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There is a lot of anxiety swirling about a possible recession. Is Corporate America starting to get nervous too? We’ll get a better idea this week when several major financial and consumer companies release their third-quarter results.
Asset 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 a few of the many big banks set to report results on Friday.
Wall Street will also be closely watching earnings earlier in the week from Dow constituents Walgreens (WBA) and UnitedHealth (UNH), Pepsi (PEP) and Delta (DAL) for clues on the economy.
“This earnings season is going to be a good test to see what management teams are saying and how much visibility they have” on future sales and earnings, said Scott Ellis, portfolio manager at Penn Mutual Asset Management.
These blue chips aren’t just going to tell Wall Street what they’ve been up to for the past three months. They are also likely to shed some light on what to expect in the crucial fourth quarter and perhaps also give some insight into their outlook for 2023.
These ideas might not be too rosy.
“Assuming there is a recession in 2023, current earnings estimates are likely too high,” said Shawn Snyder, chief investment strategist at Citi US Wealth Management. “That could be the next step down in the market, but that’s not factored in yet.”
Snyder said earnings could fall 10% next year from 2022 levels. But analysts have yet to cut their forecasts significantly. According to FactSet estimates, Wall Street still expects earnings growth of nearly 8% next year.
Large US companies with broad exposure abroad could also suffer from the relentless rise of the dollar. The strength of the greenback will hurt the sales and profits of these companies’ international operations.
“The most interesting thing to watch for this earnings season is the strength of the dollar. It’s had an absolute surge, and that will hurt multinationals,” Snyder said, adding that smaller US companies with less international presence may hold up better on the earnings front because currency swings won’t hurt them as much. .
Companies with a global business footprint are already beginning to feel the effects. Jeans maker Levi Strauss (LEVI) blamed “additional significant currency headwinds from the strengthening US dollar” for its weaker-than-expected earnings outlook last week.
Large multinationals also face other headwinds. Chip stocks, which have already been hit hard this year due to semiconductor supply chain issues, suffered another blow last week when Advanced Micro Devices (AMD) warned of a downturn in future sales.
“The PC market weakened significantly during the quarter,” said Lisa Su, president and CEO of AMD, in a press release. “While our product portfolio remains very strong, macroeconomic conditions have resulted in weaker than expected PC demand.”
Still, there should be some bright spots in this batch of earnings.
Banks should get a continued boost from rising interest rates, making lending more profitable. And unlike Europe, where investors are worried about problems at Credit Suisse (CS) and Deutsche Bank (DB), major US companies do not appear to be showing signs of financial stress.
“Bank balance sheets and capital positions remain strong,” KBW analyst David Konrad said in a bank earnings overview report. 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 start to subside enough to warrant a slower pace of rate hikes by the Federal Reserve. .
Whether or not the Fed can start thinking about a pivot will largely depend on incoming inflation data. The US government will release the latest monthly consumer and wholesale price readings next week.
The Consumer Price Index, or CPI, is the one investors will watch most closely. The CPI jumped 8.3% in the 12 months to August. Economists predict a slight slowdown for September, to 8.1%.
Wall Street is betting that the Producer Price Index, or PPI, will also slow. Forecasts call for an 8.3% jump in the PPI through September, compared to an 8.7% annual increase in August.
“The inflation figures are down. There is no doubt about it,” said Michael Sheldon, Chief Investment Officer at RDM Financial Group. Sheldon noted that there have been sharp declines in the prices of commodities such as lumber, steel and copper lately.
A big problem for the Fed is that wages are a big component of inflation — and that number is still historically high, even with wage growth slowing a bit to 5% year-over-year in September. .
“Wage growth is not as weak as it needs to be for the Fed to reassure itself,” said Luke Tilley, chief economist at Wilmington Trust.
Sheldon said the Fed would like to see wage growth fall to around 3.5% before it feels inflation is truly under control.
It’s also unclear exactly when the price spike will really start to drastically reduce consumer spending. Retail sales jumped 9.1% year-on-year in August, a sign that shoppers are holding their noses and continuing to buy despite the sticker shock. The government will release retail sales figures for September on Friday.
Monday: The US bond market closed for Columbus Day/Indigenous Peoples Day; Nobel Prize in Economics announced
Tuesday: IMF World Economic Outlook; Meta Connect Event
Wednesday: producer price index in the United States; Microsoft Surface Event (MSFT); Pepsi revenue
Thursday: consumer price index in the United States; weekly jobless claims in the United States; revenues from Taiwan Semiconductor (TSM), Walgreens, Delta, BlackRock and Domino’s (DPZ)
Friday: US retail sales; consumer sentiment in the U. from Michigan to the United States; inflation data from China; revenues from UnitedHealth, JPMorgan Chase, Wells Fargo, Citigroup, Morgan Stanley, US Bancorp (USB) and PNC (PNC)