Walmart CEO Doug McMillon
The stock market’s big turnaround in August was impressive in many ways, but when I step back, there’s a big question being asked and answered: Is the Fed behind the curve?
This issue involves a set of assumptions about the US economy, and if we look at the economic data, there is cause for concern. The Institute for Supply Management’s services index fell in June to its lowest level since 2020, global commodity prices fell, and unemployment rates in the US rose.
US stocks have been given a boost by strong retail sales data, but when I look at the US data picture over the past two months, there is no clear trend. What is clear, however, is US companies.
Scotia highlights here how rarely the word “recession” is mentioned in earnings calls:
“We haven’t seen a general weakness in consumption so far,” Walmart’s CEO said, a point echoed by Target and several other companies.
There are certainly pockets of weakness like McDonald’s and anything housing-related, but these seem like outliers. McDonald’s has been criticized for pricing (it says there’s a strong response to $5 meals) and housing is very price-sensitive.
What emerges is a picture of a consumer who is selective about pricing but not in a recessionary state of mind, at least not yet.
On the earnings front, the picture was generally positive, according to Scotia:
The second-quarter earnings season in the US is essentially over, with 95% of companies reporting. The S&P 500’s Q2 earnings per share came in at $59.86, better than the $58.64 forecast at the start of the reporting season. See Chart 3. The outperformance pushed earnings growth to 11% year-over-year versus the 9% forecast when the reporting season began. At the company level, the average earnings beat was 4.4%, just slightly below the two-year average of 4.6%, but above the five-year pre-pandemic average of 3.8%. Hard to beat, the top line also beat expectations, up +5.7% year-over-year, the best reading since Q4 2022, with 60% of companies beating Wall Street expectations. Finally, the proportion of sectors reporting a decline in annual earnings remained stable at 27% (three sectors reported a decline in earnings per share), but this is well below the levels recorded in 2022 when more than half of the sectors suffered an earnings contraction.
Moreover:
- Wall Street has not cut its dividend more than usual going forward.
- Today’s revenue forecasts are slightly higher than June levels for both 2024 and 2025.
- Low one-time fees, discounts or non-cash expenses, indicating quality earnings.
Scotia sums it up well: “If a sharp macroeconomic slowdown in the US has already begun, it has not yet shown up in earnings numbers (actual or expected).”