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Technology Stocks : Semi Equipment Analysis
SOXX 521.86+0.8%Dec 8 4:00 PM EST

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Market Snapshot

Dow 29928.31 -347.59 (-1.15%)
Nasdaq 11082.36 -66.13 (-0.59%)
SP 500 3747.48 -35.87 (-0.95%)
10-yr Note -6/32 3.83

NYSE Adv 933 Dec 2055 Vol 946 mln
Nasdaq Adv 1713 Dec 2521 Vol 4.3 bln

Industry Watch
Strong: Energy

Weak: Utilities, Real Estate, Financials, Health Care

Moving the Market
-- Questioning the Fed rate hike narrative after several Fed officials made comments recently

-- Treasury yields climbing past Friday's settlement level

-- Hesitation ahead of the September Employment Situation Report tomorrow

Closing Summary
06-Oct-22 16:30 ET

Dow -346.93 at 29928.97, Nasdaq -75.33 at 11073.16, S&P -38.76 at 3744.59
[BRIEFING.COM] The stock market had a rough showing today while it continued to deal with concerns that it got carried away with expectations of a Fed policy pivot soon and amid some hesitancy in front of the September Employment Report on Friday.

The major averages were influenced by the behavior of the Treasury market today. The 2-yr note yield, which saw 4.14% earlier, traded above Friday's close and settled at 4.23%, up ten basis points for the day. The 10-yr note yield, stood at 3.74% overnight, but also traded above Friday's close and settled at 3.83%, up seven basis points for the day.

As Treasury yields moved higher, the major indices moved lower and struggled to mount a comeback effort today. They ultimately finished near their worst levels of the session.

The US Dollar Index jumped 1.0% to 112.18, acting as an additional headwind for the equity market.

There was also some hawkish Fed speak for participants to digest. Atlanta Fed President Bostic (2024 FOMC voter) said the inflation fight is still in the early days and Minneapolis Fed President Kashkari (2023 FOMC voter) said he is not comfortable pausing until there is evidence of inflation cooling.

In addition, there was heightened geopolitical uncertainty after OPEC+ agreed to cut production by 2 million barrels per day starting in November, a move that drew sharp criticism from the White House. WTI crude oil futures rose 1.0% today to $88.51/bbl.

Today's stock market losses were broad based but somewhat modest in scope relative to recent gains. The major indices fell between 0.6% and 1.1%.

The rising price of oil boosted the S&P 500 energy sector (+1.8%), which was the only sector to close with a gain. Meanwhile, utilities (-3.3%) and real estate (-3.2%) fell to the bottom of the pack.

Market breadth showed decliners outpacing advancers by a greater than 2-to-1 margin at the NYSE and a 3-to-2 margin at the Nasdaq.

Looking ahead to Friday, market participants will receive the following economic data:

  • 8:30 ET: September Nonfarm Payrolls ( consensus 250,000; prior 315,000), Nonfarm Private Payrolls ( consensus 275,000; prior 308,000), Average Hourly Earnings ( consensus 0.3%; prior 0.3%), Unemployment Rate ( consensus 3.7%; prior 3.7%), and Average Workweek ( consensus 34.5; prior 34.5)
  • 10:00 ET: August Wholesale Inventories (prior 0.6%)
  • 15:00 ET: August Consumer Credit (prior $23.30 bln)
Reviewing today's economic data:

  • Initial jobless claims for the week ending October 1 increased by 29,000 to 219,000 ( consensus 203,000) while continuing jobless claims for the week ending September 24 increased by 15,000 to 1.361 million.
    • The key takeaway from the report is that initial claims -- a leading indicator -- have a lot more scope for deterioration before the Fed can be convinced that its rate hikes have induced a sufficient softening in the labor market to ease wage-based inflation pressures.
  • Weekly EIA natural gas inventories showed a build of 129 bcf versus a build of 103 bcf last week
Dow Jones Industrial Average: -17.6% YTD
S&P Midcap 400: -18.1% YTD
S&P 500: -21.4% YTD
Russell 2000: -22.0% YTD
Nasdaq Composite: -29.2% YTD

Market lifts off lows ahead of close
06-Oct-22 15:30 ET

Dow -303.12 at 29972.78, Nasdaq -50.25 at 11098.24, S&P -30.84 at 3752.51
[BRIEFING.COM] The major indices trade in a narrow range somewhat off session lows.

