Earnings Outlook: Post Powell Headwinds

Summary

• Jerome Powell’s Jackson Hole speech left little question that the Fed is going to take on inflation with the firehose of rising rates.   That probably sets the tone for markets in coming weeks.
• It is another good week to gauge consumer angst amid booming labour markets and high inflation.
• More retailers report, including marquee names like Best Buy and Lulu Athletica.
• And Campbell Soup and Hormel Foods will shed light on whether appetite for name brand food products is waning.

What We Learned Last Week

The S&P 500 was down 4% last week, with 85% of that movement coming on Friday after Fed Chair Jerome Powell’s hawkish Jackson Hole speech. But it was a difficult week for earnings, too. Most companies reported solid beats for 2Q – but more cautious sales outlooks for the second half, especially in the retail and consumer-facing tech sector.

We cannot think of any retailer entering 2H with a tailwind. Even Dollar General (DG) and Dollar Tree (DLTR) reported inflation was a problem, despite both reporting blowout sales and earnings as more consumers stopped by for the low prices. DLTR stock dropped 7% as it said it plans to ‘invest’ in lower prices to capture share; DG was down 3.8% in line with the broader market.

Companies are probably managing expectations downward. But we still think many will struggle in 3Q. We entered 2022 with a solid tailwind, yet that all but dissipated in H1 as issues mounted: inflation, high energy prices, and geopolitical tensions from Russia’s invasion of Ukraine.

The growing likelihood that the Fed will keep pushing rates higher rather than rely on jawboning to fight inflation will further weigh on markets.

Only 30 companies report next week, but several heavyweights will likely confirm (if not amplify) the trends of recent weeks.

Tuesday

• Big box tech retailer Best Buy (BBY) is most likely dealing with an overhang of inventory popular during the pandemic lockdowns.
• HP Inc (HPQ) should report soft demand for PCs and printers from corporates and household consumers.
• Corporate demand for tech goods and services has generally been strong; is Hewlett Packard Enterprise (HPE) riding that wave?
• PVH Corp (PVH), maker of apparel and luxury goods, could benefit from any trend to return to the office. But many people continue to resist entreaties from corporate bosses to give up WFH.

Wednesday

• One of the strongest growing subclasses of retail sales during the pandemic was alcoholic beverages. If Brown-Forman Corp (BF/A), maker and marketer of brand name whiskeys (including Jack Daniels), vodkas, gins, etc., is hurting, maybe lifestyle changes of the past two years are reversing.
• Five Below (FIVE) is another specialty retailer, but one that sells fun stuff that people kind of need. Yet it is hard to see it resisting the gravity dragging down most other retailers.

Thursday

• Broadcom Inc (AVGP) makes semiconductors and related products for corporate clients. This is one niche that has mostly done well in the past quarter.
• Campbell Soup Co (CPB) and Hormel Food Corp (HRL) offer another take on consumer demand for name-brand consumer staple products.
• People have been returning to the gym this year, but are they buying cool workout clothes from Lulu Athletica (LULU)?
• Olli Bargain Outlet Holdings (OLLI), retailer of name brand products at discount and closeout prices, probably had a strong quarter. But it is all about the 2H outlook.

Friday

• No earnings today.
• Enjoy Labor Day weekend if you are stateside!

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.)