How is Q3 earnings season shaping up so far? … more Americans living paycheck-to-paycheck … but is the U.S. Consumer stronger than we think? … 100% odds of a recession
There’s so much in the headlines right now. Let’s bounce around to several stories likely impacting your portfolio.
Earnings aren’t great, but they’re also not the trainwreck many head feared
We’re still early in Q3 earnings season, but to analyze how things are shaping up, let’s go to FactSet. It’s the earnings data analytics company used by the pros.From its most recent update last Friday:
For Q3 2022 (with 20% of S&P 500 companies reporting actual results), 72% of S&P 500 companies have reported a positive EPS surprise and 70% of S&P 500 companies have reported a positive revenue surprise…[This 72% figure] is below the 5-year average of 77% and below the 10-year average of 73%.In aggregate, companies are reporting earnings that are 2.3% above estimates, which is below the 5-year average of 8.7% and below the 10-year average of 6.5%…In terms of revenues, 70% of S&P 500 companies have reported actual revenues above estimates, which is above the 5- year average of 69% and above the 10-year average of 62%.In aggregate, companies are reporting revenues that are 1.3% above the estimates, which is below the 5-year average of 1.9% but above the 10-year average of 1.2%.
So, not great, but not awful.However, on a relative level, investors are pleased. Going into this earnings season, expectations were in the gutter. The fact that earnings aren’t matching those grim expectations so far is a victory.If the rest of Q3 earnings season plays out this way, it will be a win.This is a huge week for Q3 tech earnings. We’re on the lookout for Alphabet and Microsoft to report today after the bell. Later this week, we’ll hear from Meta, Apple, and Amazon.Their collective performance will have a huge influence on the strength of the market’s current rally.
Meanwhile, on consumer health front, there’s some troubling news
In recent months, we’ve suggested that investors should place less emphasis on inflation numbers, and more emphasis on data reflecting the health of the U.S. consumer and corporate bottom lines.This is for two reasons:One, inflation data should be dropping as we move closer to the end of the year. While some of this decline will reflect less expensive prices, much of it will be because of higher starting values for the inflation comparison. But that type of decline is purely math, not real-world price softening.Two, at the end of the day, your portfolio value will rise and fall thanks to earnings…and earnings will rise and fall thanks to the health of the U.S. consumer.So, how is the consumer holding up?Yesterday, we learned 63% of Americans are now living paycheck to paycheck.From CNBC:
As of September, 63% of Americans were living paycheck to paycheck, according to a recent LendingClub report — near the 64% historic high hit in March. A year ago, the number of adults who felt strained was closer to 57%…A separate report by Salary Finance found that two-thirds of working adults said they are worse off financially than they were a year ago.
According to LendingClub, even high-income earners are feeling stretched. The report finds that of those earning more than $100,000, 49% reported living paycheck to paycheck. That’s a big jump from the previous year’s 38%. One interesting headwind to family budgets to keep an eye on…Americans’ energy bills could turn into a real pain-point this winter, impacting their spending.Here’s Bloomberg with more:
Americans trying to keep warm this winter are poised to spend the most on heating in at least 25 years. US households face an average power bill of $1,359 this winter, the highest since at least 1997, according to the Energy Information Administration.While much of that spike is driven by higher natural gas costs, homes that rely on oil for heat — such as in the Northeast — will be hit even harder, with an average bill of $2,354.
But viewing this issue from both sides, Bank of America’s CEO Brian Moynihan sees a stronger U.S. consumer
On his company’s recent earnings call, Moynihan said that the bank’s customers are spending freely and that account balances remain higher than before the pandemic. He also pointed toward late-payment metrics that remain well below pandemic levels.On that last note, though delinquency rates are climbing today, they’re doing so from historically low levels. You can see this with Federal Reserve data below, dating back to 2004.
So, while making ends meet appears to be growing tougher for Americans, people are still spending and the consumer economy is still chugging along.
Speaking of the economy, the government will release its Q3 GDP number on Thursday.If you recall, Q1 and Q2 GDP readings were negative. What’s the estimate today for Q3?According to the Atlanta Fed’s GDPNow tool, we’re going to see an increase of 2.9%.
But if such a reading materializes, it doesn’t mean we’re out of the woods when it comes to a recession
According to Bloomberg Economics model projections from last week, the odds of a U.S. recession hitting in 2023 are…wait for it…100%.From Bloomberg:
The latest recession probability models by Bloomberg economists Anna Wong and Eliza Winger forecast a higher recession probability across all timeframes, with the 12-month estimate of a downturn by October 2023 hitting 100%, up from 65% for the comparable period in the previous update…The deterioration in the outlook was driven by a broad-based worsening in the economic and financial indicators used as inputs to the model, Bloomberg Economics found…The model is more certain of a recession than other forecasts. A separate Bloomberg survey of 42 economists predicts the probability of a recession over the next 12 months now stands at 60%, up from 50% a month earlier.
Now, if the real recession (as opposed to the two consecutive quarters of GDP contraction in Q1 and Q2) is still on the way, what does that mean for the stock market?What does that mean for a rally that might take us up, call it, 15% over the next few months?In recent days, I’ve read some analysts claim we’ve bottomed. Does that still hold true if the actual recession remains, say, 10 months away?Would we just watch a stock-market rollercoaster where we climb for a while (maybe until summer 2023), only to then watch the economy sink into a recession that kneecaps earnings – and stock prices – all over again?That’s the million-dollar question.At this point, stocks have priced-in plenty of pain for the economy. But to what extent does this price-in reflect a recession that’s still a year away?No one knows – especially because no one knows how long the Fed will maintain its hawkish rate policy, which is driving so much economic woe.We’ll get our next clue a week from Wednesday, when the Fed wraps up its November meeting on the 3rd. While the size of the hike isn’t much debated (everyone expects 75 basis points), all ears will be listening for clues about the size of December’s hike and what happens beyond.But back to our question…
If the recession is still many months away, what does that mean for stocks?
Will a future recession wipe-out any gains we make between today and when the coming recession might start?No one has a crystal ball. But let’s revisit a quote we’ve featured before in the Digest from Sam Stovall, chief investment strategist at CFRA Research. It describes the interplay between stock prices and a recession:
Prices lead fundamentals—therefore the stock market falling into a decline is traditionally an indication that most investors believe we are headed for a recession.When we do finally fall into a recession, that’s usually a good time to get back into the market.
Building on this, Forbes finds that stocks usually bottom about six months before the economy.By these signposts, a recession that remains a year away is not great news. It would mean that our “buy” signal for a new multi-year bull market could be a long way off.That said, the market wants to rally right now. So, let’s play the hand we’re dealt while recognizing that this might only be a mini-bull.Have a good evening,Jeff Remsburg
