Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

Our three stories this week:

1. Earnings season kick-off
2. King of the Luxury Jungle 
3. Measuring Geopolitical Risks 

Adrian (Portfolio Manager), and the rest of the Sidekick team.

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It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Earnings season kick-off: will good news be good enough

The first-quarter earnings season is supposed to be calm. Companies are early in their yearly plans, so this initial data point rarely causes major shifts in investor expectations. The idea is that there's plenty of time for adjustments, with Q3 serving as a more significant indicator of whether companies were too optimistic or pessimistic in their yearly goals.

Additionally, analysts often downgrade their predictions as the quarter approaches, making it easier for companies to beat expectations. For example, JP Morgan/IBES shows that 2024's first-quarter earnings growth projections for the S&P 500 [1] dropped from 10-12% last summer to 3% currently.

These lowered expectations, combined with recent positive economic indicators, suggest companies are in a good position to beat earnings forecasts. Will it be enough to push stocks higher?

As always the answer is more nuanced. With major indices re-rating year-to-date and with the Fed interest rate pivot getting delayed or even reversed, there’s a large valuation gap between stocks and government bonds which brings an unusual level of anxiety to Q1 earnings. At the same time, geopolitical uncertainty could increase further, making the picture even more blurred.

As for Flagship, we remain cautiously optimistic about the upcoming reports.  Many of the companies we follow have seen their valuations drop this year, setting a lower bar for expectations.

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2) King of the Luxury Jungle

LVMH kicked off the European reporting season on Tuesday. Despite a challenging comparison to 17% growth in Q1 2023, the company delivered 3% growth in Q1 2024. While in line with expectations, the -6% organic decline in Asia (excluding Japan) initially caused concern. However, on the earnings call the CFO quickly reassured investors that the Chinese nationals grew 10% organically in the quarter as tourists drove growth outside the Mainland.

The luxury sector reacted positively, partially recovering from last month's Gucci sales warning. Still, upcoming reports could reveal a mixed picture for the sector, which heavily depends on Chinese demand.

We continue to favour industry-leading portfolios of brands like LVMH, and/or turnaround stories like Ralph Lauren but we follow closely a short list of opportunities in the sector.

Note: We own LVMH and Ralph Lauren in our Flagship Strategy.

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3) Measuring Geopolitical Risk

Geopolitical risks are a major concern for policymakers and investors, as they can significantly influence economic decisions. This concern is underscored by a 2017 Gallup Survey [2], which revealed that 75% of investors worry about geopolitical risks.

The problem is that geopolitical experts rarely have investment backgrounds, so they cannot answer the question of which geopolitical events matter for investors and which don’t [3]. However, a couple of economists from the Federal Reserve Board [4] have attempted to measure geopolitical risk.

They created a monthly index (GPR) to track geopolitical risk based on news articles. The index shows spikes during events like the Gulf War, 9/11, and the Russia-Ukraine crisis. High geopolitical risk (more than 2 standard deviations) hurts economic activity, lowers stock prices, and shifts money from emerging to developed markets but moderate increases tend to have negligible impacts.

Interestingly, even when the impact is significant (100 points) and stocks decline 1-3% in the following month, the impact is short-lived and starts to disappear after two quarters.

This doesn’t mean we should treat the past week’s developments in the Middle East lightly. There’s an increasing risk of miscalculation on both sides which could destabilise the region further. At the same time, we think that people like to live peacefully and will do everything they can to avoid war.

Note: We own CheckPoint Software in our Flagship Strategy.

References

[1] https://www.jpmm.com/research/content/GPS-4671662-0

[2]https://www.businesswire.com/news/home/20170613005348/en/

[3] https://rpc.cfainstitute.org/-/media/documents/book/rf-publication/2021/geo-economics-full.pdf

[4] https://www.federalreserve.gov/econres/ifdp/files/ifdp1222.pdf

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Notices

Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.

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