HSBC slumps, Palo Alto nosedives, Nvidia earnings on tap

Bubble Burst Incoming?

Deutsche Bank’s Jim Reid notes that the U.S. stock market is “rivalling 2000 and 1929 in terms of being its most concentrated in history”. Market watchers love to draw parallels with history. It gets us out of the hole of finding something original to talk about.

So, to illustrate the point, here’s legendary investor Stan Druckenmiller on the 1987 crash:

“It was a combination of a number of factors. Valuations had gotten extremely overdone: The dividend yield was down to 2.6 per cent and the price/book value ratio was at an all-time high. Also, the Fed had been tightening for a period of time.

Finally, my technical analysis showed that the breadth wasn’t there—that is, the market’s strength was primarily concentrated in the high-capitalization stocks, with the broad spectrum of issues lagging well behind. This factor made the rally look like a blow-off".

Sounds kind of familiar.

Nvidia Earnings

Which takes us neatly to Nvidia earnings today, upon which a lot seems to be resting. Signs of tension were evident yesterday as Nvidia stock dropped more than 4% and dragged the rest of the market south.

At 30x earnings, there is little room above and the market is a tad worried about a 50% year-to-date gain unravelling on earnings – profit-taking, I guess you would call it. I still think there is a material chance that 2025 estimates will be revised higher though.

Palo Alto Networks

Concerns may be a bit sharper after Palo Alto Networks shares dived by a fifth after-hours as it cut its full-year guidance despite a beat on the top and bottom lines. The cybersecurity company guided full-year total billings between $10.1 and $10.2 billion vs. the previous guidance of $10.7 and $10.8 billion.

Lowering the guidance, Palo Alto Networks CEO Nikesh Arora said it was down to a strategy shift and the company “wanting to accelerate growth, our platform migration and consolidation and activating AI leadership.”

The scale of the obliteration betrays the elevated valuation of certain hyped-up tech stocks and the very high bar that they need to keep jumping to maintain investor fervour. Canary in the coal mine as far as AI is concerned? If you trade at 60x forward earnings, you better have a blowout quarter.

The plunge in PANW stock seems to have had a knock-on for cybersecurity firms — including UK-listed Darktrace, which shed 9% in early trading.

Some Stumbles

The Dow Jones Industrial Average (DJIA) — which is getting Amazon soon in place of Walgreens (about time, you might think) — fell a bit and the Nasdaq lost almost 1% as big tech came under some pressure. Chinese stocks continued to rally.

European markets are more mixed with Paris and Frankfurt essentially flat at the open. London fell sharply with HSBC dragging heavily on the FTSE 100 index with a decline of almost 7%, whilst Glencore slumped 6% as its profits halved. Together they scrubbed about 45pts off the index – almost all of the roughly 0.7% decline of 52pts.

HSBC Earnings

Profits at HSBC fell 80% in the final quarter as China worries surfaced – a $3bn write-down on Chinese bank stake and further charges on real estate. Of $3.4bn in credit loss provisions, $1bn is tied to commercial real estate in China, though the total provision was down in 2022. For Q4, HSBC’s reported profit before tax was down $4.1bn to $1.0bn almost entirely off the bank of the China bank hit.

HSBC reported full-year profit before tax rose by $13.3bn to $30.3bn, primarily reflecting revenue growth, plus a favourable year-on-year impact of $2.5bn on the sale of its retail banking operations in France, and a $1.6bn provisional gain recognised on the acquisition of Silicon Valley Bank UK, which helped offset the $3bn hit taken on its Bank of Communications Co stake.

Revenues were up $15.4bn or 30% to $66.1bn, including net interest income (‘NII’) of $5.4bn, with NIM of 1.66% up 24bps.

HSBC shares fell quite a bit on the news: good figures for the full year were largely baked in, revenue deceleration in the fourth quarter was a bit more than expected the China angst was to the fore with the write-down and management is cautious for the bank’s loan growth outlook in the first half of 2024 due to slowing economic growth in many countries.

Elsewhere...

Today FOMC meeting minutes are going to be watched for the relevant clues about the path of monetary policy in the U.S. A March interest rate cut is not the base case, as Fed Chair Jay Powell told us in January. So, what is the base case? Is it May, or later? The dollar traded lighter on Tuesday, though the 10-year Treasury yield remained close to 4.3%.

GBP/USD continues to trip the range; a bullish move ran into old horizontal resistance and the 50-day line around the 1.2679 area and has retreated to the 21-day EMA again. Possible signs of a tentative bullish move on the MACD should be watched.

Crude oil ticked lower for a second day to breach the 200-day SMA.

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