Stock bulls are coming off another winning week as investors turn attentions to Q4 earnings and the reopening in China.
Earnings season
Big banks “unofficially” kicked off earnings season on Friday with mixed results. JPMorgan and Bank of America delivered profit beats while Wells Fargo and Citigroup both fell short of analyst expectations.
Notably, banks reported bigger-than-expected increases in loan loss provisions, which is money that lenders set aside to to cover loans that might go bad. That reflects a general consensus that the US economy is at risk of slipping into recession later this year which could obviously mean higher default rates for banks.
JPMorgan Chase CEO Jamie Dimon said in the bank’s earnings statement that although the economy is still strong and that consumers and businesses are spending and healthy, “we still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher.”
Bears believe companies’ earnings results in the days and weeks ahead will carry similar warnings. They also warn that disappointing forward guidance might exacerbate ongoing fears of a prolonged “earnings recession” as companies still face a difficult environment ahead.
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One big area of concern is the impact that “deflation” might have on corporate profits. Many companies – including consumer goods companies, rental and real estate groups, car companies, etc. – have been able to offset rising operating expenses and keep margins elevated by boosting prices. But sky-high prices and changing shopping trends have hit consumer demand and already led to pockets of rapid deflation for things like clothing, exercise gear, cars, and electronics, just to name a few.
These declines have been accompanied by falling costs for many raw materials and shipping, but labor costs – the largest expense for most companies – look set to stay elevated with employers still trying to fill over 10 million jobs.
Meaning companies now need to navigate a disinflationary pricing environment amid still-elevated labor costs. If this dynamic stays in place, the result could be even more downward pressure on profit margins in the quarters ahead.
Data to watch
Today, Goldman Sachs and Morgan Stanley will cap off Wall Street bank earnings. Interactive Brokers, Pinnacle Financial, and United Airlines also report results today.
Other key results this week will include Alcoa, Charles Schwab, Discover, JB Hunt, Kinder Morgan, and Prologis on Wednesday; American Airlines, Concentrix, Fastenal, Neflix, and Procter & Gamble on Thursday; and Ally Financial, Ericsson, Schlumberger, and State Street on Friday.
The only US economic data due today is Empire State Manufacturing. Investors this week are also anxious to see results for the Producer Price Index and Retail Sales tomorrow, as well as Housing Starts on Thursday and Existing Home Sales on Friday.
Additionally, investors will have a lot of “Fed speak” to digest this week with several US central bank officials set to deliver remarks, including Fed Vice Chair Lael Brainard on Thursday.
Big Banks “Unofficially” Kicked Off Earnings Season
Wishing you a great week!
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