Earnings Outlook: Advertising Spend Will Reveal Corporate Confidence

Summary

• Equities continue to trade sideways as company outlooks point to a demand increase in the coming months.
• About 125 companies report this week, including Microsoft and Tesla, several airlines, and several major industrial corporations.
• Comcast, owner of NBC, will be a key read on whether advertising spending is picking up after a slowdown hit the communications sector hard in H2 2022.

What We Learned Last Week

Equities essentially moved sideways again last week, with the S&P 500 (SPX) down 0.6% and the NASDAQ 100 (NDX) up 0.7%. The SPX has been trading within an eyelash of 4,000 but could not manage a close above that level.

Weighing on markets has been the less than enthusiastic outlooks from companies that have reported so far.

The big reporting sector last week was regional banks. Q4 results were mostly strong, due to high net interest margins as deposit rates lagged returns on assets and solid loan growth. But most banks were cautious about 2023, warning of a mild recession and uncertainty about the timing of a recovery.

One surprising bright spot was auto finance company Ally Financial (ALLY), which posted a large beat on revenue and earnings, partly because it is relying more on deposits than wholesale financing.

There have been growing concerns about auto loans coming under stress, but ALLY credit losses were lower than expected, at 2.2%. ALLY said its loss reserves are positioned for a 3.5% loss rate in 2023 but expects losses lower than that. It seems to be looking just a quarter or two ahead.

In the industrial sector, the general sense was earnings, and outlooks were not as bad as feared. JB Hunt Transport Services (JBHT) was one of the first companies to flag a slowdown in demand earlier this year; demand has stabilised but shows little sign of rebounding.

Fastenal (FAST), the maker of fasteners used by many industries, also flagged falling demand in H2 2022 and said that markets for its goods had stabilised – but were not rebounding either.

Aluminium manufacturer Alcoa (AA) said it expects 2023 shipments to be similar to 2022, about 2.5–2.6mn tonnes. That suggests that manufacturing activity globally will be muted.

Netflix (NFLX) surprised the market with a 7.7mn jump in subscribers, probably due to its new ad-supported tier, although it did not provide a detailed breakout. Revenue was in line with expectations, but earnings per share (EPS) missed big – by 12 cents per share vs 45 cents expected.

The company said earnings will improve later this year when it addresses the password-sharing problem. There has been talk that investors are focusing primarily on earnings rather than subscriber adds, but one must wonder.

There was little to suggest that equities could break out of the past six-month trading range any time soon.

The Week Ahead

About 125 companies in our Russell 1000 universe are scheduled to report next week. The mix includes a broad range of sectors, including some key bellwethers.

Monday

• Baker Hughes (BKR) will likely follow Schlumberger (SLB) with blowout earnings. Energy companies may be cutting back on exploration activity, but the need for energy security is boosting demand for oilfield services.
• Several more regional banks report, including Bank of Hawaii (BOH), Synchrony Financial (SYF), and Zion Bancorp (ZION).

Tuesday

• Microsoft (MSFT) will be the big headline of the day.
• 3M (MMM) has fingers in every pie, from industrial goods to consumer products. Will it report more stable if lower demand? And can it pass on higher costs?
• Homebuilder D.R. Horton (DHI), which focuses on entry-level homes, will be a critical read on consumer sentiment.
• General Electric (GE) is nothing like the bellwether it was before the financial crisis, but it is still a big player in industrial capital goods. So its order pipeline will be of interest.
• Is inflation leading to more cord-cutting? Verizon (VZ) and AT&T (T) are at the cutting edge of consumer decision.

Wednesday

• Tesla (TSLA) gets a chance to resuscitate its flagging stock price, but investor expectations will be high.
• Automatic Data Processing (ADP), a provider of outsourced services for payroll, HR, benefits, and other support services, should provide an interesting window into how corporate America is positioning for 2023.
• Boeing Co’s (BA) order book will give some indication of how confident airlines are about air travel in the coming years.
• CSX Corp (CSX) rail volumes will be a useful read on the macro outlook.
• Is Las Vegas Sands (LVS) bullish on consumer appetite for travel and leisure in 2023?

Thursday

• Alaska Airlines (ALK), American Airlines (AAL), and JetBlue Airways (JBLU) should report good earnings and outlooks.
• Southwest Air (LUV) also reports, but given its problems during the holiday season, investors will be mostly interested in hearing its plans to avoid a similar catastrophe – and how much it will cost.
• Is advertising coming back after a soft spell in H2 2022? Comcast Corp (CMCSA), owner of NBC, provides the first solid read on the advertising market. Its results will be a key to how Google (GOOG) and Meta Platforms (META) will perform – and a measure of corporate confidence.
• Sherwin-Williams (SHW) may struggle given the weak housing market.

Friday

• Colgate-Palmolive (CL), with a focus on dental products, is far more specialised than Procter & Gamble (PG) – but a stingy consumer may lead to declining volumes.
• Roper Technologies (ROP) makes a broad range of industrial products for fluid control, pumps, analytical instruments, and software solutions. Its order book will be a gauge of industry appetite for capital goods in 2023.

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.)