Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
US banking earnings disappoint and what to expect next week
Peter Garnry
Chief Investment Strategist
Summary: Both JPMorgan Chase and Wells Fargo negatively surprised the market with a worse than expected net interest income outlook and bigger than estimated credit provisions pulling S&P 500 futures down 1%. The earnings releases today were certainly not the start investors had hoped increasing the stakes for next week's earnings. We highlight earnings next week from consumer bellwether P&G, streaming giant Netflix, and mining equipment manufacturer Sandvik.
US banking earnings disappoint
The first major Q4 earnings have hit the news wire with JPMorgan Chase report Q4 adjusted revenue of $35.6bn vs est. $34.2bn and EPS of $3.57 vs est. $3.10, but despite these strong numbers the outlook on net interest income of $73bn vs est. $74.4bn is disappointing investors and the provision for credit losses surprised negatively at $2.3bn vs est. $2.1bn. CEO Jamie Dimon says there is still a lot of uncertainty around the impact from the macro headwinds and that the firm’s macroeconomic outlook has deteriorated modestly. Wells Fargo has also reported Q4 earnings missing on revenue and also reporting a negative surprise on credit provisions ($57mn vs est. $860mn). Wells Fargo’s CFO is also saying that the bank is preparing for the economy to worsen. On the positive side, the bank is resuming its share repurchases in Q1. The US banking results have pulled down the S&P 500 futures by 1% to the 3,965 level.
Margin compression is main theme in Q4 earnings season
The Q4 earnings season has started today and will ramp up next week before the big show starts in the following week. Margin compression was the theme of Q3 and will definitely be the key theme again in Q4. While commodities have stopped galloping higher wage growth has taken over as the next headache for CEOs cutting into margins. With consumer spending coming down in volume terms we have now reached a limit in which companies can no longer pass all of inflation on. The casualty is operating margins. So watch Tesla in the last month cutting prices aggressively across all countries in the range between 5-20%. When you are running a 25% gross margin business that will hurt earnings. Analysts are still not reflecting this reality expecting Tesla to grow earnings 24% y/y this year.
In the S&P 500 Index 12-month forward EPS estimates are only down 4% from the peak suggesting an equity market that broadly does not expect a recession but rather a soft landing with the Fed pausing after two rate hikes of 25 basis points. Analysts expect EPS in S&P 500 to rise 10% over the next 12 months despite the 4% reduction in those estimates. This scenario seems highly unrealistic and thus 2023 is likely to be paved by negative surprises.
The list below shows the most important earnings releases next week with the three most important to watch being P&G, Netflix, and Sandvik.
P&G reports Q4 earnings on Thursday before the market open with analysts expecting revenue growth of -1.1% y/y and EPS of $1.59 down 4% y/y suggesting that volumes are being hit by inflation and that analysts expect P&G to see their operating margin decline q/q. The potential upside for P&G on its outlook is the reopening of China.
Netflix reports Q4 earnings on Thursday after the market close with analysts expecting revenue growth of 1.7% y/y as streaming services are still facing headwinds post the pandemic. EPS is expected at $0.51 down 67% y/y. The things to focus on for investors are user growth, updates on its advertising business, and user engagement figures relative to recent content launches.
Sandvik, the Swedish-based manufacturer of tools for metals working and rock excavation, reports Q4 earnings on Friday before the market open. Analysts expect revenue growth of 4.6% y/y and EPS of SEK 3.51 up 11.5% y/y. We expect a positive outlook for Sandvik as the commodity super cycle is intact delivering strong tailwinds for capital expenditures in the global mining industry benefitting suppliers such as Sandvik.
- Tuesday: Sartorius Stedim, Morgan Stanley, Goldman Sachs, Interactive Brokers
- Wednesday: EQT, Charles Schwab, PNC Financial Services, Kinder Morgan
- Thursday: Procter & Gamble, Netflix
- Friday: Investor, Sandvik, Ericsson, Schlumberger
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