Earnings Outlook: Little to Shake Markets Out of a Range

Summary

• Equity selloffs always spark worries about whether this is the start of something worse – but so far last week fits the pattern of other selloffs during the 2023 rally.
• We expect equities to plateau for now – in other words, no rising tide to lift all boats. Company outlooks are sufficiently mixed that it is difficult to sustain much upward momentum.
• About 125 companies report this week. The biggest name is Disney – but we will also hear from several traditional media companies (including The New York Times and News Corp) and whether there is any pickup in advertising volumes.

Equities Sold Off – But Why?

It is hard to say what the catalyst was for last week’s selloff – the S&P 500 (SPX) was down 2.4% from Monday’s high, and the NASDAQ 100 dropped 3.1%. It was not Apple’s 5% decline after earnings came out Thursday afternoon – the indices were falling all week. And it was not tech – the equal-weighted S&P 500 (SPW) dropped right in line with SPX, so it was a broad-based selloff.

Was it concerns about an overheating labour market that drove the 10-year Treasury yield to 4.17% before the Goldilocks non-farm payroll print on Friday (+187,000 versus 200,000 forecast)? But the SPX still fell 0.5% on Friday. And with most throwing in the towel on recession forecasts, it certainly was not renewed recession fears.

Though the SPX is up 16.6% year-to-date, the rally has been punctuated with periodic selloffs (Chart 1). On a rolling weekly basis there have been 10 declines of more than 1%, and six larger than 2% – in other words, a monthly occurrence.

We now think this is more of the same rather than the beginning of the end of this cycle.

Going into earnings season, we expected markets would plateau for a bit, like the April/May period and we continue to think this will be the case. We note that earnings beats for SPX companies are running 7.6% above consensus levels. Granted, analysts and companies may have set a low bar, but the key point is that companies continue to prove themselves resilient.

Stockpickers Have Had Opportunities

A few weeks ago, we suggested that Q2 earnings season would be fertile hunting grounds for stockpickers, and that is proving to be the case. In the table below we compare the stock performance of pairs of companies in related industries/sectors, where one rallies sharply and the other is hit hard. In most cases these companies beat consensus forecasts for revenue and earnings, often by significant margins. But one of them provided some positive surprise, whether through improved operations or a bright outlook, while the other disappointed on some dimension, often a cautious outlook.

This is a small sample, but it is a pattern of this earnings season, where some companies are rewarded while others suffer. This is not an earnings season where a rising tide lifts all boats – a key reason why we expect equities to plateau.

Another interesting datapoint – Kellogg (K) easily beat consensus forecasts and boosted its full year outlook. But it also said it raised prices 14.7% (!) in the past year and saw volumes fall 7.6% quarter-over-quarter. Ouch! Small wonder K stock fell 2.7% on the news. K says it can recover that volume through more “brand investment” – i.e., advertising and promotion. Like some other consumer staples companies, K seems to be realising its appetite for higher prices outran consumer appetite for its products.

The Week Ahead

About 125 companies report this week, across a broad range of sectors. So far in this season, the tech companies that depend on advertising (e.g., Google, META) indicate that ad spending is picking up – a welcome sign of confidence in the economic outlook. This week we will see if traditional media outlets (The New York Times, Fox, News Corp) are seeing a similar pickup.

Monday

• Tyson Foods (TSN) gives another read on whether consumers are paying for brand name chicken and meat products.

Tuesday

• Aramark (ARMK), which provides a variety of services to company offices, will be a key indication of whether corporate America is slowing down.
• Fox Corp. (FOX), News Corp (NWS), and The New York Times (NYT) will report on whether they are getting a share of advertising dollars.
• Are people still spending on Under Armour’s (UA) upscale sportswear and athletic equipment?

Wednesday

• Disney (DIS) is the big name of the day. Investors are looking for updates on restructuring, impacts of the writers/actors strike, and subscriptions to the Disney+ streaming service.

 Thursday

• Ralph Lauren (RL) will round out the story on consumer demand for nice clothing.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)