Investor Spotlight: US earnings season

It is the season to be jolly! Or is it? In this week’s Investor Spotlight, we review what happened last week in the US earnings season, with a particular focus on the financials and one major consumer stock.

The earnings story so far

Expectations were low heading into this US reporting season. Based on data compiled by FactSet, coming into the earnings period, S&P 500 companies were tipped to deliver earnings growth of 2.8%. After one week, that number has already fallen, with current consensus estimates suggesting the quarter ought to deliver a paltry 1.6% in EPS growth for the third quarter.

The problems appear to begin at the topline of companies. Based on the same set of data, revenue growth is expected to be 8.5% for the third quarter. That’s low by historical standards and a scratch below the 8.7% analysts had been estimating prior to the period. In addition to weaker sales, higher costs are also weighing on the profits of companies.

The big story for the first week – as it always is – was the first batch of financial companies reporting. While there’s a handful of names still to report, those that did last week were generally underwhelming. Estimates for EPS growth for the quarter have slipped from, 12.0% to 16.2%, in what’s simultaneously an omen for the broader market, as well as the US economy.

Four stocks that reported last week

• PepsiCo Inc

Bucking the dour start for the US earnings season was PepsiCo. The business managed to soundly beat earnings estimates, posting EPS of $1.97 per share versus $1.84 expected, on revenues of $21.97 billion, which beat the $20.84 billion forecast.

What was even more heartening was the outlook the company provided. CEO Ramon Laguarta said that despite rising costs, the subsequent price increases are successfully being absorbed by consumers. He also said the consumer overall is in a 'very healthy' position. That was enough to see the company increase its earnings growth forecast from 8% to 12%.

PepsiCo shares are in an uptrend, although there are signs of waning momentum. Technical support is around $160, while a strong level of resistance is around an all-time high of $180.

PepsiCo Inc weekly chart

• JPMorgan Chase & Co

The picture was more mixed for JP Morgan when it delivered its quarterly results last week. The bank managed to beat earnings estimates, posting EPS of $3.12 against forecasts of $2.87, thanks to a rising interest rate environment. However, the number was still down 16% from last year with loan provisions and losses in the bank’s financial assets a drag on profits.

JP Morgan CEO Jaimie Dimon did deliver an upbeat assessment of the US economy, suggesting households were in a 'healthy' position. However, Dimon did highlight growing headwinds to the economy, which ranged from inflation to tighter monetary policy and energy supply.

JP Morgan’s results boosted the company’s share price, though it remains in a primary downtrend. The stock is testing resistance at $118 as momentum appears to be turning around. A key level of resistance is around $104.

JPMorgan Chase & Co weekly chart

• Wells Fargo & Co.

Wells Fargo’s results were arguable the best of the US banks in week one. The company posted strong earnings growth of 6.56%, on EPS that came in at $1.30 against the $1.09 consensus estimate. The bank also posted stronger than forecast revenues, with topline growth of 3.6%. It also increased its dividend payment.

In a sign of caution about the outlook for the US economy, Wells Fargo also boosted its loan provisions, setting aside $784 million for potential bad debts. The bank’s CEO Charlie Scharf talked up the strength of US households and businesses, stating that both remain in a 'strong financial position'. As America’s most mortgage-sensitive bank, Wells Fargo did highlight the risk of rising interest rates.

Wells Fargo shares appear to be consolidating at the moment, with momentum looking neutral. Support is likely around $39 and resistance around $44.

Wells Fargo & Co. weekly chart

• Citigroup Inc

Citi’s results from the quarter soundly beat expectations, although the theme of much weaker annualized earnings growth for the sector rang true. The bank posted an EPS of $1.50 for the quarter, beating expectations of $1.42. That was a drop of 30% compared to the corresponding period last year.

The bank also increased its credit provisions in anticipation of greater delinquency and defaults going forward. Its investment banking arm also struggled and posted weaker-than-expected results, as slumping asset markets hit revenues.

CEO Jane Fraser was perhaps the most sombre about the outlook for the economy. She warned of ‘rolling country level recessions’ across the global economy, with the US likely to experience a 'mild recession' in late 2023.

Citi shares are amongst the biggest underperforming bank stocks. The trend remains to the downside, with growing recession risks likely to maintain that downward pressure on prices.

Citigroup Inc weekly chart