Noteworthy: Bank earning expectations and why Tesla and Netflix are worth a look

The Globe and Mail’s market strategist offers five thoughts on the research, analysis and ephemera that’s crossed his desk this week.

1. TD Cowen bank analyst Mario Mendonca previewed what he expects to be mediocre earnings reports for his sector. In aggregate he expects a 6-per-cent year-over-year decline in profits owing in part to an increase in provisions for credit losses. The analyst describes valuation levels as “reasonable, but not attractive” because of previous and potential negative earnings revisions and moderating pretax, preprovision profit growth. He rates Royal Bank of Canada and Bank of Montreal as “buy” but favours insurance stocks generally.
2. Credit Suisse’s annual Global Wealth Report provided household data for Canada and the United States on the same pages, making comparisons obvious. For instance, in the year 2000, wealth per adult was US$114,618 in Canada and US$215,146 in the U.S. The values were largely unchanged in both countries by 2010 because of the negative effects of the financial crisis. But by the end of 2022, wealth per adult in Canada had risen to US$359,577. In the U.S., it was US$551,347 per adult. The two countries also differ greatly in terms of wealth concentration. The wealthiest 1 per cent of Americans own 35 per cent of assets, while in Canada the richest 1 per cent own 24.3 per cent of wealth.
3. Journalist Matt Zeitlin detailed the rapid loss of competitiveness for offshore wind power in the United States on the Heatmap website. The Biden White House targeted 30 gigawatts of offshore power generation by 2030 but engineering firms are either pulling out of deals or not bidding for contracts at all. A consortium that had pledged to build a 1,200-megawatt project off the Massachusetts coast recently agreed to pay US$48-million in termination fees for the privilege of not moving ahead. The problem is cost inflation. Both materials and borrowing costs are higher, and remaining supply chain issues are also driving up costs. Wind turbine manufacturers have also raised prices.
4. Goldman Sachs chief U.S. equity strategist David Kostin detailed a remarkable shift in U.S. equity performance attribution. A year ago, macroeconomic factors such as interest rates and GDP growth accounted for 69 per cent of stock market returns. This year, individual company news dominates, responsible for 71 per cent of returns. Mr. Kostin writes that in the current environment, “the best stock-picking opportunities arise in sectors where returns are driven by micro [company specific] factors and where the typical firm in the sector carries a high level of firm-specific risk.” He screened the S&P 500 for 25 examples of these opportunities. Names most likely to interest Canadian investors include Moderna Inc. MRNA-Q, Netflix Inc. NFLX-Q, Norwegian Cruise Lines Holdings Ltd. NCLH-N, Paramount Global PARA-Q, Bath & Body Works BBWI-N and Tesla Inc TSLA-Q.
5. There have been numerous periods in the past two decades when China has contributed 50 per cent or more to global GDP growth but the economy has been struggling in 2023. Citi economist Xiangrong Yu reported some alarming credit data that suggest the appetite for risk is falling quickly. Total loans in China for July fell to the lowest level since 2009. Mr. Yu adds that “the details are even worse than the headline numbers” and that “the extremely low risk appetite of households is very concerning amid intensifying property concerns.” Chinese infrastructure development and construction activity is a key determinant of global resource demand and commodity prices and is thus a driver of TSX profit growth. China’s government is expected to announce further stimulus measures in the weeks ahead, but the stubborn stagnation in growth is a risk for domestic investors.