Forward Market Outlook: Week of April 21
Full and unabridged commentary originally presented in Tel Aviv's media houses
Here is the full rationale behind my commentary that appeared on the 20th of April in three publications, all based in Tel Aviv: financial news publication Globes, daily newspaper Israel Hayom, and business news publication BizPortal. On the 21st, I was also quoted in TheMarker, also a Tel Aviv-based financial newspaper. Read on!
Insights from the Earnings Season So Far:
For the past few years, aggregate earnings expectations have tended to be more conservative, leading to a significant volume of positive surprises. However, the earnings season so far has been slightly weaker than expected: around 12% of the S&P 500’s constituents have reported results, with roughly 3 out of 4 reporting a positive EPS (Earnings Per Share) surprise and 3 out of 5 reporting a positive revenue surprise.
Financials kicked off the earnings seasons with a general trend in reporting and guidance: a blockbuster today, an uncertain tomorrow. Nearly every major financial institution holds the view that a recession with global consequences is inevitable. This has been dampening market reactions to positive surprises and is likely to be the theme throughout this earnings season.
Outlook on the ongoing U.S.-China trade tensions:
The ongoing trade tensions between the U.S. and the world has little to do with “balancing trade” and improving “market access” for U.S. businesses: if so, the zero-for-zero tariff deals proposed by the European Union and Vietnam as well as more favourable conditions proposed by Japan wouldn’t have failed.
Instead, the tensions have more to do with the fact that a strong dollar makes U.S. manufacturing highly uncompetitive in the global marketplace. China lies square in the administration’s crosshairs owing to its pegged currency proving to be particularly advantageous for propping up its position in manufacturing while the dollar assets (U.S. Treasuries) it holds help “price out” the dollar (and essentially, the entirety of the U.S.) from the market.
It’s highly unlikely that trade tensions would end; in fact, it would be fair to assume that tensions would instead ratchet up.
Note #1: President Trump’s worldview on where the U.S.’ economic weaknesses lie — essentially being the “casus belli” for the tariff war — was discussed in detail on the Leverage Shares website, SeekingAlpha as well as the Tiger Brokers Community Platform.
Trade war impact on semiconductor stocks:
China controls the lion’s share of rare earth elements supply such as gallium and germanium (earned as a result of its extensive aluminium refining industry and massive network of coal-fired power plants respectively, which yield these metals as byproducts). Both these metals are key for the manufacturing of semiconductors and electronics. Meanwhile, the U.S. wields power through IP (intellectual property) held in U.S. companies that design advanced chips and electronics, giving it the ultimate say as to who receives them.
Over the past few years, China and the U.S. have restricted the flow of rare earth elements and advanced chips (respectively) to each other. Despite that, some evidence exists that China continued to secure advanced chips despite proscriptions while the U.S. continued to receive rare earth elements. This was due to “re-exports”, wherein goods arrive at and depart from a third country to the final destination labelled as an import from the third country and not the country of origin.
Note #2: The previous article on Substack discussed key developments in the extraction of galium and germanium worldwide in detail, which doesn’t ad up as a net benefit to China’s long-term position at all.
Both countries are now focusing closely on re-exports, which has some interesting consequences for semiconductor stocks. For instance, let’s consider Nvidia: in its FY25 results (ending January 2025), it reported revenues of $130.5 billion. Geographically, the U.S. went from being the source of 8% of its revenue in FY20 to 47% in FY25 while China went from 25% to 13% in the same period.
However, right around the time that restrictions on chip exports to China were being strengthened, a new region popped up into prominence: Singapore, which went from negligible to 18% in FY25. The company — quite cagily — admitted that less than 2% was consumed by local datacenters. If it is assumed that the entirety of the balance was re-exported to China, then China is Nvidia’s second largest market at 29% market share and not necessarily (as it reports) Taiwan at 16%.
