Earnings Outlook: Corporate Sector Reports on Inflation Impact

Summary

• 2Q earnings season kicks off this week. Earnings should be mostly good, but we look for more mixed messages across companies, and possibly more downside shocks.
• PepsiCo and Conagra will give key updates on how consumers are dealing with inflation.
• JP Morgan and CitiGroup will show whether volatility is friend or foe for the bottom line.
• Regional banks PNC Financial and US Bancorp may discuss middle market loan demand.

A Lot to Unpack

The 2Q earnings season kicks off this week. Companies have experienced a lot over the past three months – a bear equity market, rising rates, high energy and commodity prices, continued tight labour markets, ongoing supply chain issues, and shifting consumer behaviour as the economy fully reopened from Covid restrictions and inflation bit hard.

During the 1Q season, most companies managed to beat earnings forecasts. But they were cautious about the months ahead. Large retailers Target (TGT) and Walmart (WMT) suddenly decided they had too much of the wrong inventory after several quarters of reassuring consumers they were managing their supply chains to meet demand. And Netflix (NFLX) shocked the market by reporting its first ever decline in subscribers. Those could be the top three reports the market anticipates.

Two weeks ago, General Mills (GIS) reported strong demand for its many food products and a bullish outlook. In the same week, spice manufacturer McCormick (MCK) reported that everything seemed to go wrong – higher costs, wrong product mix, and weak demand. In a word, we got more mixed messages across companies.

That, in a nutshell, is what we may be in for this coming earning season: more mixed messages across companies, with the potential for more downside shocks like NFLX.

Outlooks aside, one key thing we will watch for is whether analysts start trimming their year-ahead earnings forecasts. The latest projected EPS for the S&P 500 is 229.32, up nine cents from last week, and 14.8% above trailing 12-month earnings.

The Week Ahead

Tuesday

• Soft drink and snack producer PepsiCo (PEP) may have avoided the worst of rising commodity prices through long-term contracts and hedging programs, but surely this will be an issue going forward.

Wednesday

• Delta Airlines (DAL) may have benefited from strong demand for travel and fuel surcharges so far, but does it expect that demand to continue?

Thursday

• JP Morgan Chase (JPM) and Morgan Stanley (MS) initiate a heavy flow of financials in coming days. Rising rates and bear markets will be key topics of discussion.
• Food processing and commodities giant Conagra Brands (CAG) has the front seat for how commodity supplies, rising prices and consumer demand are interacting.

Friday

• Blackrock (BLK), CitiGroup (C), and Well Fargo (WFC) will update us on how the major banks are managing amid volatility.
• PNC Financial (PNC) and US Bancorp (USB) will provide a regional bank perspective, particularly whether middle market loan demand is rising.

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.)