EARNINGS WATCH

Morgan Stanley Says Unclear Growth Signals to Cap Stock Gains

A double whammy of economic uncertainty and a weak period for corporate earnings forecasts is likely to cap stock market gains, according to Morgan Stanley’s Michael Wilson.

The strategist — among the most notable bearish voices on US equities until last year — said he expects the S&P 500 Index to trade in a range of 5,000 to 5,400 points as macroeconomic data flash no clear signals over the short term. The upper end of that range implies gains of just 1% from current levels, while the lower end would mean a decline of 6.4%.

In addition, analysts’ profit downgrades are expected to outnumber upgrades in line with seasonal weakness, “which is one reason why the third quarter is typically the most challenging for stocks,” Wilson wrote in a note. (…)

Growth fears took the shine off an upbeat second-quarter earnings season. S&P 500 companies are on track to post a 13% jump in profits, the strongest gain since 2021. Still, the share of firms beating sales estimates is the smallest since 2019, fueling concerns about the resilience of profit margins. (…)

Ed Yardeni’s NERI chart, which uses LSEG data looks different:

From the horse’s mouth:

455 companies in the S&P 500 Index have reported earnings for Q2 2024. Of these companies, 78.2% reported earnings above analyst expectations and 16.7% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 4.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 7.3%.

Of these companies, 58.7% reported revenue above analyst expectations and 41.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of
companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 1.1% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 24Q2 is 12.4%. If the energy sector is excluded, the growth rate improves to 13.2%.

The estimated revenue growth rate for the S&P 500 for 24Q2 is 5.3%. If the energy sector is excluded, the growth rate declines to 5.1%.

The estimated earnings growth rate for the S&P 500 for 24Q3 is 6.1%. If the energy sector is excluded, the growth rate improves to 7.5%.

Revisions are mostly up in the last 3 weeks which comprise most of the Q2 earnings releases:

And guidance is not worsening:

Yet, one month ago, Q3 growth rates were +5.3% for all S&P 500 companies ex-Energy revenues and +9.4% for earnings ex-E. They are now +5.0% and 7.5% respectively.

Q4 revenues were seen up 5.5% and earnings +16.2%. They are now +5.3% and 15.1% respectively.

Trailing EPS are now $232.27 ($230.77 one month ago). Full year 2024e: $243.51 ($243.38). Forward EPS: $258.77e ($261.17). Full year 2025e: $279.52 ($278.61)

Understand that inflation has slowed from 4.0% (core CPI) in Q4’23 to 3.4% in Q2’24.

Earnings Growth in US Finally Showing Up Outside Tech Megacaps BI data show S&P 500 earnings ex-Mag-7 set to grow 7.4% in 2Q

(…) The BI data show that earnings for S&P 500 companies, excluding the Magnificent Seven, are set to grow 7.4% in the second quarter from the same time a year ago, after five straight quarters of declines. Profits for the megacap tech group — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Tesla Inc. and Nvidia — are set to rise 35%. It’s a brisk pace, to be sure, but one that represents a sharp slowdown from even bigger gains over the past year. (…)

Overall, executives expressed optimism for future earnings, with BI’s data trending positive for the third quarter. In fact, the gauge of earnings guidance momentum — derived in part from the ratio of increased versus reduced guidance — is expected to be positive in the July-to-September period for the first time since 2021.

Data from Bank of America showed the same trend. Strategist Subramanian noted that analysts’ average estimates for both 2024 and 2025 are holding up. “This suggests that analysts are relatively comfortable with their estimates,” she said. (…)

Weaker Demand for Treasuries

From Apollo Management:

When a US government bond auction is announced, a new when-issued bond starts trading, which allows the market to trade the new Treasury bond before the auction has completed. Such trading activity promotes price discovery and allows the market to trade the government bond before it is available for sale.

When the auction is complete, the yield difference between the when-issued bond and the new bond is generally called the tail. Specifically, a one basis point tail means that the auction result was one basis point higher than where the when-issued yield was trading minutes before the auction was completed, normally at 1 p.m.

This past week, there were auctions for 10-year and 30-year Treasuries, and they both tailed three basis points, which signals that demand for Treasuries was significantly weaker than the market expected. The chart below shows tails for 10-year auctions since January 2020, and the chart shows that a three basis point tail is very significant.

The bottom line is that the trend of larger and more frequent tails since the Fed started raising interest rates in March 2022 underscores the importance of investors closely monitoring Treasury auction metrics. These metrics can provide early indications of weakening demand for Treasuries.

FYI

Source:  @TheTranscript

• PredictIt.com suggests that the outcome is hard to predict (chart). Even harder to predict is the outcome of the congressional races.

• Trump Restates His Desire for More Say Over the Fed The former president made his clearest statement yet that he wants influence over the central bank’s rate policy if he wins re-election.

Donald Trump has repeatedly questioned the principle of the Fed’s political independence and criticized Jay Powell, the central bank’s chair. (Remember when he called Powell a “bigger enemy” than President Xi Jinping of China?) (…)

“I feel that the president should have at least say in there,” Trump said at a news conference at Mar-a-Lago. “Yeah, I feel that strongly.” (…)

It’s worth noting that the Fed does more than set rates: It also regulates the nation’s banks, and is the lender of last resort for that system. The central bank is also a huge market participant during crises, buying securities and other financial assets to maintain liquidity.

• The Israeli intelligence community’s updated assessment is that Iran is poised to attack Israel directly in retaliation for the assassination of Hamas’ political leader in Tehran and is likely to do it within days, sources told Axios’ Barak Ravid.

The new intelligence assessment indicates an attack could come before the Gaza hostage and ceasefire talks planned for Thursday. That potentially jeopardizes negotiations at what Israeli officials have said is a “now-or-never” moment for a potential deal between Israel and Hamas.

