Earnings Outlook: Recession Concerns? Not at My Company!

Summary

• The hoped-for yearend rally did not happen as recession concerns continue to drag on market sentiment.
• But curiously, the latest batch of earnings reports display little concern about risks of a broader recession.
• Our read is that recession risks may be deeper into 2023 than markets seem to think today.
• Consumer staples companies dominate earnings reports in the coming week, which should give us a read on whether peoples’ purchasing priorities are shifting.

What We Learned Last Week

Any hopes that equities might rally into yearend did not pan out. The S&P 500 (SPX) ended last week down 14bp and was down 5.7% in December. Going into 2023, recession worries continue to predominate, making it unlikely that 2023 opens with a solid rally. Rather equities most likely continue to trade sideways and lower for now.

By our metrics, the SPX is trading near fair value. The NASDAQ 100 (NDX) is overvalued by about 9%, suggesting it has more downside in coming days and weeks.

If recession risks are weighing on equity markets, that is not coming through in recent company earnings reports. We mostly see a continuation of recent company-specific trends, but companies are not pointing to recession risks.

Cruise giant Carnival Corp (CCL) missed on revenue and earnings because 4Q bookings were lower than expected. But CCL said 2023 bookings are approaching 2019 levels and raised its 2023 outlook. No mention of recession risks.

Cereal and food giant General Mills’ (GIS) revenue and earnings beat consensus, primarily because of higher prices; volumes were down. It raised the year ahead outlook, with no mention of recession risks.

In early July, Micron Technologies (MU) was the first company to highlight an emerging slump in demand for consumer electronics and rising inventories. It said it was cutting production and suggested that the problems should ease by yearend. Well, MU inventories are still rising – by 25% QoQ and 48% since June. Clearly, the problems for consumer electronics are still very much with us. But there was no mention of broader recession risks.

Federal Express (FDX) said that volumes were down and blamed a consumer reset on e-commerce. But, again, it did not mention broader recession risks.

We find this disconnect between what is driving equity markets and what companies are saying curious. Perhaps the pressure of a tight labour market and an apparent ability to pass on rising costs has left many companies less concerned about recession. Alternatively, recession risks may be further out in the future than equity markets seem to think.

The Week Ahead

Only six companies are slated to report this week, all of them on Thursday and most of them in the consumer staples sector. Later this month, on Friday 13 January (of all days), the 4Q earnings season kicks off with many of the major banks reporting full year results.

Thursday

• Packaged food Conagra Brands Inc (CAG) will likely report results similar to GIS – little or no volume growth but an ability to pass on rising costs.
• Alcohol sales soared during the pandemic as people did their drinking at home. Beer, wine and liquor vendor Constellation Brands (STZ) should indicate whether that pattern is returning to normal.
• We will be watching to see if Walgreen Boots (WBA) sales at the front of the store (cosmetics, cards, household items and the like) are still robust.

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.)