With earnings season now well underway and results coming thick and fast, it is sometimes easy to overlook some significant reports, both good and bad. Investors naturally tend to focus on the earnings of companies whose stock they already own, or at least those whose stock they are thinking of buying. However, that can mean that some reports that are indicators of conditions for businesses and or consumers can get overlooked. That is why, at the end of each week during earnings season, I look back at what we have seen, looking specifically for that kind of thing.
The week started on a very positive note, as a slew of regional and other mid-sized banks, including HDFC Bank (HDB), Guaranty Bankshares (GNTY), and FB Financial (FBK) all beat expectations. I wrote last week that regional bank earnings were something to watch this week and the positivity that flowed from those Monday results has continued as banks like PNC (PNC), US Bank (USB), Regions Financial (RF) and Huntington Bancshares (HBAN) all came out with reports and analyst calls that caused their stocks to pop.
Without a doubt, those mid-sized bank earnings are the most positive thing this week, indicating that the odds of a full-blown crisis in mid-sized banks is now basically zero. There have been some much higher profile reports, but while the encouraging news from bigger banks and good news from giants like IBM (IBM) are undoubtedly positives, their success was not completely unexpected, nor do any of them have much positive impact beyond their own stocks or sectors. With regional banks, though, there were legitimate fears coming into earnings season, and those fears have now been allayed. There could still be some weakness reported by those to come but, if there is, that will now be seen as isolated cases, not a systemic problem that could weaken the banking system as a whole.
This quarter, as is usually the case, earnings misses that have broad significance are a little harder to find, mainly because there are so few of them. For reasons that are too many and varied to go into here, an average of around seventy percent of S&P 500 companies beat Wall Street estimates for EPS every quarter, so misses of any kind are rare. What you do sometimes see, though, are earnings that are positive for the quarter just ended, but that come with commentary that suggests future weakness. There are two areas of the market that stand out in that regard.
The first is one that some people see as basically irrelevant these days: oil. Or to be more specific, oilfield services. Both Baker Hughes (BKR) and Halliburton (HAL) reported positive surprises on Wednesday, but both also said that they anticipated a slowdown in their business, as the 25-30% drop in crude over the last year was not only discouraging new projects, but also prompting some rig closures. That pattern of a beat with negatives was repeated this morning with SLB (SLB) (formerly known as Schlumberger). In a narrow sense, that means job losses in the oil and gas industry but, more worryingly, it also suggests that oil companies, who have historically been very good at estimating future demand, are anticipating a slowdown in the second half of the year.
The other somewhat concerning results came from the car retailer Auto Nation (AN) this morning. As with BKR and HAL, they beat expectations for Q2, but there were some warning signs. In their case, it was slowing demand for used cars. They made up for it by way of a bounce back in new car sales, but there is one possible reason that would be of concern to all investors. Used cars don’t come with manufacturers’ loan interest incentives, and if that is what is pushing people to new cars, even as the supply issues in both new and used ease, it indicates that rate hikes are finally beginning to have real world impact.
One of the most remarkable things about the first half of this year has been the resilience of the American economy in the face of continued rate hikes by the Fed. The big gains in stocks tell you that traders and investors are betting that this resilience is sustainable, but if higher rates are only now starting to impact used car sales, it looks more likely that has more to do with a lag between Fed policy changes and their effects on the consumer. If so, the full effects of the Fed’s tightening are yet to be felt, and if that turns out to be the case, it suggests we are in for a rough H2 in 2023.
When you separate out the good and bad like this, the message from earnings this week, while appearing on the surface to be extremely positive for stocks, is not actually that clear cut. The positive is really about the avoidance of a major downside risk, while the negatives hint at potential issues over the next few months. On balance, that suggests that even though history and logic both indicate more earnings beats and a generally positive market mood over the next few weeks, the second half of the year may be a more challenging environment than markets are currently pricing in.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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