Political developments – Trading or investing?
Joe Biden has withdrawn from the 2024 presidential race, endorsing Vice President Kamala Harris, who is garnering support from key party figures but awaits official nomination (potentially at the Democratic National Convention on August 19). Betting odds reflect these changes: Trump’s chances decreased to 61% (down 4 points), while Harris’s odds increased to 39%. The equity market has been violent especially for sectors and companies that are sensitive to the policy differences between the two parties. We do not have any crystal ball and while this news might trigger volatility going forward, we keep focusing on long term good business rather than on short term political trading.
Reporting season – Bumpy Road ahead and warning wave
Going through the reporting season, we’re seeing a significant wave of profit warnings, with 34.8% of the companies that have already reported their results that missed estimates in Europe, compared to only 15.4% in the more resilient US market. Key challenges include weak consumer demand, supply chain issues, and economic slowdowns, particularly affecting industrial companies. On the other side, c. 60% of companies beat EPS estimates in EU, while in US they were c. 77%. Sectors like AI, healthcare, and communication Services are showing positive outlooks. Companies with strong pricing power may outperform, especially as deflation threatens profitability in sectors like airlines and consumer goods outside of luxury.
by LSEG I/B/E/S. Data as of 23 July 2024. Based on data from 155
companies present in the two quarters in question.
Summer peak is coming
It’s shaping up to be the summer’s peak for market activity. On the macro front, we’ve got job market insights from JOLTs, central bank decisions from Japan, Europe, and the UK, inflation numbers from the Eurozone, while in US jobs report and Fed’s meeting. Meanwhile, earnings season intensifies, with expected financial results from companies that make up nearly half of the S&P 500’s value.
US Banks – Return of M&A on the Horizon?
Since President Biden’s poor debate performance on June 27th, US banks have rallied on the prospect of a Trump win. This rally has been supported by tamer inflation data leading to expectations that the Federal Reserve will begin to cut interest rates and engineer a soft landing for the US economy. Small banks, which underperformed large bank peers by roughly 2000 bps between the start of 2023 and the debate, trading at an average discount of 30% relative to historical P/Es during this time, have led the way.
The strength in small banks is being fuelled in part by the hope that a Republican administration will appoint industry-friendly regulatory leadership, opening the door to increased M&A. Over the past several years, merger activity has been stifled by the approval process becoming lengthier and uncertain; indeed, many banks have shelved merger plans out of fear deals will not be approved. After a recent peak of nearly 500 deals in 2015, activity declined by almost 70% in 2022 and 2023 with 2024 on pace to be even slower. However, a favourable regulatory backdrop could quickly change this as small banks look to drive better returns through scale. Combined with lower rates and growing confidence in the economy, these factors will likely drive a meaningful increase in deal volume and become a potential renewed source of shareholder returns. While uncertainty remains regarding the upcoming months, the outlook for small US banks and M&A landscape has indeed brightened.
Algebris Investments’ Financial Equity and Global Equity Teams
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