19 December 2022 Equities | US

Earnings Outlook: Market Mood to Reset Into Yearend?

Summary

Equities continue to be caught between a fight or flight dilemma – whether to fight the Fed or capitulate before a recession arrives.
We think the Fed is dead serious about cutting inflation even if it ends up in recession. We suggest investors take advantage of rallies to reduce equity positions.
Robust results from Oracle and Adobe show that enterprise spending on technology remains strong. Yet soft bookings from Accenture also suggest that the outlook for the enterprise sector may be getting cloudier.
Only 13 companies report in the coming week, but they include bellwethers like Federal Express, Micron Technology and Carnival Corp. They could reset the market mood going into yearend.

What We Learned Last Week

The S&P 500 (SPX) moved above 4000 again after the favourable CPI print, then traded off after the Fed reiterated its firm stand against inflation and, maybe more importantly, the dot plots revealed a likely terminal rate above 5%. The weak retail sales print brought on more angst about recession risks. The SPX ended the week down 1.9%; the NASDAQ 100 sold off by 2.8%.

We doubt the retail sales data will have much impact for now – reading between the lines it appears spending is not falling – it is just shifting from goods to services.

What is apparent from last week’s price action is that investors are caught between a fight or flight response – whether to fight the Fed or capitulate. In our view, the Fed is dead serious about sticking to the inflation fight. If we are right about still-hefty spending on services then services inflation could be stubborn and the Fed may have little choice but to push the economy into recession.

We suggest taking advantage of rallies to reduce equity positions.

Robust earnings reports and solid outlooks from Oracle Corp (ORCL) and Adobe Inc. (ADBE) are another indication that the enterprise spending on technology remains robust. Jabil Inc (JBL), a much smaller manufacturer of electronic components also reported strong results and outlook. Yet IT services consultant Accenture PLC (ACN) said bookings were lower than expected, leading to a 6% selloff in its stock. We will see in coming months whether this miss is firm specific or an indication of a more cloudy outlook for the enterprise sector.

Homebuilder Lennar Corp (LEN) also reported better than expected results and a good outlook, and solid balance sheet. This, along with last week’s report from Toll Br (TOL) confirms our view that homebuilders are much better position to weather this housing downturn than in the past.

The Week Ahead

Between now and yearend a scant 13 companies report earnings. But there are several key bellwethers among them.

Tuesday

Investors holding Fed Ex (FDX) stock will want to know if the company is finally putting its various problems behind it. But from a macro standpoint the big question is whether shipping volumes are still trending down.
General MIills (GIS) will likely report ongoing good demand for it name-brand foods; but is it still able to pass on rising costs to consumers?
Is Nike Inc (NKE) getting its inventory problems under control? And are consumers still spending on its brand?

Thursday

Carnival Corp (CCL) has been quite upbeat about cruise bookings for 2023; its outlook will be a good indication of whether consumer sentiment is becoming more cautious.
Micron Technology (MU) was the first major semiconductor/memory company to report rising inventories of consumer-oriented chips back in June. It will provide welcome updates on its inventory status and more broadly, the outlook for consumer technology in 2023.
Carmax Inc. (KMX) will likely be hurt by depreciating used car prices. It will be interesting to see if it provides insight into how quickly used car prices return to pre-Covid levels.