Scenes from Q2 earnings season

Mid-week market update: I wrote on the weekend that Q2 earnings season is potentially pivotal for the stock market (see What to watch for in a pivotal earnings season). Going into reporting season, the consensus is calling for a rebound in earning, though the recovery is expected to be stronger in large and mid-caps compared to small-caps.



The very early report card shows relatively upbeat results, though there are some blemishes of concern.



Early report card

In reality, this isn’t quite an early report card and not a mid-term, but the results of a quiz. The big banks reported and the sector has performed well, indicating that the reports were generally well received. Underneath the hood, however, some details of the reports are a little disconcerting.


As examples, both JPM and C are preparing for a sharp rise in unemployment. Here is a key quote from JPM’s Bob Michele, via Bloomberg:

Based on all the stress we’re seeing in the system, we’re pretty confident we’re going to see that sharp rise in unemployment. .. It’s going to feel like a soft landing until you actually hit recession.

Here is a similar quote from Citigroup’s CFO:

We’ve got a base case, an upside, a downside. Our current reserves are based on the mix of those 3 macroeconomic scenarios. It reflects about a 5.1% unemployment rate on a weighted basis over the 8 quarters, and it’s roughly flat to what it was last quarter.


As a reminder, the current unemployment rate is 3.6%. An unemployment rate of over 5% is a sharp rise and recessionary. If banks are preparing for such an environment, they will tighten lending conditions, which leads to a credit squeeze. FactSet reported that banks are raising Q2 loan loss provisions.



The NY Fed reported that the rejection rate for auto loans is at a decade highh. Credit card rejection rates are rising, though they’re not at their peak yet.



Equally disturbing is the report from cyclical bellwether Fastenal, which is warning of a slowdown in demand in H2 2023.



As well, global mining giant Rio Tinto warned on its outlook: “China’s economic recovery has fallen short of initial market expectations, as the property market downturn continues to weigh on the economy and consumers remain cautious despite monetary policy easing…Manufacturing data in advanced economies showed a further slowdown and recessionary risks remain.”



What resilient consumer?

I wrote on the weekend that I was monitoring the results from luxury goods makers for indications of the Chinese consumer. Burberry and Richemont reported, and the general tone is strength in China and Asia, but weakness in Americas, which is contrary to top-down reports of a resilient American consumer. If high-end luxury goods market is faltering in the U.S., what does that say about consumption and how the Fed’s tightening is affecting the wealth effect?


New Deal democrat monitors real retail sales closely, as it leads employment by several months. June real retails sales came in flat and it’s -3.1% below its 2021 peak.




Vulnerable to a pullback

The latest BoA Global Fund Manager Survey highlighted a dispersion in sentiment. While retail investors are bullishly positioned, institutional managers are relatively cautious but recovering from extreme levels of bearishness. Technically, these readings look like a market that’s poised for a pullback within the context of a long-term uptrend. Individual investors are too bullish, which argues for a pause or correction. Institutional money moves glacially, but when it moves, the tide may seem never-ending.



Despite the institutional cautiousness, don’t expect the AI mania to continue in the short run from big money support. The FT reported that many large U.S. investment funds are at or near their diversification constraints that block them from buying more large-cap tech stocks. Many mutual funds are running into strict regulatory limits that determine whether a fund can be categorized as diversified.



There is also this tactical warning from Nomura’s derivatives analyst Charlie McElligott.



In the short run, the market is vulnerable to a pullback. I just don’t know what the catalyst might be. The intermediate term depends on the results and guidance from earnings season and the Fed’s policy direction, which we’ll find out more about next week.


1 thought on “Scenes from Q2 earnings season

  1. The TSLA earnings beat but TSLA went down hard. Could be a sign.
    Copper is not strong.
    I wonder about what real estate is causing in China. Real estate is a big deal there and prices are going down.
    If this is a bear market rally, where we base it on price and not PEs, we are running out of runway, so it would have to turn soon, otherwise we get an ATH which on a price basis equals bull market.

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