Back to Business as Usual
I am sorry but I just don’t buy the hype that this earnings season is going to be The Most Important Earnings Season Ever! Stop with this nonsense please. Our media brethren just can’t say something normal. Everything has to be THE MOST IMPORTANT or GAME FOR THE AGES. UGH!!
This earnings season will be important just like every other earnings period. It is a time for investors to look at their portfolios and look a bit into the future and decide if they are on the right track or they have veered off somewhere.
Skittish investors generally will parse through forward looking statements and then load up or head for the hills. That has proven to be a horrible investment strategy over time but yet a substantial group of investors still operate this way. Lessons just seem to never be learned.
However, here we are again.
The emphasis this quarter will be on the banking sector for sure and it just so happens that most of the money sector banks will report in the next week or so. I am not sure that you will see much in the way of data in those reports but it will be interesting to hear what the heads of these titans will say. You already have heard pretty much what is on Jamie Dimon’s mind so I don’t expect much from him but there are other key players here and they have viewed what has transpired over the last month or so from different angles. Pretty sure they will be cautious and subdued.
I do like listening to the various heads of Citi, JPMorgan, Wells Fargo and Bank of America because I firmly believe that they see the bigger picture as far as the economy is concerned. Yes, they are all waiting for the next shoe to drop but they are also are running their businesses with a very close eye on the foundation of the US economy. Consumer lending, consumer spending, commercial lending, inflation or deflation of assets across dozens of sectors.
Look, I hate banks for a number of reasons but the fact still remains they are as good a guide to economic activity as any US government report. Listen to the CEO’s, parse the BS self serving crap and dig into what they are worried about and what they are excited about and you will learn a lot.
As for the remaining CEO’s, not so much. I think that some earnings reports are very telling but most are not. WalMart is, while General Motors is not.
Consumer spending is the key to the US economy and US equity markets. You see uptrends in consumer spending, you will then see a rising economy. It’s simple. You see Visa and Mastercard reports and you can tell where things are going.
If you invest in sectors thats a horse of a different color, of course, but the way I look at things for this column is in a Macro sense. Big picture, longer time frame.
Getting back to this earnings season. I think it won’t be as bad as economists believe. The consensus is somewhere around a 6.6% decline in earnings year over year this quarter and a 6.1% drop next quarter. Maybe a little harsh. I do think we are in the middle of an earnings recession and that will play out for the better part of the first three quarters this year. Yet, we probably won’t feel a real recession anytime soon.
Hard to have a textbook recession when the job market remains fairly strong. People are working, people are earning and people are spending. Prices are not receding and inflation may be slowing but it is still here. I may have been half asleep when we went over inflation/recession/stagflation/deflation in Economics 101 but I do believe it is impossible to have a real recession when prices are rising more than 2-3% annually. You can have one or the other but you really can’t have both.
One thing that will continue for a while is producers willingness to hold the line on inflated prices. There are no huge sales in the stores (grocery stores, not retail stores). There are no coupon inserts in the mail. There will be no return to 2020 packaging. You pay $1.59 for a 5.5 ounce container of yogurt where in 2020 you paid $1.00 for a 6 ounce container of the same yogurt. No, we won’t be seeing an actual pint of anything or a real half gallon of Orange Juice (it’s 52 ounces now). Those days are over.
Oh but wages are growing at an accelerated clip you say. A 4.4% year over year rise in wages does not match up with inflation so the consumer is still behind and producers will be using rising wages as the main reason for raising prices. Which seems a little suspicious since prices have gone up more than 4.4% on pretty much everything and anything you purchase.
I am no mathematician but the math doesn’t work. It has never worked since this round of inflation started in February of 2020.
And this is why I think the earnings season will be a little better than expected. Companies have priced their profit margins in to the new economy. We raise prices by 10%, we give our employees a 5% raise, our commodity costs have come down drastically and our transportation costs have come down as well. Adds up to a sustained level of profitability.
Consumers pay more for less product. We produce the same amount of product but sell more in unit volume and we reap the profits.
Confusing? Yes, but there is logic in what I am saying and at the end of the day and the end of this column it’s about earnings and shareholder rewards. Which I expect to be pleasantly surprised by both.