Summary
- Earnings have been mostly positive, but equities succumbed to the pressures of a hawkish Fed, a robust labour market report and higher Treasury yields.
- Tech companies that provide cloud services and equipment to companies looking to upgrade their technology are doing well, those that are consumer-facing less so.
- The New York Times reported stronger digital advertising, seeming to defy the experience of the tech giants. Could it be that ad spending is shifting away from Alphabet and Meta rather than slowing?
- Some 115 companies in our Russell 1000 universe report this week. Probably the biggest and most closely watched will be Walt Disney on Tuesday.
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Summary
- Earnings have been mostly positive, but equities succumbed to the pressures of a hawkish Fed, a robust labour market report and higher Treasury yields.
- Tech companies that provide cloud services and equipment to companies looking to upgrade their technology are doing well, those that are consumer-facing less so.
- The New York Times reported stronger digital advertising, seeming to defy the experience of the tech giants. Could it be that ad spending is shifting away from Alphabet and Meta rather than slowing?
- Some 115 companies in our Russell 1000 universe report this week. Probably the biggest and most closely watched will be Walt Disney on Tuesday.
What We Learned Last Week
The message from earnings was mostly positive last week. Some 85% of the S&P 500 (SPX) have now reported 3Q earnings with an overall beat of 3.1%. But a hawkish Fed and robust labour report combined to push the 10-year Treasury up 16bp to 4.16% and knock the SPX down 3.4% to 3,771.
The NASDAQ 100 fared worse, dropping 6% to 10,857. It is now trading near our measure of fair value after being more than 15% when earnings season started. We expect it to trade in a range for now, pending new information on earnings or the economic outlook.
We acknowledge the underlying strength of the US economy and labour market. But equities are unlikely to mount a sustained rally while the Fed raises rates. And the risk is the pressure of higher rates will cause economic and earnings growth to slow, which will put downward pressure on equities. That is why we continue to underweight equities in our overall Asset Allocation framework.
Due to inventory build-up, the pattern of consumer-facing tech companies reporting weak earnings or outlooks continues. The latest victim is telecom chipmaker Qualcomm (QCOM). But tech companies focused on providing equipment and software to companies looking to migrate to the cloud or automate more of their processes continue to report strong earnings and robust outlooks. These include Microchip Technology (MCHP), Lattice Semiconductor (LSCC), Arrow Electronics (ARW), and On Semiconductor (ON).
If we see these kinds of companies faltering, we can be sure a recession is about to hit.
Warner Brothers Discovery (WBD) missed on earnings and revenue, partly because of merger costs and soft ad revenue. This continues a pattern by Alphabet (GOOG) and Meta (META), which pointed to economic headwinds for weak ad spending. Yet The New York Times (NYT) reported robust results due to rising subscribers and higher ad revenue.
That ad spending would be nosediving seems surprising given the underlying economic strength and strong consumer spending. More likely is that Apple’s (AAPL) move to allow people to opt out of tracking on their iPhones has flummoxed the algorithms that enable GOOG and META to target ads to specific consumers, and advertisers are returning to more traditional media. We will watch to see if this is the case.
One final comment – consumer staples companies such as Kellogg (K), Monster Beverage (MNST), and Mondelez International (MDLZ) continue to report that they have been able to pass on rising costs without loss of volumes. This points again to underlying economic strength and inflationary pressure and highlights that the Fed has a way to go to slow the economy and inflation.
The Week Ahead
The pace of earnings slows a bit, as about 115 companies in our Russell 1000 universe are slated to report this week. We will see a good mix of industrial and tech companies reporting, along with several bellwether consumer discretionary names. Among the highlights to watch for are the following:
Monday
- Will Choice Hotels (CCH) follow other hotel companies such as Marriott International (MAR), Host Hotels and Resorts (HST), and Hyatt Hotels Corp (H) with solid earnings and bright outlooks?
- Lyft Inc (LYFT) is still struggling to turn a profit. Is the return to the office trend starting to make a difference?
- Data analytics software vendor Palantir Technology (PLTR) should confirm companies in this niche are doing well.
Tuesday
- People are eating out and travelling again, but apparently not going to movies yet. AMC Entertainment (AMC) will shed light on the outlook for the big screen as streaming services for the (not so) small screen at home proliferate.
- DuPont de Nemours (DD) provides a critical read on whether manufacturers are buying chemicals, adhesives, and other raw materials needed to make things.
- Grocery Outlet (GO), a smaller and more specialised food vendor, will probably confirm what we are hearing from other food companies – people can and are paying up.
- Planet Fitness (PLNT) results will likely further show that its gyms have supplanted Peloton (PTON) as the workout of choice.
- Walt Disney Co. (DIS) has a finger in every entertainment pie – destination resorts, streaming, movies. But most investors will be focusing on its subscriber base.
Wednesday
- Donuts, anyone? DR Horton Inc. (DHI) probably sold a lot!
- We were surprised at how strong demand has been for RVs this year. Rivian Automotive Inc. (RIVN), a maker of specialised vans and sport utilities, will be hoping to benefit from that enthusiasm.
- Wynn Resorts should follow Caesars Entertainment (CZR) and Las Vegas Sands Corp (LVS) with strong results and outlook.
Thursday
- Six Flags Entertainment (SIX) is one theme park operator that did not benefit from the surge in demand for destination entertainment earlier this year. We will find out if things improved over the summer.
Friday
- It is Veterans Day in the US – no companies are scheduled to report.