Looking ahead to Friday, market participants will receive the following economic data:

  • 8:30 ET: September Nonfarm Payrolls ( consensus 250,000; prior 315,000), Nonfarm Private Payrolls ( consensus 275,000; prior 308,000), Average Hourly Earnings ( consensus 0.3%; prior 0.3%), Unemployment Rate ( consensus 3.7%; prior 3.7%), and Average Workweek ( consensus 34.5; prior 34.5)
  • 10:00 ET: August Wholesale Inventories (prior 0.6%)
  • 15:00 ET: August Consumer Credit (prior $23.30 bln)

Market makes new lows as 2-yr note yield climbs
06-Oct-22 15:00 ET

Dow -347.59 at 29928.31, Nasdaq -66.13 at 11082.36, S&P -35.87 at 3747.48
[BRIEFING.COM] The major averages fell to fresh session lows as selling picked up for the 2-yr Treasury note.

The 2-yr note yield plateaued around the 4.19% level for a few hours before climbing to 4.23% in the last half hour. The 10-yr note yield is up six basis points to 3.82%.

Energy complex futures rose this session. WTI crude oil futures rose 1.0% to $88.51/bbl; natural gas futures rose 0.1% to $6.94/mmbtu; unleaded gasoline futures rose 0.8% to $2.68/gal.

Republic Services underperforms on cautious sell side note, CF Ind. gains alongside other fert peers
06-Oct-22 14:25 ET

Dow -275.85 at 30000.05, Nasdaq -34.88 at 11113.61, S&P -26.64 at 3756.71
[BRIEFING.COM] The broader market is lower to varying degrees at this point on Thursday, the benchmark S&P 500 (-0.70%) still in second place.

S&P 500 constituents Republic Services (RSG 133.96, -7.21, -5.11%), SolarEdge Technologies (SEDG 222.10, -12.14, -5.18%), and Generac (GNRC 170.61, -8.07, -4.52%) pepper the bottom of the index. RSG and waste peers underperform after a cautious Deutsche Bank call earlier in the day, solar and renewable energy names are lower in view of gains on crude oil/traditional energy plays, while GNRC caught an intraday downgrade to Neutral out of BofA Securities citing possible order deceleration risks.

Meanwhile, material name CF Industries (CF 106.11, +3.56, +3.47%) is outperforming on Thursday; a possible catalyst is word of shipment disruptions on the Mississippi River, which is seeing water levels decline amid a drought in the region, thus shrinking supply.

Gold unchanged with eyes fixed on tomorrow's jobs data
06-Oct-22 14:00 ET

Dow -202.26 at 30073.64, Nasdaq -0.19 at 11148.30, S&P -16.08 at 3767.27
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (flat) is near unchanged levels; Nasdaq was up +0.73% at today's highs, then down -0.87% at the lows.

Gold futures settled unchanged at $1,720.80/oz with eyes more focused on tomorrow morning's jobs data.

Peloton pedals higher following report of another round of layoffs, but future remains murky (PTON)

Peloton's (PTON) glory days may be far behind it, but the connected fitness company is still searching for answers as it attempts to execute a dramatic turnaround. The company's latest bid to resuscitate its ailing business includes another round of layoffs. According to the Wall Street Journal, PTON is cutting 12% of its workforce, or about 500 positions, with many of the reductions affecting the marketing department. Unfortunately, job cuts have become commonplace at PTON this year. In total, the company has now issued at least 1,800 layoffs in 2022 in an effort to better align the size of the business with current demand trends.

There probably isn't much of a surprise factor as it relates to this news since PTON is on a cost-cutting mission. However, what may be catching investors' attention is CEO Barry McCarthy's comment that the company has six months to prove if it can survive on its own. In effect, McCarthy is stating that there's only so much that he can do to save the company. Ultimately, the company's survival will depend upon whether there's sufficient enough demand for its products to generate positive cash flow and earnings.

On that note, PTON has made good progress in reducing its cash burn. In 4Q22, free cash flow improved by about $266 mln yr/yr to ($411.9) mln. After significantly reducing its inventory, and outsourcing all of its equipment manufacturing, McCarthy believes that PTON can reach breakeven cash flow on a quarterly basis in 2H23.

