Kristina Hooper, Chief Global Market Strategist at Invesco, provides her key learnings from the start of Q3 earnings season, noting that overall they suggest positive US economy and market trends. She also shares her thoughts on Chinese stimulus measures, arguing that they signal a positive outlook for the medium- and long-term, and offer potential for structural reforms.
Earnings season has just begun, with 6% of the companies in the S&P 500 Index having reported earnings so far. S&P 500 earnings growth for the third quarter is currently expected to be 4.1%. However, there are significant differences between sectors — technology earnings growth expectations are 14.9%, while earnings growth for the materials and energy sectors are forecast to be negative.1 In addition to the financial data being reported, the transcripts from earnings calls are giving us some interesting insights into the economy as corporate executives share their observations and outlooks.
It’s important to note that most S&P 500 companies have beaten expectations in previous quarters. In fact, the actual earnings growth rate for the index has exceeded the estimated earnings growth rate in 37 of the last 40 quarters. FactSet Research anticipates this will happen again this quarter, and that earnings growth will likely end up being around 7% year-over-year after actual earnings are reported for all index companies, well above the current estimate of 4.1%. This should be supportive of stocks.
Of course, I’m also interested in earnings season for what it can tell me about the strength of the economy (or lack thereof), risks to the economy, different sectors in the economy, different consumer segments, as well as the outlook for the near term. I went through the earnings call transcripts of a number of companies — both in the S&P 500 and outside it — that reported earnings last week. Here are some learnings from those calls:
- The US economy remains in good shape, with a soft landing likely. As one major financial services company explained, “These results are consistent with a soft landing. That’s pretty consistent with this kind of Goldilocks economic situation.”
- In general, consumers are healthy. As the same major financial services company explained: “So overall, we see the spending patterns as being sort of solid, consistent with the narrative that the consumer is on solid footing and consistent with a strong labor market.” Another financial services company shared, “We continue to look for changes in consumer health, but we have not seen meaningful changes in trends when looking at delinquency statistics across our consumer credit portfolios.” However, in general consumers are continuing to be price conscious; several companies described them as “discerning” and other companies described them as seeking “value.”
- Higher income consumers seem to still be powering the US economy. As a major airline carrier explained on its earnings call, “Consumers are continuing to prioritize premium experiences, and our core customer base is in a healthy financial position with travel remaining a top spend category.” It seems that higher income consumers are compensating for weakness among lower income consumers. As explained on a financial services earnings call, “We continue to see more pronounced stress in certain customer segments with lower deposit and asset levels, where inflation has partially offset strong employment and wage growth.” This makes sense, given that higher income consumers are a smaller portion of the population but are generally considered responsible for the majority of US consumer spending.
- The labor market seems to be the key to the health of the consumer. As one financial services company articulated, “Overall, customers in our US consumer businesses continue to hold up relatively well, benefiting from a strong labor market and wage growth.” Companies that have seen some consumer weakness attribute it to the labor market. One consumer beverage company explained, “…ongoing macroeconomic headwinds, particularly rising unemployment, have led to a recent deceleration in the rate of growth of consumer demand for our products…”
- Corporations are in good shape as well. As explained on a financial services company earnings call, “Company balance sheets are strong, contributing to both consumption and investment in the economy…” Companies seem to be feeling optimistic about next year. As the airline carrier explained, “Corporate travel continues to improve…” Their recent corporate survey showed 85% of respondents expect their travel spend to increase in 2025.
- We can’t forget the economic risk created by a rise in trade wars. One industrial company shared that one reason for pressure on its margins was an increase in trade barriers, “…certain countries have raised import duties, lifting the cost to us of moving product across borders.”
All in all, these initial earnings calls have offered some confirmation of the resilience we’ve been seeing in recent US economic data – and a reminder of some of the risks.
More details emerge on China’s stimulus plan
In other news, I’ve been talking about the great potential impact of the stimulus package Chinese policymakers announced several weeks ago. At a press conference over the weekend, we got more details from the Chinese Ministry of Finance about their plans to use the Ministry’s balance sheet to support longer-term growth. While the specific amount of the new stimulus package wasn’t provided, the plan calls for an increase in government debt to help local governments’ balance sheets, re-capitalize state-owned banks, support the property market, and deliver financial support to groups of people in need. This is a comprehensive plan, and our initial take is that it’s likely to benefit the economy and markets in the medium and longer term with the intention of making positive structural changes.
Looking ahead
This week will bring more earnings reports and some key data including US retail sales and US industrial production – which mean more insight into the strength of the US economy. In addition, we’ll get reports on Canada and UK inflation as well as eurozone economic sentiment among other data releases.
As I read the earnings call transcripts, I will be focused on any guidance around job cuts. As I mentioned above, it seems the strength of the US consumer going forward will be dictated by the strength of the labor market. Despite some recent positive economic data, I am ever more vigilant in looking for cracks in the US economy, the epicenter of which would likely be a weakening in the labor market. With initial US jobless claims spiking last week to the highest level in more than a year, I will be looking for any signs of weakening in the labor market – since it arguably holds the key to the health of the US consumer, which in turn holds the key to the health of the US economy
With contributions from David Chao
