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Growth Team Weekly Investment Insights

1) The S&P 500® Index’s Strong Earnings Season

According to FactSet, the S&P 500® Index’s Q1 blended (actual and estimated results) year-over-year earnings growth rate is 5.3% with 92% of index constituents reporting results. If this stands, it will be the index’s highest year-over-year earnings growth rate since Q2 2022.

• The top five Q1 contributors to earnings growth for the index are NVIDIA (based on expectations because the company has not reported yet), Alphabet, Amazon, Meta and Microsoft. The remainder of the index reported a year-over-year decline of 2.2%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 5/13/2024.

• On the other hand, a large notable detractor within the health care sector is dragging down the “everything else” part of the index.
• Bristol Myers Squibb is the largest detractor to earnings growth for the S&P 500 after reporting (non-GAAP) EPS of -$4.40 for Q1 2024 compared to (non-GAAP) EPS of $2.05 for Q1 2023. The non-GAAP EPS number for Q1 2024 included a net impact of -$6.30 due to “Acquired IPRD charges and licensing income primarily driven by the Karuna Therapeutics asset acquisition and SystImmune collaboration.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 5/13/2024.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 5/13/2024.

2) Airbnb Earnings

Speaking of earnings, Airbnb’s results showed a few things. First, consumers continue to spend money on travel. Second, the company was an example of something we have been witnessing this earnings season: in certain areas of the market that have experienced strong outperformance over the past couple of quarters, strong earnings results have not been enough to support elevated investor expectations.

• Net income reached $264mn in Q1 compared with $117mn a year ago and analyst expectations of $152mn. Revenue of $2.14bn also beat analyst forecasts for $2.06bn.
• The company also ended the first quarter with its highest number of active listings and said it continued to see “double-digit supply increases across all regions”.
• However, the company forecasted slowing revenue growth in the second quarter to 8%-10%. Despite attributing the slowdown to the early timing of Easter, the leap year and currency headwinds and expecting growth to pick up again in the middle of the year, shares sold off on the report.

3) United Kingdom Returns to Growth

Last week we highlighted the European Union’s better-than-expected growth. This week, we highlight similar news within the United Kingdom.

According to the Financial Times, the UK economy exited last year’s technical recession with growth of 0.6% in Q1 2024 versus expectations of 0.4%. This is the highest since Q4 2021.

• The 0.6% figure also represented the strongest growth for any G7 country with available data, compared with 0.3% for the Eurozone and 0.4% for the US.
• The first quarter also marked the return to growth for per capita output, which increased 0.4%, following seven consecutive quarters without positive growth.
• Overall, the UK economy has grown 1.7% since the fourth quarter of 2019, immediately before the pandemic. That is far less than the 8.7% growth in the US for the same period and 3.4% in the Eurozone.

Furthermore, at its May meeting the Bank of England held interest rates unchanged at 5.25% and signaled it would cut rates this summer if inflation stayed low.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4) The World is Leaning into Hybrids While China Continues to Dominate Electric Vehicles (EVs)

Staying in Europe, this article highlighted the competitive threat of Chinese EVs if governments don’t step in. The current backdrop right now is one of EV demand weakness with high interest rates and concerns over inadequate charging infrastructure chilling buyers’ enthusiasm. This has led to a rebound in sales of hybrid vehicles.

• “We have to invest heavily in the future of plug-in hybrids,” said Mark Reuss, the president of General Motors. “We have to be agile. We have a global tool chest of technical things that we can deploy fairly rapidly.”

This pivot among car makers comes at the same time there is a growing threat from Chinese manufacturers rolling out cheaper EVs. According to Schmidt Automotive Research, Chinese brands like BYD accounted for almost 10% of the fully electric cars registered in Western Europe in March versus just 4% two years ago.

• The European president of BYD recently stated, “We are confident that we could be in a leading position” before the end of the decade.”

Brussels is investigating whether Chinese carmakers use subsidies to cut the prices of their vehicles. This probe is widely expected to lead to higher tariffs on imported models. Recent analysis expects that the EU would need to impose huge tariffs of about 50% to stem the flow of cheap Chinese EVs into the bloc.

According to Rhodium Group, BYD’s Seal U, for example, sells for €20,500 in China and €42,000 in the EU. It estimates the profits to be €1,300 and €14,300 respectively, giving a strong incentive to export. Imports already pay a 10% EU tariff rate, amounting to roughly €2,100 a vehicle.

• It was also calculated that a 30% duty would still leave the company with a 15% (€4,700) EU premium per vehicle in relation to its China profits, meaning that exports to Europe would remain “highly attractive.”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5) China Debt Sale Aims to Boost Economy

So far, China has been the performance leader in Q2 among the major markets in the MSCI AC World Index, and its government continues to try to reinforce economic momentum amid a lengthy property crisis.

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 5/10/2024. Past performance is not indicative of future results.

According to the Financial Times, Chinese authorities have kicked off plans to sell Rmb1tn ($140bn) of long-dated bonds as Beijing raises spending to stimulate the economy. China sold similar long-dated bonds in 2020 when Rmb1tn was raised to try to control the COVID-19 pandemic and boost infrastructure investments. The bonds being sold this time are expected to have even longer maturities as a way of funding long-term projects while alleviating the debt burden of local governments.

“The bond sale is a critical part of the concerted efforts to support significant, urgent, and challenging projects that are essential for the modernization of the economy,” Liu Sushe, deputy head of the National Development and Reform Commission, said in a public briefing in mid-April.

Artisan Partners Growth Team manages portfolios that held securities issued by Amazon, Alphabet, Microsoft and Airbnb as of 3/31/24.  Portfolio securities are subject to change.