Global Equity Spotlight Episode 13

Hello everyone and welcome back to Global Equity Spotlight, a series where we delve into interesting topics affecting equity markets. Today, I have Jacques and Cornelius with me. Thank you guys for being here and a special thanks to Jacques for being here on his birthday. Thank you. So let’s kick off. Post the first quarter’s result season coming to an end, we’ve seen a lot of earning surprises coming through. Could you maybe unpack that for us?

Yeah, sure. So we’ve seen about 90% of the S&P 500 companies report their results and so far 84% of those companies have beaten. To put this in context, the five-year average is around 78%; the 10-year average is around 75%. I think what’s interesting from this result season is that the quantum of the beat has been far above historic averages. Now, some of that has been driven by one-off valuation gains from SpaceX and Anthropic, but the quantum of the beat was still much larger than we’ve seen over the last few years. And we know that earnings drive the market over time, and we can see how the market has rewarded the companies with the positive earning surprises that they put out. What’s also happened is that the outlook for earnings has been upgraded; 2026 earnings numbers have been upgraded by more than 7% already. I think it was interesting if we look at the companies that reported, the hyperscalers specifically put out very strong results, especially from their cloud businesses. Google’s cloud business grew 63% in this quarter; Amazon’s grew 28%, which is the fastest in 15 quarters.

Brilliant. Thank you. So how have these various companies reacted to the underlying change in earnings?

The share prices have reacted quite positively. A company like Alphabet jumped quite a bit on the day, and it’s amazing how quickly the narrative has shifted in the market. Last year, Alphabet sold off all the way down to a 15 times forward price-earnings ratio because they were seen as a loser from AI with their search business being challenged by LLMs, where people put more queries through that relative to the traditional search. And with this sharp acceleration of growth and the TPU chips, they have now rerated back to a 27 times. On the other side, Microsoft last year was seen as a big winner with their relationship with OpenAI and all the other products that they have, and they traded at more than a 100% premium to Alphabet just a year ago, and they’ve derated all the way to a 22 times. And Meta, despite posting the strongest beat on revenue and earnings and the strongest growth on revenue and earnings versus the other big tech companies, they’ve actually sold off quite a bit on the day and they’ve now derated to a 17 or 18 times price-earnings ratio.

Of course, it wasn’t a smooth ride for the collective hyperscaler group. They were under quite a bit of pressure at the start of this year because of all the concerns of what the return on investment will be on this capex. Last year, or in 2022 and 2023, these companies were spending 100 to 150 billion in aggregate on capex, and that has jumped to 650 billion this year and it’s projected to grow probably north of 20% next year. So there’s a lot of money being spent and they are basically using all their free cash flow. So there’s a big dislocation between the free cash flow of these companies and the earnings growth, and the question in the market is whether they will get a sufficient return on capital. But the strong results, where you constantly seeing backlogs growing and acceleration of revenue and acceleration of earnings growth, has allowed those fears and the share prices have been rewarded with a rerating over the last month or so.

Brilliant. Thank you so much. To the audience, thank you so much for your time and we look forward to seeing you next time.