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There is much fear of a possible recession. Is corporate America getting nervous too? We’ll get a better feel for this week when several top financial and consumer companies report their third quarter results.
Wealth management giant and iShares owner BlackRock (BLK) is due to report on Thursday. JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Morgan Stanley (MS) are just some of the several top banks set to report results on Friday.
Wall Street will also be keeping a close eye on gains in Dow constituents Walgreens (WBA) and UnitedHealth (UNH), Pepsi (PEP) and Delta (DAL) earlier in the week for clues about the economy.
“This earnings season will be a good test to see what management teams are saying and how much transparency they have about future sales and earnings,” said Scott Ellis, portfolio manager at Penn Mutual Asset Management.
These blue chips won’t just be telling Wall Street how they’ve fared over the past three months. They’ll also likely shed some light on what to expect in the crucial fourth quarter, and possibly provide an outlook on their 2023 prospects as well.
These findings may not be too rosy.
“Assuming there’s a recession in 2023, current earnings estimates are probably overestimated,” said Shawn Snyder, head of investment strategy at Citi US Wealth Management. “That could be the next downtrend in the market, but that’s not factored in yet.”
Snyder said it’s possible earnings could fall 10% next year from 2022 levels. But analysts haven’t lowered their forecasts that drastically just yet. According to FactSet estimates, Wall Street continues to forecast nearly 8% earnings growth over the next year.
Large American companies with significant foreign exposure could also be hurt by the inexorable rise in the dollar. The resilient greenback will hurt the sales and profits of this company’s international operations.
“The most interesting thing to watch for this earnings season is the strength of the dollar. It’s seen an absolute surge, and that’s going to hurt multinationals,” Snyder said, adding that smaller U.S. companies with less international exposure might fare better on the earnings front because currency fluctuations wouldn’t hurt them as much.
Companies with a global sales presence are already beginning to feel the effects of the crisis. Jeans maker Levi Strauss (LEVI) blamed “the significant additional currency headwinds from the stronger US dollar” for its weaker-than-expected earnings outlook last week.
Large multinationals also face other headwinds. Chip stocks, already hit hard this year by problems in the semiconductor supply chain, took another hit last week as Advanced Micro Devices (AMD) warned of a slowdown in sales.
“The PC market weakened significantly during the quarter,” said Lisa Su, AMD chairwoman and CEO, in a press release. “While our product portfolio remains very strong, macroeconomic conditions resulted in lower than expected PC demand.”
Still, there should be some bright spots on this string of earnings.
Banks should continue to benefit from rising interest rates, making lending more profitable. And unlike in Europe, where investors are concerned about problems at Credit Suisse (CS) and Deutsche Bank (DB), top US companies appear to be showing no signs of financial stress.
“Bank balance sheets and capital positions both remain in solid shape,” KBW analyst David Konrad said in a preview of bank earnings. Konrad has bullish ratings on Goldman Sachs (GS), Bank of America (BAC), and Wells Fargo.
Banks may benefit from higher interest rates, but most investors (and consumers, of course) are hoping that inflation will finally cool enough to justify a slowing of the Federal Reserve’s rate hikes.
Whether the Fed can start considering a pivot will largely depend on the inflation data coming in. The US government will release the latest monthly data on consumer prices and wholesale prices next week.
The consumer price index, or CPI, is the one that investors will be watching most closely. The CPI rose 8.3% in the trailing 12 months to August. Economists are forecasting a slight slowdown to 8.1% in September.
Wall Street is betting that the producer price index (PPI) will also slow. Forecasts are for the PPI to rise 8.3% through September, compared to an 8.7% annual increase in August.
“Inflation numbers are going down. There’s no doubt about it,” said Michael Sheldon, chief investment officer of RDM Financial Group. Sheldon noted that there have been big falls in the prices of commodities like lumber, steel and copper recently.
A big concern for the Fed is that wages are a big component of the inflation picture – and that figure is still historically high, even if wage growth slowed somewhat to 5% yoy in September.
“Wage growth is not as low as it needs to be for the Fed to take comfort,” said Luke Tilley, chief economist at Wilmington Trust.
Sheldon said the Fed would like to see wage growth slow to around 3.5% before it feels inflation is truly under control.
It’s also not clear when rising prices will really start to weigh heavily on consumer spending. Retail sales rose 9.1% year-on-year in August, a sign shoppers are holding their noses and continuing to shop despite the sticker shock. The government is due to release September retail sales figures on Friday.
Monday: US bond market closed for Columbus Day/Indigenous Peoples’ Day; announced the Nobel Prize in Economics
Tuesday: IMF World Economic Outlook; Meta Connect event
Wednesday: US Producer Price Index; Microsoft (MSFT) Surface event; Pepsi revenue
Thursday: US consumer price index; Weekly Unemployment Claims in US; Earnings from Taiwan Semiconductor (TSM), Walgreens, Delta, BlackRock and Domino’s (DPZ)
Friday: US Retail Sales; consumer sentiment in the United States of America; inflation data from China; Revenues from UnitedHealth, JPMorgan Chase, Wells Fargo, Citigroup, Morgan Stanley, US Bancorp (USB) and PNC (PNC)