Earnings Outlook: Vacation and Cruise Plans in Focus This Week

Summary 

• Equities took a hit on concerns about a hawkish Federal Reserve (Fed), but finished the week with continued hopes that priority is still a soft landing. 
• FedEx confirmed that the freight recession persists as consumers buy less stuff and industry works off still high inventories. 

• Costco and Carnival Cruises will provide key updates on what consumers are spending their money on these days.  

What We Learned Last Week 

Last week was a good illustration of the various forces driving equities. As it sank in that the Fed is poised to keep pushing rates higher, the S&P 500 (SPX) dropped 2.6% and the NASDAQ 100 (NDX) fell 3.3% (Chart 1). Then on Friday markets rallied for much of the day before closing little changed. Essentially markets seemed to be regaining some confidence that whatever the Fed says it will err on the side of keeping the recovery going and avoiding a hard landing.  

Recent earnings reports provide some interesting colour on the evolving macro outlook. 

FedEx (FDX) – Restructuring at FDX resulted in substantial cost cuts and a solid earnings beat – although revenue missed modestly. FDX equity was up 4.5% on the news.  

FDX picked up share from UPS, which was operating under threat of a strike, and from the bankruptcy of freight hauler Yellow (YELL). Still, package volumes declined. Sales fell 6% YoY and FDX lowered its sales forecast to flat from an up low single-digits percent increase. 

Translation – even with one-time share gains, the freight and cargo recession is still firmly in place with little indication that it will improve in coming quarters. This is an ongoing headwind for the broader economy. 

General Mills (GIS) – Cereal and processed food giant GIS managed a modest beat on revenue, EPS, and gross margin. It affirmed its revenue and outlook. Two points of note:  

• Business is shifting to club, discount, and dollar store channels as more people respond to inflation by seeking out bargains on food and staples.  

• Pet food volumes dropped 5% vs expectations of a modest gain. This was attributed to more people working at the office and having less time to pamper their pets. This is another one of those oddball adjustments that are keeping forecasters off balance as society and the economy continue to readjust to a new normal after the Covid lockdowns. 

Darden Restaurants (DRI) – Like most other companies, Darden Restaurants (DRI) beat revenue and EPS expectations easily. It then sold off by 2.7% on concerns about potential demand as student loan forbearance programs end and on some weakness in its high-end restaurants. DRI owns middle-class chains like Olive Garden and LongHorn Steakhouse; and high-end eateries such as Capital Grille and Ruth Chris Steakhouse. 

Do people who can afford to eat at high-end restaurants really need to cut back? Maybe the novelty of eating out after the post-Covid lockdown surge has worn off? Or more likely, middle-income people splurged on an expensive meal and have not returned. 

In any case, there was little in DRI’s earnings or comments to suggest people have reached a point where they need to cut back on restaurant meals. This is one bottoms up datapoint, but it is a plus for the near-term economic outlook. 

On balance, then, a mixed outlook, and a portrait of an economy still adjusting to a post-Covid world – but still solid.   

Equities Still on Hold 

We expect equities to remain in the trading range of recent months. We see little prospect of a sustained rally until it is clear the Fed will not raise rates further. The risks for now are more tilted to the downside, but we do not expect a significant selloff. That will require some clear catalyst, such as rising unemployment or indications that the Fed could turn to a Taylor Rule policy regime and push Fed Funds to above 7%. 

The Week Ahead 

The pace of earnings picks up, with 15 companies in our Russell 1000 universe slated to report. Several of them are key players in today’s economy. 

Monday 

• RV manufacturer Thor Industries (THO) should attract outsized attention as an indicator of evolving consumer demand for (very) big ticket discretionary purchases. 

Tuesday  

• Costco Wholesale Corp. (COST) will surely report strong sales; the key question will be the extent to which consumers are cutting back on more discretionary items and how much of a boost is it getting from inflation. 

• Cintas (CTAS) provides companies with uniforms, restroom, and cafeteria supplies (etc.). It may provide colour on how returning to the office is going. 

Wednesday  

• Micron Technology (MU), maker of more commodity semiconductors, will report on where semiconductor inventories stand now, as well as how it plans to manage a ban by China on its activities there. 

Thursday 

• Carmax (KMX) will report on how it is riding out ongoing volatility in used car prices and may comment on how the UAW strike may affect used car prices and demand. 

• Nike Inc. (NKE) will be another read on consumer demand for high-end sportswear. 
• Vail Resorts (MTN) may discuss season ticket sales for the upcoming ski season, a measure of consumer demand for experiences over stuff. 

Friday 

• Carnival Corp (CCL) has sold off by a quarter since June (vs. 2.4% for SPX) on concerns about rising rates and its heavy debt load. But the key question for equity investors and creditors alike will be whether people’s enthusiasm for booking cruises shows signs of flagging. 

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.)