The long-awaited second quarter earnings season has begun in earnest.
Heightened inflationary pressures could have impacted corporate results as lower revenues, squeezed margins and rising labor costs are expected to have played a role in Q2 results and may also affect corporate guidance as the economy is showing signs of slowing down. So far, while just over 20% of S&P companies have reported results, 65% reported actual earnings above expectations, slightly below the average of 69% on five years, which is honorable given the economic environment. In total, reported earnings are 1.35% above estimates, which is also slightly below the five-year average of 1.8% according to data provided by FactSet.
Earnings season off to a good start
Broadly, major U.S. banks reported strong earnings on the back of continued momentum in consumer spending, steady credit growth and improving net interest margins due to higher interest rates. interest. But there have naturally also been some warning signs, including the AT&T and Verizon barometers that grabbed headlines last week. AT&T is concerned about the growing number of late payments to its customers. For its part, Verizon found that rising prices were impacting subscription growth.
Google has paused its recruiting campaign to reassess its staffing needs.
Hiring reduction forecasts
Another important indicator that we will be monitoring closely is the forecast for reductions in hiring within companies. For example, Ford recently announced its intention to cut 8,000 salaried positions within the Internal Combustion division in order to intensify its transition to electric vehicles. Google has paused its recruiting campaign to reassess its staffing needs and revise its hiring priorities for the next three months. Apple also plans to slow hiring and spending growth in 2023. Another company to express concern, Microsoft plans to curb hiring. Earlier in the year, even Tesla announced plans to cut its workforce by 10% and the list doesn’t stop there. Overall, the market has reacted quite positively to the results released so far with the ICE US High Yield Index rising 30bps last week.
The devil is in the details
During this earnings season, we will be particularly interested in recent trends and earnings. If the earnings season and outlook confirm that the economy is still showing signs of momentum and solid earnings, Fed policy could still be on track to meet the 3.375% target for Fed Funds d ‘by the end of 2022. However, if earnings prove disappointing due to continued labor market tightness and a rising unemployment rate, that would tick one of the Fed’s boxes for achieving the desired slowdown in the economy. This last scenario would give the Fed arguments to justify the slowing of the monetary tightening cycle if it obtained the desired effect on inflation. In fact, last week’s economic data shows that Fed policy is having the desired effect: new jobless claims are higher than they have been in some time, PMI indices Americans continue to contract, while the “Philly Fed” index on business prospects is in sharp decline.
The rise in unemployment is tolerated in the context of the fight against inflation.
The current earnings season should help us to see things more clearly and give us an idea of what the state of business health could be next quarter and for the rest of the year. If the economy continues to show signs of contraction, Fed Funds should stabilize at levels below current expectations and in doing so, reduce some of the volatility currently plaguing rates markets. On the other hand, if consumption holds up and has a positive impact on corporate profits, the Fed could have an incentive to stay the course of its monetary policy.
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