We are just over halfway through the most anticipated US earnings season for some time. The market has been desperate to get some real data points on how the US and to some extent the global consumer is travelling. Therefore now is a good time to analyse to see if any common themes are emerging, and how this might be relevant for the upcoming Australian reporting season in August.
To start, see below some high-level data, comparing this US earnings season to ones prior:
– Beats/Misses. With 54% of S&P 500 companies having reported, 67% are beating 2Q earnings (vs. 79% avg. last 4Qs) and 64% are beating revenue estimates (vs. 77%). Financials and Communications were notable drags for both Sales/Earnings beats.
– Surprise. Earnings have surprised to the upside by 0.8% (vs. 11.2% on avg. through the past 4Qs) and 2.0% ex-Financials. Sales and Earnings surprise for the S&P 500 were largely supported by Staples (5.0%, 7.8%), Energy (14.9%, 39.1%) and Healthcare (2.2%, 8.0%).
– Growth. For companies that have reported so far, 2Q Revenue Growth is around 10.1% y/y and Net Income Growth is -3.3% (vs. 3.6% ex-Financials).
– Revisions. Since the beginning of the earnings season, 2Q22E EPS has been revised up 1.6% to $56.09 (+7%). Looking to the following year, 2023E EPS has been revised down -by 1.2% since the beginning of the earnings season to $246.33 (+9% y/y).
So what does this data tell us? Yes, earnings have been weaker, there have been more surprises to the downside. Despite this, revenue is growing and there has been small upside revisions for this year and small downside revisions for 2023. In reality, I would suspect most CEOs are being conservative in the current environment.
Analysing the specific themes, there are some clear trends. Visa and Hilton are among the big beneficiaries of economic normalisation that has provided support for travel. At the same time, this economic normalisation has been a headwind for pandemic winners like Shopify. Weak results at bedmaker Tempur Sealy fit with the shift away from discretionary big-ticket items. Sherwin Williams was hit by slower North American DIY demand trends and homebuilder Taylor Morrison flagged some deterioration in the housing market. Energy companies, as expected Chevron and Exxon, performed well in this current environment and were even able to beat expectations.
With tech having been sold off aggressively since the March highs, expectations were low heading into earnings season. Amazon reported a solid beat across all lines and was subsequently rewarded with an +10% move higher. Alphabet results showed search is the most resilient platform to the broader digital advertising slowdown.
The clear standout loser so far and a bellwether for the US economy, was Walmart and it was aggressively sold down 9% after warning about a slowdown in its discretionary segments. Walmart had positioned itself poorly for a slowdown with high inventories, which in turn is leading to heavy discounting. But after working through the detail and perhaps realising it wasn’t a long-term issue for the business, the stock is now close back to the level prior to releasing earnings.
As always, the banks are a good barometer of how the US consumer is travelling, and the below from JPM CEO Jamie Dimon, is a good summary.
“What I have pointed out in my letter is very strong underlying growth, right now, which will go on. It’s not stoppable. The consumer has money. They pay down credit card debt. Confidence isn’t high, but the fact that they have money, they’re spending their money. They have $2 trillion still in their savings and checking accounts, business are in good shape. Home prices are up. Credit is extraordinarily good.”
Similarly from Wells Fargo.
“Consumer credit card spend remained strong, up 33% from a year ago. All spending categories were up with the highest growth in travel, entertainment, fuel, and dining. After strong growth in the first quarter of 2021, driven by stimulus payments, debit card spending increased 6% in the first quarter of 2022.” – Wells Fargo (WFC) CEO Charlie Scharf
When thinking about closer to home, Australian households are in a similar position, with the average household having saved up around $45,000 since the pandemic. This bodes well for a controlled slowdown rather than a deep recession with the premise that inflation trends won’t continue to accelerate in the coming months.
So circling back to the equities market, it feels like a mild recession is already priced in. Based on the YTD underperformance of Cyclical vs. Defensive equity sectors, the depth of negative earnings revisions that are already priced in matches past recession moves. The shift in rates markets to price in an earlier and lower Fed Funds peak reinforces this view. With the peak market pricing for Fed hikes likely behind us, the worst for risk markets and market volatility should hopefully also have passed.
The road ahead is most certainly still going to be bumpy, but hopefully, we can learn some lessons for how the consumer and the economy is travelling from the US reporting season and replicate that for Australia. There may be a recession at some point and there technically is one in the US now, but the thing about recessions are that they are always followed by a recovery and we need to best decide how to be positioned for this.
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