Earnings Outlook: Economic Data Trumps Earnings This Week

Summary

• Are equities settling into a trading range now, or is the slide set to resume? It depends on the data.
• Federal Reserve (Fed) Chair Jerome Powell offered a modestly hawkish view on rates – but also implied that the Fed is still hoping to tame inflation without a hard landing. That spells dovish to us.
• Fiscal spending should keep the economy chugging along, although softer discretionary consumer spending is a downside risk.
• We would see equities continuing to slide as an evolving buy-the-dip opportunity.
• About 33 companies report this week, including electronics retail bellwether Best Buy, which may provide clues on whether the drought in consumer demand for tech products is near a bottom.
• But the big draw this week is economic data on consumption, housing prices, and the all-important monthly labour market report.

Market Implications

• We continue to see some risk that the longer end of the yield curve rises further.
• We like to be tactically underweight in the interest-sensitive homebuilder sector, via the XHB ETF.

What We Learned Last Week

Equities seemed to hit a floor last week, with the S&P 500 (SPX) trading in a narrow range around 4,400 and the NASDAQ 100 (NDX) wrapped around 14,875. Whether the market is settling into a trading range, or the slide of recent weeks resumes, will – to paraphrase Powell – be largely data-dependent. We expect equities to trade in a range for now.

In his Jackson Hole speech last week, Powell was moderately hawkish when he indicated that the Fed was prepared to raise rates further and keep them high for longer. But he also emphasised that the Fed is watching closely to see how higher rates so far will affect the economy in coming months.

Translation – the Fed is still prepared to err on the side of dovishness to try to slow inflation and avoid a hard landing.

A second factor supporting the economy and equities is the ongoing fiscal stimulus from President Joe Biden’s American Rescue Plan Act (infrastructure), the Inflation Reduction Act (climate change), and CHIPS and Science Act (semiconductors). This spending will make it difficult for the Fed to cut rates any time soon – but it also is not rate-dependent and will produce the kind of investment that could boost productivity in coming years and even decades.

On the downside are recent earnings from a variety of retailers, including Macy’s (M), Kohl’s (KSS), Dick’s Sporting Goods (DKS), Nordstrom (JWN), Victoria’s Secret (VSCO), and even discount vendor Dollar Tree (DLTR). Consumers are cutting back on most discretionary purchases. Higher-income people may be substituting services for stuff, but among lower-income consumers, they are buying less of even staples. Markets reacted positively to July retail sales, but the year-over-year gain was only 3.2% – in line with inflation and implying no meaningful growth in real terms. For a consumer-driven economy, that points to potential softer growth in coming quarters.

Most companies are beating earnings and revenue expectations, but investors are reacting strongly to their outlooks. Those that beat expectations outlooks, such as personal finance vendor Intuit (INTU) are rallying 5% and more. Those that disappoint are getting hit with selloffs. Software vendor SnowFlake (SNOW) confirmed its outlook, and mentioned AI products in the pipeline, but after cutting the outlook in the previous two quarters, investors clearly wanted more.

Put together and we see a market in a trading range for now. We cannot rule out a further slide, but barring some new negative shock, we would view that as a buy-the-dip opportunity.

The Week Ahead

It will be another quiet week on the earnings front, with about 33 companies reporting. However, tomorrow sees electronics retailer Best Buy (BBY) update markets on consumer appetite for tech equipment and toys.

Away from that, this week will be about data. In addition to the usual month-end releases (JOLTS, consumption, home prices etc.), the monthly labour report comes early on 1 September. Investors can trade fretting about the labour market over the Labour Day weekend to pondering how to trade it come next week.

Tuesday

• Best Buy (BBY), the leading retailer of consumer tech, may indicate whether the demand drought for PCs and other electronics has bottomed.

Wednesday

• Discount apparel retailer Burlington Stores (BURL) will be another test of what consumers are buying these days, and whether they will continue.
• The two Hewlett Packards (HPE and HPQ) focus on the enterprise tech and PC/printer businesses respectively – both are probably facing headwinds going into H2 2023.

Thursday

• Alcoholic beverage giant Brown-Forman (BF/B) is probably selling less to households these days; are restaurants making up the difference?
• Five Below (FIVE) retails the kind of discretionary items that people so far seem to need – fashionable phone cases, chargers, party supplies, beauty products etc. If that kind of demand is flagging, then consumers across the income spectrum really are cutting back.
• VMware (VMW) provides a variety of enterprise software solutions; it may give some insight into how corporate America’s capital spending plans are evolving in 2023.

Friday

• Enterprise technology companies Broadcom (AVCO) and Ciena (CIEN) report – will they try to link their outlooks to AI?
• Campbell Soups (CPB) and Hormel Foods (HRL) will provide colour on how consumer demand for name-brand foods is holding up.
• Lululemon Athletica (LULU) will provide its take on whether people are still willing to pay up to look good when they go to the gym – or just out.
• Ollie’s Bargain Outlet Holdings (OLLI) may gain from middle-class shoppers stopping by for discount merchandise.

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.)