The harder part, though, will come on the sales side. The main challenge is that, in the wake of the pandemic, people want to get out of their homes to work out, rather than spend more time in them. This is clearly evidenced by the recent recovery in Planet Fitness (PLNT), which generated revenue growth of 64% and 67% over the past two quarters. Additionally, the pandemic created a massive pull-forward in demand. Many people who were interested in owning a PTON bike or tread have already purchased one.

If PTON fails to return to growth, it won't be for a lack of effort.

  • The company recently launched its bike rental program, providing first generation bikes and All-Access Memberships to users for $89/month. When PTON reported Q4 results, it disclosed that roughly 20% of all first-generation bikes were rented in the limited test markets.
  • PTON is definitely getting its products in front of customers. In August, it announced a deal to open a store on Amazon (AMZN), followed a month later by a new partnership with Dick's Sporting Goods (DKS) to sell its equipment at its stores.
  • On September 20, PTON unveiled the Peloton Row for $3,195, with pre-orders in the U.S. starting immediately.
PTON is putting up a good fight, but it's hard to shake the feeling that it's climbing a hill that might be insurmountable. Last quarter, net connected fitness subscription additions collapsed by 98% yr/yr, while average monthly connected fitness churn nearly doubled yr/yr to 1.4%. With McCarthy establishing a six-month window for PTON's turnaround to take hold, it won't be too long before the fate of the company becomes clearer.

McCormick trades higher despite EPS miss; supply chain normalization taking longer than expected

McCormick (MKC +1%) is trading modestly higher today despite reporting another EPS miss with its Q3 (Aug) report this morning. EPS misses have been a rare occurrence for this supplier of spices, seasoning mixes, and condiments but the company has now reported back-to-back misses. The silver lining perhaps was that this miss was much smaller, revenue was in-line and MKC reaffirmed full year guidance.

To understand how MKC is doing, we need to analyze its segments independently because each segment is affected by the market in different ways. Its two segments are Consumer (62% of revs) and Flavor Solutions (38%), which caters to food manufacturers and foodservice customers. During the pandemic, Consumer segment sales soared with more people cooking at home, but the FS segment stagnated. But FS has now rebounded as restaurants get back to normal.

  • What stood out is that Q3 marked just the third EPS miss in the past 15 quarters. So these back-to-back misses are quite unusual. It was good to see MKC grow revenue again yr/yr after a rare decline in Q2. Revenue growth was modest at 3% yr/yr to $1.60 bln, but that was in-line with expectations.
  • It was great to see growth return in the Consumer segment, albeit just barely, up 1% yr/yr to $928 mln. However, sales were up 4% on a constant currency (CC) basis and Q3 saw a 1% unfavorable impact from its Kitchen Basics divestiture. Growth was driven by the Americas and especially Asia/Pacific, fueled by price hikes. Of note, Consumer sales in Asia/Pacific grew 5% and a whopping 10% CC. We suspect COVID lockdowns early in the quarter led to more at-home cooking.
  • The star of the show was the FS segment with sales up 6% yr/yr to $668 mln, and up 10% CC, fueled by price hikes in each region. The strongest region by far was the Americas with FS sales up 9% yr/yr, driven by continued high demand from packaged food and beverage companies as well as higher sales to branded foodservice customers.
  • Despite the raised prices, the EPS miss was caused by continued supply chain challenges. Getting certain materials has taken longer than expected. Also, MKC is absorbing higher costs to meet high demand in some parts of its business while demand has moderated in other areas, which is resulting in lower operating leverage and impacting margins. The big takeaway is that the normalization of the supply chain costs is taking longer than MKC expected, pressuring gross margin.
Overall, we were a bit surprised to see the EPS miss. The big topic on the last call was MKC saying that it started raising selling prices which should hit the P&L in 2H22. But it sounds like MKC is only just starting to benefit from higher prices. MKC expects to keep raising prices into next year as it plans to fully offset inflation over time. Also, the normalization of the supply chain is taking longer than expected. Importantly, on the demand side, MKC reaffirmed its belief that long-term consumer trends have accelerated since the beginning of the pandemic, including the sustained shift to cooking more at home, even as restaurants have opened back up.

