Morning Wrap: ASX 200 to fall + UBS says downgrades to earnings are outnumbering upgrades

The S&P 500 and Nasdaq fall amid a pullback among mega cap tech names, the Dow outperforms as energy and defensive stocks catch a bid, the Bank of Canada unexpectedly hikes rates after two consecutive pauses and UBS says downgrades to forward earnings for ASX companies are outnumbering upgrades.

Let's dive in.

S&P 500 SESSION CHART

S&P gives back early strength to close at worst levels (Source: TradingView)

MARKETS

• S&P 500 finished at worst levels, down from session highs of 0.36%

• Mixed session with big tech acting as a drag on the Nasdaq while the Dow finished higher on the outperformance of defensives and energy stocks  

• Treasury yields higher while gold fell 1.2% and close to 3-month lows

• Market remains in waiting mode for CPI and Fed next week 

• Big money managers FOMO into Nvidia after missing out on rally (FT)

• Narrow market leadership continues to raise concerns about rally (WSJ)

STOCKS

• Banks brace for strain as Treasury ramps up borrowing (FT)

• Affirm shares gain on compatibility feature with Amazon Pay (CNBC)

• GameStop misses earnings estimates, shares sink after hours (Reuters)

• Coinbase shares bounce as CEO hits back at SEC lawsuit (Reuters)

ECONOMY

• Bank of Canada unexpectedly hikes rates to 22-year high (Reuters)

• China's export growth slows, raising concerns about economic slowdown (Bloomberg)

• OECD sees growth below pre-Covid levels in 2023 and 2024 (Bloomberg, Reuters)

• World Bank cuts 2024 global growth forecast as rate hikes bite (Reuters)

• German April industrial production rises less than expected (Reuters)

• S&P ratings says China property liquidation risk heightened by delisting threat (Reuters)

Deeper Dive

Sectors to Watch

US markets mirrored how the ASX 200 performed on Wednesday – giving back early strength to close at session lows. The market remains in a vulnerable state where volatility and distribution is picking up. Can the ASX 200 muster up some resilience or will we slip below recent lows?

• Tech: Big tech was a major drag on US benchmarks overnight, with notable weakness from names like Microsoft, Google and Amazon. The S&P/ASX 200 Info Tech Index is up 12.7% since the start of May but it's started to stall in the past eight sessions. Is this the beginning of a pullback for soaring tech names like Wisetech, Altium and Xero?

• Gold: Treasury yields rallied overnight, prompting gold to fall 1.2% to around US$1,940. The Bank of Canada hiked overnight after holding steady at the previous two sessions. The upside surprise to rates has put gold on the backfoot again.

• Energy: Oil prices were little changed since Saudi Arabia's oil output cut earlier this week. However, the S&P 500 Energy sector rallied 2.65% overnight to a one-month high. Could we see some follow through strength for names like Woodside?

• Defensive theme: The Dow managed to finish positive thanks to the outperformance of year-to-date laggards like Energy, Real Estate, Utilities and Industrials. Is this simply a bounce for laggards or the beginning of a rotation towards more defensive pockets of the market?

The earnings dichotomy widens

Confession season has a way of surprising investors and weeding out the good from the bad, the outperformers from the underperformers. But the recent run of earnings downgrades has had a much larger weight on the index than usual. UBS analysts say the downgrades have taken 0.6% and 0.8% off ASX 200 YoY earnings growth for FY23 and FY24 respectively.

And, as has become the case, companies that hand out disappointing earnings guidance are being hammered by the market. Elders (ASX: ELD), for instance, saw its share price collapse 19% when it handed out a double-digit miss on earnings versus the street consensus. Canada re-initiating student visas for IDP Education (ASX: IEL)'s competitors created a potential 11% hole in its coming earnings. Shares there fell by 15% in two days.

Hand out an earnings upgrade though, and you're laughing all the way to the bank. GrainCorp (ASX: GNC), Xero (ASX: XRO), James Hardie (ASX: JHX) all handed out earnings beats and were rewarded with double-digit share price gains.

Hans' Chart

For my favourite chart this week, I'm borrowing from Rob Almeida at MFS Investment Management. As this chart shows, equity investors always seem to be the last people in the room to recognise recession risks. For his part, Almeida is saying the current quiet period is a good chance to stress-test your models. In 2007, MFS fixed income analysts made sure our equity analysts were incorporating higher borrowing costs and stressing their cash flow models. He notes this time may be a good time to try that strategy again.

Source: FactSet

ASX corporate actions occurring today:

• Trading ex-div: Terracom (TER) – $0.03 

• Dividends paid: None

• Listing: None

Economic calendar (AEST):

• 11:30 am: Australia Balance of Trade

• 7:00 pm: Eurozone Q1 GDP

• 10:30 pm: US Initial Jobless Claims