A number of UK companies have reported earnings on Tuesday, including Diageo, Pets at Home and WPP and their results have been mixed. Diageo has seen its share price plunge by more than 3.8% after profits missed expectations after reporting weak Latin American sales. The company said that sales are still normalizing after the pandemic, but investors are unwilling to be patient with companies that perform worse than expected, and there are some worrying details in this earnings report.
Diageo is weighted down by a constrained consumer
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Create account Try a demo Download mobile app Download mobile appDemand for Diageo has cooled in the US market, and the company is also losing market share across multiple business lines. This does not make for pretty reading. This is also a tricky environment for drinks operators like Diageo. Demand for high margin, premium products is fading as the economic cycle turns and unemployment is expected to tick up, at the same time as competition is increasing. Remy Cointreau may have seen its share price rise last week after it delivered weaker earnings but a stronger outlook for 2024, however, its share price is still down 17% in the past month and fell 4% at the start of the week. Diageo has fared better than Remy Cointreau, however, the prospect of a constrained consumer who is trying to save money where they can, does not bode well for Diageo in the medium term.
Pets at home fails to bite with lower profit guidance
Pets at Home, the pandemic darling after we all bought puppies and kittens, is also a victim of post -pandemic normalization, as demand for its pet products slows and it cut its profit guidance fort this year. Its share price is down 2% so far on Tuesday, although it has managed to claw back some earlier losses. Its share price is down more than 10% since the start of the year, as investors shun consumer discretionary stocks like Diageo that offer affordable luxury, and instead opt for the safety of tech. This is mostly benefitting US stocks, however, UK firms who can prove that they can harness the power of AI – a key theme for markets this year – can pay off. WPP’s share price is up by 2.38%, although earlier gains of more than 6% have started to fade.
WPP: mention AI to see your stock price soar
WPP delivered a double whammy of good news for the UK stock market. Not only did it upgrade its medium-term financial targets on the back of cost-cutting measures, but it also said that it plans to spend £250mn this year to harness the power of AI. Markets like this type of cost-cutting, where companies cut out inefficiencies and instead focus on tech that can boost productivity, effectives and ultimately profitability. The market seems happy with this plan, and we shall have to see if it pays off. S4 Capital is also higher on Tuesday on the back of this news, after its share price bombed last week on the back of a disappointing earnings report. The reaction of WPP’s share price to Tuesday’s news highlights how powerful a theme AI has become and the share price is surging as the company positions itself to be the leader in the era of AI. It appears that if a company lays out plans to embed AI into its operations, then their share price gets attention from the bulls, we expect this theme to continue.
AI and tech lead the way in the US, while the rest of the market struggles
A theme could be developing for earnings season, cyclical companies are struggling, especially if they miss earnings expectations, while a large number of Magnificent 7 US tech giants are seeing their stock prices hit record levels at the same time as they are also expected to drive earnings growth for the S&P 500 in Q4. Six of the seven Magnificent 7 stocks are expected to be the top contributors to YoY earnings growth for the S&P 500 for 2023, according to analysis from FactSet. The 6 tech titans, including Apple, Microsoft, Alphabet, Amazon, Nvidia and Meta are expected to deliver earnings growth of 53.7% in aggregate for Q4. If you strip out these tech giants, then earnings growth for the S&P 500 for Q4 would be -10.5%. Four of the Magnificent 7 are also expected to see Q1 2024 earnings grow by 79.9%, including Nvidia, Amazon, Meta and Alphabet. Excluding these four companies, S&P 500 earnings growth is expected to be a mere 0.3% for Q1.
AI dominates the market
When you realize how much influence the biggest US tech firms have on the US blue-chip index, you realize how the rest of the companies on the S&P 500 are struggling in the same way as their European counterparts. This puts the results of companies like Diageo into context. Sadly, for Diageo, and for the FTSE 100 as a whole, it just isn’t tech, which means its earnings growth has more downside risk and makes for a gloomier story.
Eurozone skirts recession, but growth remains weak
Later on, Tuesday we will get results from Microsoft and Alphabet, and we will get a better idea if the Magnificent 7 can deliver on these enormous earnings expectations. We also had a large number of economic releases on Tuesday. Eurozone growth was a mixed bag. There was a decline in Q4 GDP for Germany, as expected, and growth in France was flat. Spain was the bright spot, growing at 0.6% last quarter, and the overall rate of growth for the Eurozone was a mere 0.1%. Whether the Eurozone is in a technical recession or not does not matter, it is stagnating like the UK. The economy is expected to recover this year; however, growth rates are not expected to be at US levels any time soon.
Why are European workers so sick?
Germany noted that it has lost more than EUR 20bn of economic growth due to sick days. This suggests that the UK is not alone in struggling with worker productivity. The question has to be, why doesn’t this impact the US economy in the same way? Do US workers have stronger immune systems? We certainly can’t say it’s because of a superior healthcare system. But it seems that if Europe can follow the US, then it may be able to crack the growth problems plaguing the Eurozone and the UK.
US labour market cooling, but only slightly
Elsewhere, US JOLTS job opening numbers are released at 3pm GMT, this is the first piece of US jobs market data we get this week, with the key release being Friday’s payrolls report. The market expects a reading of 8.75mn for December, down from 8.79mn, which may suggest a slight loosening in the US labour market, but probably not enough to get the Fed to signal a rate cut in March when they meet on Wednesday. The US Treasury also reduced its borrowing estimate for Q1 to $760bn, a drop of $56bn. This helped to boost bonds and stocks, US bond yields fell across the curve and the S&P 500 reached a fresh record high.