Constellation Brands taps into strong beer business, but wine and spirts are still a headache (STZ)

Alcoholic beverage company Constellation Brands (STZ) tapped into its high riding beer business once again in 2Q23 to deliver a solid beat-and-raise quarterly report. The momentum underlying the company's Mexican beer brands, including Modelo, Corona, and Pacifico, has remained steady, even as macroeconomic headwinds strengthen. Consistent market share gains, especially for Modelo, which remained the top share gainer in the entire U.S. beer category, and an ongoing recovery in the foodservice channel, are driving the strength in STZ's beer category.

Similar to recent past quarters, the beer business outperformed the wine and spirits business by a wide margin. Depletions, which measures the number of cases sold to distributors, increased by nearly 9% for beer, while wine and spirts experienced a 2.2% decline. A few other key items jump out regarding this divergence.

  • STZ's wine and spirits segment has undergone some upheaval over the past few years. In STZ's mission to transform its wine and spirits business into a premium/craft portfolio, the company divested most of its lower quality wine brands that are still popular due to their lower price points. Ultimately, the company believes that this premiumization strategy will generate higher margins and profitability, but that hasn't really panned out yet.
    • Operating margin for the segment slipped by 40 bps yr/yr to 19.3% as higher raw material and transportation costs more than offset favorable product mix and price increases. At first glance, the modest dip doesn't seem overly alarming. However, the decline looks much worse when considering that STZ lapped a quarter in which operating margin plunged by 620 bps in the year-earlier period.
    • The company is doubling down on this strategy, separately announcing that it reached an agreement to sell another portion of its wine portfolio, including Cooper & Thief, Crafters Union, The Dreaming Tree, Monkey Bay, 7 Moons, and Charles Smith Wines. Of course, this shake-up will result in even steeper yr/yr declines for net sales and depletions, placing even more burden on the beer business.
  • On a positive note, high-end brands like Meiomi, The Prisoner Wine Company, and Casa Nobel Tequila, experienced double-digit growth in Q2. In total, the fine wine and craft spirits category posted depletion growth of 16%. We do have some concern, though, whether demand for pricier wine and spirits will hold up as consumers tighten their budgets.
    • Yesterday, packaged food company Lamb Weston (LW) commented during its earnings conference call that it's seeing a trade-down effect occur in the restaurant industry. Specifically, quick-service restaurants are experiencing an upswing in traffic at the expense of full-service restaurants. That is not a promising trend for wine and spirits sales.
  • STZ did nudge the upper end of its FY23 EPS guidance range higher, forecasting EPS of $11.20-$11.60, compared to its prior outlook of $11.20-$11.50. However, this slight upward revision is entirely due to the improving performance of the beer segment, which is now expected to achieve net sales and operating income growth of 8-10% and 3-5%, respectively. Previously, the company was forecasting net sales and operating income growth of 7-9% and 2-4%, respectively.
STZ has held up relatively well this year, with shares down by about 8%, compared to a loss of about 20% for the S&P 500. Its relative strength is tied to the resiliency of its business in difficult economic times, and its healthy earnings growth (+26% in Q2). Today, however, the stock is under pressure as investors may be losing some patience with the underperforming wine and spirits segment. So far, the company's efforts to downsize the segment by focusing only on top tier brands haven't paid off, making today's announcement of unloading more mainstream brands a bit of a disappointment.

Conagra's solid EPS upside in Q1 and reaffirmed FY23 guidance comes up stale compared to peers (CAG)

Conagra (CAG -2%) is starting the day off fairly stale despite posting solid upside on its top and bottom lines in Q1 (Aug). The consumer packaged goods giant, which boasts numerous famous brands like Slim Jim and Vlasic, saw its widest earnings beat in eight quarters, underscoring its ability to navigate through fierce inflationary pressures.

However, we commented leading into CAG's Q1 report that after General Mills' (GIS) top and bottom line upside in AugQ and raised FY23 earnings and organic sales guidance, investors had higher expectations for CAG. As a result, we view CAG's merely reiterated FY23 earnings and organic sales guidance, which was already below analyst expectations last quarter, as a slight letdown. CAG expects FY23 adjusted EPS to expand +1-5% yr/yr and organic revs to grow +4-5%.

Also, CAG's still not-normalized supply chain remains an issue as it continues to result in higher costs. For example, in CAG's Foodservice business, it had to dispose of product due to an off-spec finished good issue, resulting in sales and margins below where they should have been. Additionally, other consumer goods were off-spec, resulting in lost inventory that will linger into Q2, impacting volumes and margins.

