Oith earnings season now well underway and earnings accumulating rapidly, it is sometimes easy to overlook some important reports, both good and bad. Investors naturally tend to focus on the earnings of companies in which they already own stock, or at least those in which they are considering buying stock. However, this may mean that some reports that are condition indicators for businesses and/or consumers may be overlooked. That’s why, at the end of each week during earnings season, I look back on what we’ve seen, looking specifically for this sort of thing.
The week started on a very positive note as a large number of regional banks and other mid-sized banks including HDFC Bank (HDB), Guaranty Bankshares (GNTY) and FB Financial (FBK) all exceeded expectations. I wrote last week that regional bank earnings were something to watch this week and the positivity that stemmed from those Monday results continued as banks like PNC (PNC), US Bank (USB), Regions Financial (RF) and Huntington Bancshares (HBAN) all released reports and analyst calls that sent their stocks skyrocketing.
Undoubtedly, these mid-sized bank earnings are the most positive thing this week, indicating that the likelihood of a widespread crisis in mid-sized banks is now virtually nil. There have been far more high-profile reports, but while the encouraging news from the big banks and the good news from giants like IBM (IBM) are undoubtedly positive, their success was not completely unexpected, and none of them has had much positive impact beyond his. stocks or sectors. With regional banks, however, there were legitimate fears heading into earnings season, and those fears have now been allayed. There could still be weaknesses pointed out by those to come but, if there are, it will now be seen as isolated cases, and not as a systemic problem that could weaken the banking system as a whole.
This quarter, as is usually the case, profit losses that matter a lot are a little harder to find, mainly because there are so few of them. For reasons too many and varied to address here, an average of about seventy percent of S&P 500 companies beat Wall Street estimates for EPS each quarter, so failures of any kind are rare. What you sometimes see, however, are earnings that are positive for the quarter just ended, but come with comments suggesting future weakness. Two market sectors stand out in this regard.
The first is the one that some people consider fundamentally irrelevant these days: oil. Or to be more precise, oil services. Baker Hughes (BKR) and Halliburton (HAL) reported positive surprises on Wednesday, but both also said they expected a slowdown in business as the 25-30% drop in crude over the year latest not only discouraged new projects, but also prompted some platform closures. This pattern of a beat with negatives was repeated this morning with SLB (SLB) (formerly known as Schlumberger). In a narrow sense, this means job losses in the oil and gas industry but, more worryingly, it also suggests that oil companies, which have always been very good at estimating future demand, anticipate a slowdown in the second half of the year.
The other somewhat worrying result came from automotive retailer Auto Nation (AN) this morning. As with BKR and HAL, they exceeded expectations for the second quarter, but there were a few warning signs. In their case, it slowed the demand for used cars. They made up for it with a rebound in new car sales, but there’s a possible reason that every investor would be concerned about. Used cars don’t come with manufacturer loan interest incentives, and if that’s what drives people to buy new cars, even as new and used car supply issues ease, it signals that rate hikes are finally starting to have an impact in the real world.
One of the most remarkable things about the first half of this year has been the resilience of the US economy in the face of continued Fed rate hikes. Big gains in equities tell you that traders and investors are betting that resilience is lasting, but if higher rates are only now starting to impact used car sales, it seems more likely to have more to do with a lag between Fed policy changes and their effects on the consumer. If so, the full effects of Fed tightening have yet to be felt, and if that turns out to be the case, that suggests we expect a tough second half of 2023.
When you separate out the good and the bad like that, the message for this week’s earnings, while appearing on the surface to be overwhelmingly positive for stocks, isn’t really that clear. The positive is really about avoiding major downside risk, while the negative hints at potential issues over the next few months. Taken together, this suggests that while history and logic point to both more earnings beats and generally positive market sentiment over the coming weeks, the second half of the year could be a more challenging environment than markets currently expect.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.