Nearly three-quarters of S&P 500 firms have reported second-quarter results, so the earnings picture for the second half of the 12 months looks unusually complicated. So far, it has been a “so-so” quarter. We beat earnings as usual, but revenue beat expectations. About 79% of S&P 500 firms are beating earnings expectations, and that is about average, in keeping with LSEG. Two observations: First, the common beat is way lower than it has been recently. We’re seeing a mean beat of about 4.5%, almost half of the 8% upside of the primary quarter. Second, only 47% beat revenue forecasts, a lower percentage than normal, suggesting some pricing pressure. Companies aren’t making daring predictions for the second half of the 12 months. That’s a bit frustrating. Most firms are beating earnings estimates, but are declining to lift their full-year forecasts beyond that. Coca-Cola, GE Aerospace, Hasbro, Sherwin-Williams, Deckers Outdoor, AbbVie and Lockheed Martin all raised their full-year guidance. However, they did in order a direct results of last quarter’s strong results. An entire host of other firms, equivalent to AT&T, Verizon, Mattel, IBM and Chipotle, simply reiterated their previously announced guidance for the 12 months. This is an indication that, despite a continued strong economy, there are too many variables at play and firms are simply taking a wait-and-see approach. Tech company earnings are still rising but slowing. There have been an increased variety of misses within the tech sector this season, including Fair Isaac, CDW, Skyworks Solutions, Juniper Networks, Enphase Energy, NXP Semiconductors, Accenture and Oracle. More importantly, big-cap tech company earnings growth is slowing in comparison with the large gains of the past two years. More cautious consumers have weakened the pricing power of many firms. Procter & Gamble and Clorox, for instance, have been hit twice: price increases are petering out and demand is muted. It’s the same story for food firms, whose sales have declined resulting from increased consumer price sensitivity. All major food firms – Hershey, Kraft Heinz, Mondelez, PepsiCo, ConAgra Brands, General Mills and JM Smucker – have seen revenue declines this season resulting from lower sales. Meanwhile, fast-food restaurants remain under pressure to supply customers value for money. McDonald’s had weak sales, but footfall improved after the corporate launched its $5 menu. Shake Shack saw stronger sales trends in June and July as the corporate used “strategic promotions.” Wendy’s said value for money was “critically important” and boasted that it could offer value ahead of a few of its competitors. Additionally, Starbucks said that “our thoughtful promotions resonated with our customers in our effort to provide value, suggesting that our promotional plans are starting to take hold.” The upscale consumer remains to be spending, but some weakness is clear One of us (Bob) just returned from a five-day stay in Atlantic City: The casinos were mostly full, from the gaming tables to the restaurants. But Bank of America recently ran an interesting headline: “Cracks in Travel/Leisure Emerge.” The company noted underperformance in gaming (Bally missed earnings forecast while MGM Resorts lamented weakness within the fiscal first quarter), parks (Comcast’s Parks missed forecasts) and hotels (Host Hotels cut estimates, Marriott cut, as did timeshare company Marriott Vacations. Wyndham lowered revenue per available room forecast). Airlines were also highlighted, with Allegiant, Ryanair and Spirit citing weak pricing. Many complaints about weakening consumers in China A weak Chinese economy has been a major headwind for various global firms this season. Procter & Gamble’s sales in China fell 8% 12 months over 12 months as consumer spending declined. PepsiCo also observed cautious consumers there and General Mills saw “a real deterioration or weakening in consumer sentiment” within the country. McDonald’s and Starbucks reported negative comparable-store sales within the region. Visa said payment volumes inside China declined, while Marriott disclosed it was the one region to report negative hotel revenue within the quarter. A strongly promotional environment in Greater China was a key think about Nike’s cautious outlook for the brand new fiscal 12 months. Despite more subdued domestic spending, there are signs that Chinese consumers are saving their spending for overseas travel as an alternative. Luxury brands like Kering and LVMH found that the Chinese are benefiting from the weak yen and buying products in Japan. While performance in Macao was a disappointment for Las Vegas Sands, the casino operator said Chinese visitors are still flocking to its Marina Bay Sands property in Singapore. What’s the chance to second-half earnings? There are two significant macro risks: First, there’s an inflation scare — a series of reports suggesting inflation shall be higher than expected. Second, there’s the potential for a growth slowdown — that’s, a sharper decline in employment than expected or a sharper decline in consumption than has been seen. We saw a little bit of a growth slowdown scare with the weak ISM manufacturing index, particularly within the below-average employment component. That led to a drop in bond yields on Thursday. Here’s the excellent news: So far, overall third-quarter estimates for the S&P 500 have not modified much for the reason that start of this earnings season.
