Earnings & Rates - A busy week
Citadel and Meta earning reports, and FED interest-rate decision
For all investors there are 4 times in the year more stressful than others. Now is one of those 4. Yes, that’s right, it's earning week (or month). Companies have been reporting, analysts have been forecasting and investors have been hoping. There have been a couple interesting reports which we will look at, and see why they are important. To make matters more intense, we had the FED decision from its July meeting yesterday.
Interesting Earnings
Let’s look at 2 companies earnings in particular: Citadel Securities and Meta.
Citadel Securities
As a leading market maker focusing on quant-strategies, Citadel has not been a company out of the news, with record revenues from trading activities dominating headlines for the past 14 quarters, bringing over $1bn in each.
It was therefore a shock to investors that Citadel Securities reported a fall in revenue of 29% in Q2 2023, compared to Q2 2022. In the first half of 2023, Citadel Securities has brought in (just) $2.7bn. This is a fall of 36% YoY.
Citadel’s largest source of trading revenue is through its US Equities strategy, which has suffered this quarter from a slowdown in retail activity. A large part of Citadel’s business is wholesale: executing retail investors orders from brokerages. These orders are routed to Citadel, a market-maker, for execution. Hence, much of their order flow depends on retail investors placing trade orders. Q2 saw a significant decrease in retail activity and investment, hence this translated into tangible headwinds for Citadel Securities.
There may be a weakened sentiment for high-frequency trading firms like Citadel, with some others such as Virtu reporting suffered revenues. As market activity is slowing, the impact for the remainder of 2023 may persist as seen so far. But, we do not believe this will be a significant factor, given the size of Citadel and the extremity of revenues in absolute terms. It is still generating alpha and returns: the strategies are not failing.
Meta
Meta has seen a different story to Citadel. Meta beat analyst forecasts for revenues in Q2 2023 in the range of $32-34bn. This represents the first double-digit percentage (11%) increase in quarterly revenue since 2021 end.
This marks a significant point for Meta, with Mark Zuckerberg facing scrutiny due to sluggish growth and concerns over the course of growth for Meta. But this enforces a positive sentiment for the company. It shows reliance of Meta in the face of restructuring: over 20,000 job redundancies and flattening management.
But the most exciting prospect for Meta remains its plans for ventures into generative AI. With big-tech companies focusing on market dominance in the AI space, this is nothing Meta is shying away from. Zuckerberg stated:
We continue to see strong engagement across our apps and we have the most exciting road map I’ve seen in a while
The potential for new product launches, supported by revenue growth beating forecasts provides a strong foundation for future price growth for Meta, given the success and competitiveness of its AI product range.
Meta has recently launched several new ventures:
Threads: instagram’s answer to Twitter - a conversation app which gained 100m users in 5 days (record by a long way)
LLM - Llama 2: large language models are seen in the likes of OpenAI, and Meta released a commercial version. Plans to generate chatboxes powered by Llama
Interest Rates
The most anticipated story of this week was the FED July meeting, even surpassing earnings reports. There was an uncertainty around the decision, with some forward guidance given by hawkish members and Powell himself to enforce the inflation mandate of the FED. And indeed, the decision swayed the way of the hawks, with a 25bps hike.
US Federal Fund rates now stand at a target range of 5.25%-5.5%. This is a 22-year high.
The usual suspects were described for the reasons: controlling inflation and bring it down to 2%. Responses were relatively muted, with slight decreases in both equity markets and US Treasuries, but nothing significant.
What is interesting is that Powell stated that FED Economists no longer predict a recession for the US, however he maintained grounded on no rate cuts for 2023. There was an indication of forward guidance, with Powell not ruling out another hike in September, but not confirming either.
Markets are pricing in a rough 50-50 chance of a 25bps hike. It is a volatile environment still, and a data-driven approach is the best way to tackle the problem, taking each month individually looking at key data prints.
But, it does seem interest rates are directing inflation towards the right direction, and hence further hikes may not be needed. This is a positive insight for stocks, and for those like Citadel and Meta.