Meanwhile, concerns of consumer trade-down occurring in the face of rising prices remain, especially with CAG posting its sixth consecutive quarter of falling volumes yr/yr in Q1. Although its peers, such as GIS and Kellogg (K), have been experiencing sliding volume growth lately, both are not enduring as lengthy a drought as CAG. Management noted that it will continue to monitor the impact its price hikes have on volume as private labels have increased their dollar share of some categories over the past three years, including a meaningful jump beginning this year. Nevertheless, CAG is confident that its brands, combined with its limited exposure to private label alternatives, will help it retain its post-pandemic market share.

  • Alongside this upbeat tone, CAG also delivered multiple highlights in Q1. Its volumes fell just 4.6% yr/yr, no worse than GIS. Also, revs accelerated nicely at +9.5% yr/yr to $2.9 bln. At the same time, adjusted earnings expanded by 14% yr/yr to $0.57 per share.
  • Additionally, outside of its International business, each of CAG's operating segments saw robust growth, including Foodservice, which led the charge in revenue growth in Q1 at 14.6%. Given the supply chain headwinds in this segment, as well as the industry continuing to face intense inflationary pressures, we view CAG's double-digit growth as a significant win.
  • Another highlight stemmed from CAG's Refrigerated & Frozen segment. Although sales only grew 9.6% yr/yr, this business saw the slimmest volume decline at just 2.5%. CAG also noted that it gained share in certain categories, like frozen dinners and plant-based proteins.
Bottom line, even though CAG's Q1 results shined when stacked against its Q4 (May) report, it did not hold up well compared to GIS. That said, we see encouraging developments from Q1, such as accelerating revenue growth and continual share gains in some categories. Furthermore, cooking-at-home trends remain healthy, which should help CAG maintain its share gains even if consumers continue trading down to private labels.

Lamb Weston's gains are no small potatoes as price increases drive strong earnings growth (LW)

Potato producer Lamb Weston (LW) has not been sheepish about acknowledging the challenging macro environment that's in front of it, but the company continues to serve up solid results despite the inflationary and supply chain related headwinds.

The company, which provides fries to McDonald's (MCD), and to many other major restaurant chains and retailers, easily surpassed 1Q23 earnings expectations as EPS surged by 315% yr/yr to $0.75. Bolstered by its strong performance, LW said that it's now tracking towards the high end of its FY23 guidance for EPS of $2.45-$2.85, and revenue of $4.70-$4.80 bln.

At the core of LW's earnings beat and bullish outlook is the company's effective pricing strategy. Over the past fifteen months, LW has increased product pricing multiple times in its Foodservice and Retail segments to counter rising input and transportation costs. Additionally, in the Global Segment (large quick-serve and full-service restaurant chains), LW benefited from price escalators that are included in multi-year contracts, as well as from some price adjustments made outside of those contracts.

Overall, price/mix increased by 19%, fueling a 900 bps surge in gross margin to over 24%. While LW capitalized on previous price hikes in Q1, the company also implemented new pricing actions during the quarter. Consequently, the company expects the pricing tailwinds to gradually build throughout 1H23.

Outside of the positive developments regarding pricing, the news is much more mixed.

  • Similar to other packaged food companies, like General Mills (GIS) and Conagra (CAG) -- which reports earnings before the open tomorrow morning -- LW continues to experience declining volumes. Following a 1% drop last quarter, volume declined by 5% in Q1, due to softer casual dining and full-service restaurant dining in the U.S. Persistent supply chain disruptions compounded the issue.
    • During the earnings conference call, LW commented that it's seeing a trade-down effect take place in the restaurant industry as a result of high inflation. Specifically, quick-serve restaurants, like MCD, are benefiting at the expense of pricier casual dining and full-service restaurants.
    • Meanwhile, in the Retail segment, the company is unable to fully meet demand because its production is constrained. Supply chain issues, including commodity and labor shortages, are limiting its volume.
  • LW doesn't anticipate that the macro environment will improve much in 2023, causing demand trends to remain uneven and volatile. However, the company noted that it saw similar restaurant traffic trends during the financial crisis of 2008-2009, and that its business remained resilient during that turbulent time. According to LW, consumers are currently ordering fries at restaurants at a rate above pre-pandemic levels, illustrating this resiliency in demand.
Buoyed by its impressive earnings growth, LW has exhibited remarkable relative strength this year, gaining 30% compared to a loss of 21% for the S&P 500. With additional pricing actions underway, the company is poised to deliver solid bottom-line growth in the quarters ahead, which may translate into further outperformance for the stock.