Note #3: Nvidia’s FY 25 (ending January) results were analyzed and discussed in detail on the Leverage Shares website, SeekingAlpha as well as the Tiger Brokers Community Platform.
When the U.S. enforced bans on the sale of Nvidia’s China-specific H20 chips on the 15th of April, Nvidia stated that the potential impact could be up to $5.5 billion. This might be too conservative an estimate: if all re-exports were clamped down, the potential loss of revenue from China being shut out is at least somewhere between $5.5 billion and 29% of $130.5 billion, i.e. $38 billion.
Of course, global demand outside of China remains pretty strong and inventory could be flash-sold at a relatively low discount to limit the impact on the company. However, there is another twist here: Nvidia’s foundry TSMC (which also manufactures for its rival AMD) sources at least 30-35% of the raw material (by value) needed to manufacture chips from China. If China were to cut off the supply of raw material to Nvidia in retaliation by cutting off supplies to TSMC, the rolling effects would be keenly felt all around the world, drive up prices and throttle supplies of chips.
Now, TSMC founder C.C. Wei — during the company's recent earnings release — expressed confidence that TSMC will continue to grow in revenue as it did over the past quarter. This might be a bit optimistic, given that it doesn’t account for geopolitics impacting real-world supplies for it to continue its revenue growth.
Recent USD depreciation or the volatility in the bond market:
If one were to consider President Trump’s worldview that the USD has been artificially inflated to make the U.S. non-competitive and pair that with the opinions of the Chairman of his Council of Economic Advisors Dr. Stephen Miran, this is a desired outcome. In fact, Dr. Miran has held in the past that Treasury bonds could effectively be “re-termed” via swaps to longer-term debt in order to reduce interest burdens and a “user fee” should ideally be applied on foreign bond holders as fair consideration for the stability implied by the holding of U.S. Treasuries and the security umbrella the U.S. enables around the world.
For now, there’s no indication that “re-terming” or “user fees” are on the table but early trends suggest that there’s a generational play being considered. Middle Eastern economic ministries, for example, have long suggested to their rulers that their vaults be diversified out from holding just dollars earned through petrodollar contracts to holding assets of other countries they trade with — such as China, India, Brazil, et al. If calls strengthen as a result of bond market volatility and diversification is permitted in the course of the generational play, a disciplined selloff of U.S. bonds and an uptake in other bonds could be expected.
Key earnings and macroeconomic reports to watch:
The “U.S. leading economic indicators” report for March out on Monday (the 21st of April) will be of interest: the previous report indicated a drag (i.e. a negative) of 0.3%; another negative would be another sign of a strengthening in a recessionary outlook.
UPDATE: The Conference Board’s “Leading Economic Index” dropped 0.7% in March — against an aggregate expectation of 0.5% — after decreasing 0.2% in February.
Wednesday (the 23rd of April) has the S&P flash manufacturing PMI for April being released. The previous release had the PMI treading water at 50.2. Immediately after this is the new home sales report for March. Home sales constitute about 15% of all U.S. home sales. In February, new home sales more-or-less met expectations with an estimated 676,000 units versus an aggregate expectation of 679,000. However, median prices were down from a year earlier, which is a decidedly mixed signal. It will be interesting to see if this continues.
Thursday (the 24th of April) has the initial jobless claims report, which is expected to remain low, as well as the durable-goods order report for March. The previous durable-goods order report was essentially propped by high-value military orders (which doesn’t come as a surprise since the U.S. controls 43% of the global arms exports market while its nearest competitor France is a distant second at 9.6%) while other consumer goods were running negative. It will be a matter of interest to see if this continues.
Friday (the 25th of April) has the finalized University of Michigan Consumer Sentiment Index report for April. In the preliminary report two weeks earlier, sentiment had slumped to the lowest level in three years, with the survey presenters stating that this slump was "pervasive and unanimous" across age, income, education, geographic region and political party affiliation. Rarely has the "finalized" been significantly different from the "preliminary", so it’ll be an interesting pattern to examine.
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