerned that the bar for Technology companies was going to be so high that even great earnings may not move the needle. Then, Donald Trump’s election victory and the potential for business-friendly tax cuts raised markets’ hopes even further. But despite these sky-high expectations, Nvidia came through with excellent results, meeting or exceeding analysts’ estimates. The company’s stock didn’t soar by any means—it was down a bit in pre-market trading the day after the announcement, then rebounded as the day went on but ended the week slightly down. But the earnings did show that the bar wasn’t set unreasonably high, because they still managed to deliver. Nvidia’s profits reinforce the pattern of earnings beats in the Tech (and Communication) space we’ve seen this quarter, including from cloud software maker Snowflake, Shopify, and Spotify, the latter two of which I discussed last week. These strong results bode well for the continuation of higher returns in the equity space.

Bottom Line: Strong Tech earnings and Trump’s potential tax cuts could be tailwinds for markets and support our thesis of being overweight equities.

Retail Earnings

On the retail front, both Target and Walmart released their Q3 earnings, and while Target failed to meet expectations, Walmart exceeded them. On the surface, it was a puzzling pair of announcements—how could results from two companies with such similar customer bases diverge so sharply? Target’s announcement highlighted that some of their higher-end goods weren’t selling well, which may indicate a degree of consumer fatigue and a continuation of the trading down to less expensive goods that we’ve discussed previously. Walmart, however, said that many of its higher-end items were still selling, which undercuts the Target narrative. This tells us that while consumer spending patters have shifted to a degree, we can’t blame everything happening at Target on the consumer. Higher-end goods at Walmart tend to be cheaper than those same items at other stores, including Target. This goes a long way toward explaining why Target’s higher-end sales disappointed while Walmart’s showed a continuing consumer appetite for such items. It’s a great example of how just looking at one company’s results is not always accurate in determining the pulse of the consumer. Looking ahead, Black Friday—the day after American Thanksgiving, which often features big sales from the major retailers—should be an opportune time to more closely examine pricing and consumer spending patterns.

Bottom Line: Be wary of mixing macro and company-specific stories—yes, consumers are adjusting their spending downward, but Target’s earnings miss is also a function of qualities unique to that company.

Volatility

Since Donald Trump’s election victory, markets have been bullish, but that upward movement hasn’t been in a straight line. We’ve seen days where markets have been up and then faded, or been down and then bounced back. What’s the cause of this volatility? In our view, investors are still trying to balance the potential positives of a Trump administration—including tax cuts and market deregulation—with bearish signals that could play out in 2025, including fewer interest rate cuts, greater geopolitical risk, and new tariffs. After a great run-up in the months before the election and the first few days afterward, it’s not surprising that it would take some time for markets to evaluate these competing factors. That said, we still think this is an environment where it makes sense to buy on any sizeable dips: the overall economic backdrop remains fairly strong, earnings have generally been good, and we believe additional rate cuts in 2025 are likely even if there may not be as many as investors had hoped, which should be supportive for valuations.

Bottom Line: Markets are still weighting the potential pros and cons of a Trump administration, which has likely contributed to volatility—but we don’t view that choppiness as a bearish sign for equities, just more bumps.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled “Trump bump”: Why markets have rose-coloured glasses on, for now.

Insights

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