Last Updated: 06-Oct-22 09:01 ET | Archive
Yesterday carries over to today
The stock market did not finish higher yesterday but it showed some good resolve, briefly rebounding to positive territory after an early 1.8% decline before ending the session with a modest 0.2% loss.

Like yesterday, the futures market was leaning a good bit lower earlier but it has fought back from larger losses.

Currently, the S&P 500 futures are down nine points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 13 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 78 points and are trading 0.3% below fair value.

Like yesterday, the stock market is contending with the notion that it has gotten ahead of itself in expecting a Fed policy pivot. Atlanta Fed President Bostic (non-FOMC voter) threw some cold water on the idea, saying late yesterday "not so fast" when it comes to the market's idea that there will be a rate cut in 2023, according to Bloomberg. That remark followed an indication that he believes the fed funds rate should be 4.00-4.50% by year end, and from there he would like to pause and assess things.

The latter will be interpreted by some as a "pivot" since it would be a turn away from a steady stream of rate hikes, but it would certainly not be a pivot to an accommodative policy. Nonetheless, we suspect a market desperately searching for some light at the end of the dark rate-hike tunnel will take some comfort in the idea that there could be a potential pause to start 2023 if Mr. Bostic's view resonates with other Fed officials.

We would contend this morning that the market is taking some comfort, like it did yesterday, from the recognition that Treasury yields have not been able to move above Friday's settlement levels. The 2-yr note yield climbed to 4.18% a few hours ago, but then faded away to its current level of 4.15%. The 10-yr note yield, meanwhile, flirted with 3.79% overnight and now sits at 3.76%.

The weekly jobless claims report moved in a satisfying manner for a market aware that the Fed wants to see some softening in the labor market. The softening in the latest claims report, though, isn't exactly material.

Initial jobless claims for the week ending October 1 increased by 29,000 to 219,000 ( consensus 203,000) while continuing jobless claims for the week ending September 24 increased by 15,000 to 1.361 million.

The key takeaway from the report is that initial claims -- a leading indicator -- have a lot more scope for deterioration before the Fed can be convinced that its rate hikes have induced a sufficient softening in the labor market to ease wage-based inflation pressures.

The Fed, and everyone else, will have a lot to consider tomorrow when it comes to the employment situation. That situation will be on display with the release of the September employment report at 8:30 a.m. ET.

In the meantime, there has been more hemming and hawing today over yesterday's decision by OPEC+ to cut its production by two million barrels per day starting in November. That move has drawn criticism from the White House and it has created some additional geopolitical tension at a time when the world doesn't need any more geopolitical tension.

WTI crude futures are up 0.1% to $87.84 per barrel, leaving them up 10.5% for the week.

-- Patrick J. O'Hare,

The Big Picture

Last Updated: 06-Oct-22 16:08 ET | Archive
Earnings Preview: Q3 and Beyond
The third quarter is over, but we're not done with it yet. In fact, we are going to hear a lot about the third quarter in coming weeks as publicly traded companies report their earnings results for the July-September period.

We know already that it was a tough period for the stock market. The S&P 500 declined 5.3% in the third quarter. It did so as interest rates went up and earnings estimates came down.

We'll soon learn if the third quarter earnings estimates were cut too much or not enough. According to FactSet, the estimated earnings growth rate for the third quarter was 9.8% on June 30. Today it sits at 2.3%.

The third quarter earnings bar has been lowered significantly, and we suspect it will be relatively easy for most companies to clear it. The bigger hurdle -- and where we think more companies than usual will get tripped up -- is the guidance.

A Tipping Point

The coming week will feature only a handful of S&P 500 companies reporting their results, but that doesn't mean it will be an insignificant week of reporting.

Three Dow components -- Walgreens Boots Alliance (WBA), JPMorgan Chase (JPM), and UnitedHealth (UNH) -- will be reporting along with several other high-profile financial companies, including BlackRock (BLK), Citigroup (C), Morgan Stanley (MS), PNC (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC).

None of these reports will be released before Thursday, which will make for a back end loaded week of reporting fireworks knowing that the September Consumer Price Index will be released on Thursday and the September Retail Sales Report will be released on Friday.

