Key Themes Emerging From Q1 Earnings Reporting Season

• Regional banks stocks remain off the pace | The FDIC takeover of First Republic, the second biggest bank failure ever, is a reminder that tensions in the banking system have not fully subsided. While the overall banking system remains sound and regulators have learned from past crises that swift action is needed when challenges arise, the market still can’t decide whether we’re in the backstretch or the homestretch when it comes to the recent tremors. However, the ongoing disruptions will likely influence the Fed’s decisions as it calibrates policy going forward. One dynamic the Fed will be focused on is the extent of credit tightening that is yet to be realized from the recent banking disruptions. In fact, just last month Fed Chair Jerome Powell estimated that the expected tightening would be roughly equivalent to an additional 25 basis point rate hike. The market has already concluded that the Fed will hike less than perhaps it wanted to, but the bar for cutting rates remains much higher than it has been in the past given that inflation remains well above the Fed’s 2.0% target and unemployment is still hovering near historic lows. And, with the Fed’s credibility on the line after its delayed reaction to rising price pressures after the pandemic, Powell does not want to encourage the market to price in cuts too soon and potentially risk another reacceleration in inflation down the road.
• 1Q23 earnings season is coming down the homestretch | Over 80% of S&P 500 companies have reported earnings and thus far, the results have been better than feared. Earnings growth is on pace to decline ~2% year-over-year, better than the consensus forecast of a 6% decline heading into the reporting period. While the bar may have been set low and the backdrop remains challenging, we’re optimistic about what we’re hearing from company managements. Below are some of the highlights:
  • The consumer is still ‘in the money’ | Despite concerns of an impending slowdown, the consumer remains in good shape. Banks and credit card companies, such as Wells Fargo and Visa, have reported strong spending across travel and entertainment. Another bright spot came from the home builders, where D.R. Horton and Pulte highlighted improving homebuyer demand and reduced cancellations now that mortgage rates have stabilized and sticker shock from last year’s rapid increases has worn off.
  • ‘Odds-on’ cost-cuts/efficiency initiatives | After last year’s dismal performance, companies like Amazon, Alphabet and Meta switched into cost-cutting (i.e., layoffs) and efficiency mode to protect their margins. Out of the gate, their stocks have been rewarded with double-digit gains YTD. The cost-cutting trend is spreading to others, like 3M, Disney, and Morgan Stanley.
  • Some ‘front-runners’ have maintained pricing power | Starbucks, PepsiCo, McDonald’s and Proctor and Gamble have delivered strong earnings results this quarter. Strong brand loyalty and price inelasticity has allowed these firms to maintain pricing power in this elevated inflationary environment. Good for the company’s bottom line, but not so great news for the Fed.

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