Earnings Outlook: Markets Still See the Sunny Side of Things

Summary

• The business press turned more bearish after last week’s inflation and retail sales prints, but equity remain quite buoyant.
• Earnings last week were generally constructive and support a soft landing. Travel-related companies were particularly robust.
• Next week, we start hearing from retailers on the past holiday season and how business is shaping up in 2023. Home Depot and Walmart head the parade on Tuesday.
• But crypto platform Coinbase Global could overshadow them.

What We Learned Last Week

The financial press reported at length last week that equity markets had suddenly started worrying about higher inflation and a more hawkish Federal Reserve (Fed), after higher-than-expected inflation data and January retail sales.

The proverbial visitor from Mars might be confused. The S&P 500 (SPX) was down a scant 0.3% to 4,079 on the week; the NASDAQ 100 (NDX) was up 0.4% to 12,358. Is this not simply a reasonable pause after SPX rallied by 8.9% and NDX by 18% since early January? Markets certainly do not go straight up.

We read  that markets are still confident in a soft landing, where inflation keeps slowing as the Fed raises its policy rate to 5% or so, then cuts rates. The market narrative’s timing might have changed, though – rate cuts might come later than markets thought a week ago. And even if the Fed raises rates further – that will hit inflation harder, and the rate cuts will still come eventually.

In fairness, there was little in last week’s economic releases or earnings reports to shake confidence in that narrative.

Earnings last week mostly point to a constructive outlook. Companies linked to the travel industry – hotels (e.g., Marriot International (MAR), Hyatt Hotels (H), Airbnb (ABNB)); cruises (e.g., Royal Caribbean (RCL); entertainment (e.g., Madison Square Garden (MSG), MGM Resorts MGM) – report solid beats and better-than-expected outlooks.

Car rental companies Hertz (HTZ) and Avis Budget Group (CAR) reported strong demand for rental cars, and smaller-than-expected depreciation on used cars.

Deere and Co (DE) said high agricultural prices have allowed farmers to buy new equipment.

PepsiCo (PEP), Coca-Cola (KO), and Kraft Heinz (KHC) all reported solid beats due to aggressive price hikes well in excess of inflation. But they also reported declining volumes as consumers turn more cautious and price sensitive. All three said they will hold the line on price increases in 2023. That is good news for inflation – but earnings could come on the soft side.

The only really soft spot in the past few days were toymakers Hasbro Inc., (HAS) and Mattel Inc. (MAT), which suffered far weaker holiday sales than expected. The message here seems to be that consumers have different priorities.

Given the overall tone, no wonder equity markets appear buoyant and willing to look past the next round of Fed rate hikes. Still, much earnings information is backward looking, and many companies that reported earlier this month point to a soft H1, and give little or no visibility about H2.

In short, we see little to cause the market to break out of the range that has prevailed since last May.

The Week Ahead

At this point, about 80% of companies have reported. In our Russell 1000 universe, about 150 companies will report next week. Most notably, major retailers enter the fray with more comprehensive reports on the past holiday season, and how business is shaping up so far this year. Monday is a holiday in the US so it will be quiet.

Tuesday

• Home Depot (HD) and Walmart (WMT) head the retail parade. HD is tied to the depressed homebuilding industry; WMT is a key bellwether on consumer spending for both discretionary goods and groceries. Both will be key for the market this week.
• Coinbase Global (COIN), with its crypto trading platform, may be one of the few companies that could overshadow WMT and HD today, even though its economic significance is a tiny fraction of HD and WMT.
• It will be a major surprise if Caesar’s Entertainment (CZR) reports a soft outlook.
• Homebuilder Toll Br (TOL) will likely report that it is still profitable despite the slower housing market.

Wednesday

• 3-D chip maker Nvidia (NVDA) may indicate whether consumer electronics is close to a bottom or if the drought is likely to continue.
• Exercise gadget-maker Garmin (GRMN) provides another read on consumer appetite for nice-to-have things.
• Expect oil and gas producer Pioneer Natural Resources (PXD) to announce a modest CAPEX budget for 2023 and share buybacks.

Thursday

• How is used car vendor Carvana Co (CVNA) navigating the tight and volatile used car market?
• Domino’s Pizza (DPZ) investors will be hoping that consumers still want pizza delivered despite inflation.
• Will Warner Bros Discovery Inc. (WBD) follow Netflix (NFLX) and Disney (DIS) in reporting meaningful adds to its subscriber rolls?

Friday

• If other food companies are any indication, Monster Beverage (MNST) should report solid if not monster results.
• Lamar Advertising (LAMR) should provide colour on whether the chill in digital advertising extends to outdoor signs visible on busy highways.

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.

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