Walmart CEO Doug McMillon
The big turnaround in stock markets in August was impressive in many ways, but when I step back, a big question is asked and answered: Is the Fed behind?
There are a number of assumptions about the US economy embedded in this question, and looking at the economic data, there is reason to be concerned. The ISM services index fell to its lowest level since 2020 in June, global commodity prices have fallen, and US unemployment has risen.
A big boost for US stocks came from strong retail sales, but when I look at the US data for the last two months, there is no clear trend. What was clear, however, was the performance of American companies.
Scotia highlights how rarely the topic of “recession” was mentioned in conference calls about quarterly results:
“So far, we’re not seeing a weaker consumer overall,” Walmart’s CEO said. Target and many other companies echo that sentiment.
Certainly there have been some weak spots like McDonald’s and anything related to housing, but those are more outliers. McDonald’s has faced resistance with its pricing (and said there was a strong response to $5 meals) and housing is very price sensitive.
The picture that emerges is of a consumer who is picky about pricing, but is not – at least not yet – in a recessionary mood.
In terms of overall earnings, Scotia says the picture is positive:
The US Q2 earnings season is essentially over, with 95% of companies having reported. S&P 500 Q2 earnings per share came in at $59.86, better than the $58.64 expected at the start of the earnings season. See Figure 3. Expectation overachievement drove the earnings growth rate to 11% y/y, up from expectations of 9% at the start of the earnings season. At the company level, median earnings overachievement was 4.4%, just slightly below the past two-year average of 4.6%, but above the five-year pre-pandemic average of 3.8%. Revenue, which is harder to manipulate, also beat expectations, rising +5.7% y/y, the best since the last quarter of 2022, as 60% of companies beat Wall Street forecasts. Finally, the percentage of sectors reporting a year-over-year decline in earnings remained stable at 27% (three reported a decline in earnings per share), but was well below 2022 levels, when more than half of the sectors saw earnings decline.
Over and beyond:
- Wall Street has not cut profits more than usual in the future
- Today’s sales forecasts are slightly above June levels for both 2024 and 2025
- Few one-off costs, impairments or non-cash expenses, indicating the quality of earnings
Scotia sums it up well: “If a steep macroeconomic downturn has indeed set in in the US, this is not yet reflected in the earnings figures (actual or expected).”
