Positive shift in sentiment for US equity indices
This week's case is H&M, whose share price has been falling, but where there is a long-term trend of improving operating margins towards the targeted level of 10%. Given the high dividend and frequent buyback programs, the risk of further price falls should be limited. European indices such as the OMX, FTSE and DAX have outperformed US indices over the past month. From a technical point of view, US indices have turned higher and falling yields could potentially support such a move.
Case of the week: H&M's journey to improved margins
H&M, which will publish its Q4 2024/2025 report on 30 January, has managed to increase its operating margin in a five-year perspective and is now at 7.4%, still a bit away from the 10% level. Analysts were disappointed with H&M's last Q2 2024/2025 report on 26 September, when earnings fell 24% short of expectations. The conditions for a positive surprise should be better this time, as analysts have lowered their expectations after the Q3 report.
Over the past five to ten years, H&M has experienced weak sales growth combined with difficulties in achieving profitability in the business. H&M, once the company with the highest market capitalisation on the Stockholm Stock Exchange, is now ranked fifteenth in this category, so this development has been discounted by the stock market.
In the first nine months of the 2023/2024 financial year (1 December 2023-31 August 2024), 9% of Group sales were generated in the Nordic region and 56% in the rest of Europe. Weak economic conditions in Europe, where retail consumption is often one of the first places for households to save, explain some, but not all, of the weak sales progress. H&M has also lagged behind its main competitors.
H&M, sales growth in SEK and local currencies (%), 9m 2020 to 9m 2024
The company has shifted from growing by opening new stores to closing stores, particularly in Europe. This has reduced costs, which brings us to the programmes initiated to improve long-term profitability. As you can see in the following graph, the gross and operating margins have improved by 3.8% and 8.0%, respectively, since 1 September 2021. 90% of other external costs were marketing and selling costs for the H&M Group in the first nine months of 2024, so it is important to focus sales on the most profitable stores. If H&M were to achieve an operating margin of 10%, this would translate into Earnings Per Share (EPS) of SEK 10.14 per share and a Price to Earnings (P/E) multiple of between 14 and 15 times.
H&M, gross and operating margins (in %), 9m 2020 to 9m 2024
The main owners, the Persson family, have used the dividend (which remains at SEK 6.50 per share) to increase the family's shareholding from 48% five years ago to 62% today. This increased shareholder position has also been achieved through the company's frequent buyback programmes for H&M shares.
H&M B (SEK), one-year daily chart
H&M B (SEK), five-year weekly chart
Macro comments
For Q4 2024 (with 9% of S&P500 companies reporting), 79% of companies have reported a positive EPS surprise, while 67% of companies have reported a positive revenue surprise according to Earnings Insight.
Last week the S&P500 Financials sector dominated Q4 earnings reporting. Below we have compiled data on earnings versus expectations and the price reaction to this information.The US companies that reported beat analysts' earnings estimates by an average of 11.2% and a median of 6.5%.
Q4 earnings estimate vs actual, deviation (in %) for US companies
On Wednesday, 22 January, the macroeconomic agenda consists of the economic forecast for Sweden from Nordea and Handelsbanken and the US leading indicators for December. The S&P500 earnings season continues with fourth-quarter reports from Abbott Labs, Johnson & Johnson, Procter & Gamble and Progressive.
On Thursday the 23rd, the Japanese Trade Balance for December will be on the agenda. This will be followed by the French Industrial Expectations in January. Later, we will also see the Euro-Zone Household Confidence Indicator for January. From the US, we will get the initial jobless claims and the Department of Energy (DOE) weekly crude oil inventories. Fourth quarter reports are due from Elevance Health, Freeport-McMoran, GE Aerospace, Texas Instruments and Union Pacific in the US, from Schaeffler in Germany, and from EQT, Swedbank, Sandvik and Investor in Sweden.
Friday 24th January starts with Japan's Consumer Price Index (CPI) and Purchasing Managers’ Index (PMI) for December and an interest rate announcement from the Bank of Japan. December PMIs are also due from India, while January PMIs are due from France, Germany and the Eurozone. From the US, we also get the January PMI, as well as the Michigan and Kansas City Fed indices for January and existing home sales for December. Friday will also see Q4 reports from Ericsson and Alleima in Sweden and from American Express, HCA, Verizon and NextEra Energy in the US.
Looking at the short-term performance of the world's leading equity indices, European indices are currently gaining momentum. Among the US indices, the more domestically focused Dow Jones and Russell have performed relatively better than the S&P500 and Nasdaq. Over the longer term, we have seen a significant outperformance of the S&P500 and Nasdaq, led by the US Mag 7 stocks.
One-month, six-month and five-year performance of equity indices ranked on a one-month basis
Sentiment has changed – keep an eye on US yields
Sentiment has turned in the US and the broader S&P 500 is trading above the upper border of a short-term falling trend channel. Note that the MACD has given a buy signal, and the 6,100 level could be next. It is also worth keeping an eye on US yields, which could break down. Such a scenario would be positive for equities.
S&P 500 (in USD), one-year daily chart
S&P 500 (in USD), weekly five-year chart
The Nasdaq 100 is trading near the top of a short falling channel. Falling yields could support the index on its way to levels around 22,000.
Nasdaq 100 (in USD), one-year daily chart
Nasdaq 100 (in USD), weekly five-year chart
The German DAX seems to have been boosted by the positive sentiment in the US over the past few trading days. As the chart below shows, the index is trading close to fresh highs. However, note that the Relative Strength Index (RSI) is showing overbought levels. If the S&P 500 in the US can continue to rally after breaking above the shorter falling trend channel, the odds of the positive sentiment in Europe continuing will improve.
DAX (in EUR), one-year daily chart
DAX (in EUR), weekly five-year chart
Year-to-date, the OMXS30 has outperformed the DAX. A breakout from the S&P 500's short-term downtrend could push the OMXS30 to new highs.
OMXS30 (in SEK), one-year daily chart
OMXS30 (in SEK), weekly five-year chart
The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence
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