We do not want to go astray on this earnings preview piece delving into the economic releases, but the fact of the matter is that the economy is going to factor prominently in the earnings reporting period.

That isn't anything new, yet it will have more bearing than it typically does because the U.S. economy -- and the global economy for that matter -- is thought to be at a tipping point because of the rapid-fire rate hikes from many of the world's leading central banks.

In many respects the global economy has already tipped. Growth is slowing and now it is a matter of whether the economy keeps tipping into a recession. Some will argue that it already has, sticking to a technical definition of two straight quarters of a decline in real GDP, yet others will point to remarkably low unemployment rates to refute that notion.

Regardless, the behavior of the stock market this year and the inverted yield curve make it clear that economic optimism is not running high.

We Have a Situation

We are going to hear a lot of attention being paid to "macroeconomic conditions" during the reporting period and most likely a lot of reservations being expressed about the macroeconomic situation, which is eroding under the weight of high inflation, rising interest rates, a strong dollar, lingering supply chain issues, geopolitical turmoil, high energy prices, a reduced wealth effect, and China's zero-Covid policy.

We might have missed a nettlesome factor or two, but the market and corporate managers clearly have a high wall of economic worry to climb.

It is noteworthy then that we will hear from many of the country's leading financial institutions at the start of the third quarter reporting period. We will get a line right away on the economic outlook based on what the banks are doing with their loan-loss reserves, what the investment banks are saying about the impact of the volatility in capital markets, and what they are all doing with their own growth plans.

Undoubtedly, JPMorgan Chase CEO Jamie Dimon will be asked if he still thinks an "economic hurricane" is coming. It wouldn't surprise us if he said a lot depends on what the Fed decides to do from here, which is really what the overall market is worrying about, too.

A Moving Target

The financials sector is expected to report a 12.4% year-over-year decline in earnings for the third quarter, according to FactSet. That is the second-largest decline among the 11 sectors, trailing only communication services (-13.8%).

Once again, the energy sector will be doing the heavy earnings lifting for the S&P 500. Third quarter earnings for the sector are projected to be up 115.1% year-over-year, which would account for nearly 6.1 percentage points of overall earnings growth. The other sectors expected to make positive contributions, per FactSet data, are industrials (1.61 pp), consumer discretionary (0.60 pp), and real estate (0.38 pp).

The remaining seven sectors are all expected to report year-over-year earnings declines that will subtract 6.36 percentage points from growth.

One can see, too, that profit margins are going to face some pressure. That shows up in the fact that S&P 500 revenue growth is projected to be 8.7% year-over-year, yet earnings growth is only expected to be 2.3%.

The same rings true for the fourth quarter. Early estimates suggest fourth quarter revenue will increase 5.9% year-over-year while fourth quarter earnings increase 3.8% year-over-year.

Those estimates will be subject to change -- and they will change. We expect the earnings estimate to come down as the third quarter reports roll out and as the fourth quarter continues to unfold.

Regular readers know that we also think the calendar year 2023 earnings growth estimate of 8.1% is also too high considering the lag effect of central bank rate hikes and the various factors mentioned above that are contributing to a deterioration in the macroeconomic situation.

What It All Means

The stock market has been accounting for the worsening earnings environment, which is why the forward 12-month P/E multiple has contracted to 16.1x from 21.2x at the start of the year. Investors have not been as willing as they used to be to pay up for every dollar of earnings growth in a rising interest rate environment.

That is the case because it is understood that earnings growth is going to be under pressure.

Just how much pressure is the great unknown. Research done by D.A. Davidson indicates the average earnings decline for the past ten recessions has been 29.5%. Excluding the financial crisis and the dotcom bust periods, the average decline has been 18.7%.

An 8.1% growth rate for 2023 sure seems to be generous at this point given all the writing on the economic wall of worry that points to little growth at best in 2023 or a recession at worst.

Guidance that substantiates the need to cut earnings estimates will be an obstacle for the stock market at first and an opportunity later.

The obstacle will relate to difficulty in assessing the stock market's true value as earnings estimates get marked down further. The opportunity will arise when earnings estimates match more closely with the economic reality and investors feel more confident that they are buying value and not falling into a value trap that has been set with high earnings estimates that won't be met.

-- Patrick J. O'Hare,

Meanwhile, the U.S. Dollar Index is up +0.9% to $112.09.

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