Israeli Defense Minister Yoav Gallant told U.S. Defense Secretary Lloyd Austin yesterday that the Iranian military preparations suggest Iran is getting ready for a large-scale attack, a source told Axios.

Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

CONSUMER WATCH

Spending in July:

Bank of America aggregated credit and debit card spending per household fell 0.4% year-over-year (YoY) in July, compared to a drop of 0.5% YoY in June. On a monthly, seasonally adjusted (SA) basis, July’s total card spending per household rose 0.3% month-over-month (MoM), following a drop of 0.1% MoM in June.

July was a strong month for services, including restaurants spending, increasing by 0.5% MoM SA, while retail spending ex restaurants rose 0.2%.

The summer travel season appears to be providing momentum to consumer spending and internationally, some of this has been ‘event’ driven. Bank of America internal data shows a 27% rise in spending in Paris and other Olympic cities over the period July 25th to August 4th compared to the same days in 2023. This figure compares to around a 23% increase in spending in London at the time of the 2012 Olympics.

Taylor Swift concerts in Europe also continue to draw US consumers too, and we saw a 35% YoY increase in spending in the cities hosting the Eras tour compared to spending in these cities over the same dates in last year.

In addition, a number of one-off factors influenced spending in July. At the start of the month, Hurricane Beryl made landfall in Texas resulting in in some downward impact on spending there. Toward the end of the month, IT system crashes globally may have frustrated some spending. On the upside, online promotions likely boosted retail spending in the middle of the month. Overall, none of these factors seemed to be a significant driver of total card spending in the aggregate.

Labor markets – growing but slowing:

(…) there are no obvious signs of a surge in joblessness in Bank of America internal deposit data on households receiving unemployment income, though there was a small rise in the YoY growth rate of households receiving unemployment income in July 2024 across income cohorts.

We’ve noted many times that the labor market remains a key source of consumer spending momentum. Our data on after-tax wages and salaries growth continues to show robust wage growth with wages for lower- and middle-income households growing faster than higher-income households. It appears that higher-income households wage growth is improving, having been close to zero for much of 2023.

In our view, wage growth should continue to underpin the consumer for some time.

Data on July retail sales will be released next week. Nominal retail trade, though still up 2.0% YoY, has declined MoM in 2 of the last 3 months. I have argued that this apparent slowdown was due to declining goods prices and that volume remained reasonably strong.

This chart shows that retail trade growth is still positive vs CPI-Nondurables and especially CPI-Durables:

In Q2, retail trade grew 0.5% QoQ but CPI-Nondurables rose 0.3% and CPI-Durables declined 1.2%. My proxy for retail inflation was –0.2% QoQ in Q2 suggesting real growth of 0.7% or 2.8% annualized.

Here’s what BofA data says:

A concern would be if households are buying fewer things per transaction, essentially reducing their ‘basket size’ and implying less overall volume expansion for a given number of transactions. While this is possible, Exhibit 9 and Exhibit 10 show that consumers are also increasingly looking to stretch their dollars. For example, in groceries and clothing, spending growth in stores focusing on ‘value’ products is stronger than overall spending in these categories. As a result, we think it likely that consumers have thus far been successful at wringing volume growth from their spending by becoming more price sensitive, even as overall inflation drops back.

  

Interestingly, BofA data also suggest that “For now, however, credit card utilization rates remain below 2019 levels.”

It’s important to note that not all the drawdown in savings and checking balances has been spent, either. Some households have been moving their money into less-liquid investment accounts. Bank of America internal data shows the July 2024 median balances per account for certificates of deposits (CDs) are up 25% YoY, on top of the 70% YoY growth that occurred this time last year (Exhibit 13). Some households may also have been taking money out of liquid deposits to invest directly in stocks, bonds and other financial assets.

Another area of household savings are retirement accounts. According to Bank of America’s 2024 Q2 Participant Pulse, the average 401(k) contribution rate of 6.5% remained consistent with year-end 2023, and more participants – almost 90% – kept their contribution rate consistent than in 1Q (81.2%). However, there was an increase in 401(k) plan participants that took a hardship distribution in 2Q 2024 to 0.67% from 0.61% in 1Q 2024 and 0.52% in 2Q 2023. While the overall percentage share is low, it could be an indication that there are some pressures building for some pockets of consumers.

Job Growth Stalls in Canada; Unemployment Rate Holds at 6.4% Country loses 2.8K jobs in July; economists saw 25K gain

(…) Wage growth for permanent employees decelerated to 5.2% from 5.6% a month earlier, though it remained faster than expectations of 4.8%.

Combined, the data point to an economy that’s struggling to churn out jobs, and while the unemployment rate didn’t rise as expected, it’s still 1.4 percentage points higher than in January of last year. The report adds to evidence that Canada’s job market is on track to loosen gradually, preserving a soft landing without a sharp spike in unemployment so far. (…)

“While the strong increase in full-time jobs is a positive by pushing hours worked higher, most of the job creation looks to be once again in the public sector. This suggests that economic activity remains weak in the private sector. In addition, the details shows the labour market deteriorated more for the younger cohorts,” he said.

The youth unemployment rate surged in July, rising 0.7 percentage points to 14.2%, the highest level since September 2012 outside the pandemic.

Total hours worked rose 1.9% from a year ago and were up 1% on the month.

The participation rate fell to 65%, as the labor force fell by 11,300, the first decline since September 2022.

The employment rate — the proportion of the working-age population that’s employed — fell 0.2 percentage point to 60.9%.

Job losses were led by decreases by retail and wholesale trade, as well as the financial sector, which shed 44,100 and 15,000 positions respectively. Public administration hiring rose 20,000. (…)