Are earnings for this quarter behaving like a recessionary environment? My take is the 'earnings compression' if it does happen will have to be postponed to Q3 instead of Q2, by which points inflation will really cool down (based on crashing commodity prices, falling gas prices, tightening real estate, food crisis being overblown). So far, we are not seeing changes in the earning denominator sufficient to really increase P/E ratios dramatically. These are obviously cherry-picked, but I tried to add as many examples and statements as I could. If the consumer really were so weak, you wouldn't see so many contrarian statements from major banks, restaurant chains, auto makers, credit card processors, etc. GDP/inflation numbers are very aggregative metrics, so let's dive into what the actual companies are reporting.
I will not link to where many of these quotes come from due to time and this not being an academic paper, but I took most of them from the news articles in Bloomberg/CNBC/Seeking Alpha and can be googled for verification.
Big Banks:
- JPM expects credit losses to remain abnormally low through much of 2023, because customers haven’t yet drained cash balances that grew fatter during the pandemic, executives said Monday. “Big picture, the near-term credit outlook, especially for the U.S. consumer, remains strong,” said CFO Jeremy Barnum.
- C: “Little of the data I see tells me the U.S. is on the cusp of a recession. Consumer spending remains well above pre-COVID levels with household savings providing a cushion for future stress. And as any employer will tell you, the job market remains very tight.
- BAC: “Our U.S. consumer clients remained resilient with continued strong deposit balances and spending levels,” said CEO Brian Moynihan. Earlier this month, BofA said credit and debit card spending rose 11% in June.
Restaurants/Food:
- Chipotle/MCD report weakening demand from lower income consumers, but overall strong sales beats. In MCD, they see more substitution from fancier restaurants to MCD, and for Chipotle, they already cater to a slightly richer crowd.
- Major beat from KO. “We continue to see resilience and a lot of demand not just in the U.S. but across the world,” Coke Chief Financial Officer John Murphy said in an interview. Consumers who missed experiences such as dining out and entertainment during the first two years of the Covid-19 pandemic are willing to spend more now, Coke Chief Executive James Quincey said on a call with analysts. Executives said the company is preparing for consumers’ purchasing power to come under increasing pressure in the second half of the year.
Credit Card:
- Visa reporting strong consumer and lots of travel. “Consumers are back on the road, visiting various corners of the world, resulting in cross-border travel volume surpassing 2019 levels for the first time since the pandemic began in early 2020,” said Chairman and CEO Alfred F. Kelly, Jr.”
Auto:
- GM wrote ““I would say that at the end of the day, all the data that we’ve seen to date on vehicle pricing and demand remains strong…we still think that there is a big pocket of demand that hasn’t been met yet.” Tuesday, General Motors GM +4.02% (GM) said it expects to make more money in the second half of the year.
- F expects earnings to triple!
- Mercedes: said it expects demand for its vehicles to outstrip supply for the rest of the year.
Travel:
- Hilton sees strong growth: The hotel industry has benefited from people spending on travel as well as hotel stays, though rising interest rates and tight financial conditions are stoking fears of a recession. However, credit card and other data indicate that travel demand is likely to remain robust.
Software/tech:
- MSFT with such strong guidance it brought the whole market up after its earnings. Azure grew 40% quarter over quarter, a very slight slowdown.
- SPOT sees major increase in subscribers. Spotify eclipsed forecasts and added 6mn subscribers to its service in the second quarter, defying the slowdown at Netflix that has weighed on the music company’s stock price. The company ended June with 188mn subscribers, beating its guidance for 187mn. Total users — which includes those who do not pay — also beat expectations, rising to 433mn.
- JPM on Google after earnings: “Our primary takeaway is that search’s demand is persistent even in a tough macro advertising environment given its consistent and high ROI while benefiting from its diversification across online and offline as well as across verticals and geographies,” JMP analysts’ noted.”
Ecommerce:
- Etsy with major beats. The company also noted it acquired 6M new buyers during the quarter, shaking off concerns of post-pandemic deceleration.”
- AMZN prime day: “The expanded inventory must have played a key role in enabling Amazon Prime Day 2022 to become the single biggest Prime Day event in its history, with members purchasing more than 300 million items worldwide. “
Logistics:
- FedEx and UPS both beat and affirmed guidance
Housing:
- Definitely cooling here, but not all bad. “The recent DHI results show that the post-pandemic overheated housing market is beginning to cool off. During the third quarter, the company recorded 16,693 new orders which were down 8% YoY. The net new orders slumped due to a meaningful rise in cancellations which rose to 24% as the rapid rise in mortgage rates created a minor panic among homebuyers. However, the good news is that management has mentioned in the Q3 earnings call that the reselling demand is quite good, and the cancellations are being resold smoothly.”
Non-Examples:
- Retail like WMT/TGT got crushed, but… with the totality of this data, suggests they had poor execution for inventories.
- QComm sees weaker smartphone demand, but on the other hand, AAPL sources say strong demand for its iPhone in China.
- Best Buy: The retailer said it expects same-store sales to decline around 11% for the fiscal year, compared with the drop of between 3% and 6% that it forecast in May.
- DPZ had big miss.
Leave a Reply