The Weekend Edition # 133 - Leanings from Earnings: The US Consumer

Welcome to another issue of the Weekend Edition!

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Here's what we cover

• Market Recap - Rebounding Market

• Learnings from Earnings - The US Consumer

• Closing Thoughts -

• Closing Thoughts - Small Caps Beware

• Calendars

Market Recap - Rebounding Market

May 06 - May 10, 2024

Sell in May and Go Away is not off to a great start. Markets are rebounding and moving higher after the Fed meeting and what’s being perceived as weaker labor market data, leading traders to consider a Fed cut sooner rather than later. We’ll see what CPI and PPI bring this week.

Globally, the deceleration in inflation has moderated and central banks remain cautious about cutting, digesting the Fed’s possible higher-for-longer stance. We saw a mixed week overall.

Commodities are also showing us a mixed picture for now and there’s some room for consolidation after the run from Feb. We still think commodities will continue to run higher after this period of consolidation and there is further upside - particularly in energy, copper, and precious metals.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Learnings from Earnings - The US Consumer

92% of the S&P 500 have reported Q1, 2024 earnings, and the scorecard is looking better than expected. The blended earnings growth now stands at 5.2% while revenue growth stands at 4.1%. (Data from FactSet)

As earnings outpace revenues, we’re seeing margin expansion among companies which makes sense, since the effects of cost-cutting and lower freight rates are making their way through the system.

However, we’re still seeing reasons for concern among companies, and many have been punished for guiding lower for the quarters ahead.

“For Q2 2024, 51 S&P 500 companies have issued negative EPS guidance and 36 S&P 500 companies have issued positive EPS guidance.” - FactSet

So what have we learned from earnings?

A Mixed Consumer

The discussion around the consumer remains mixed. There are some companies that continue to believe in the strength of the consumer while, others are talking about either “normalization” or lower-income groups starting to spend less.

“As it relates to consumer spending, the shift of spending from goods to services continues to be a headwind for our business. – Tractor Supply Company”

We’re seeing this in the Q1 GDP numbers as well. While overall consumer spending moderated from 3.3% in Q4, 2023 to 2.5% in Q1, 2024, the real decline was seen in goods spending, particularly durable goods.

We’re also seeing the consumer becoming more cost-conscious.

“Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending, which is putting pressure on the QSR industry.” - McDonald’s

“We're seeing it in some of the data, it's early, but there's also an early indication that consumers are using product a little longer. While as you look to how do you get the most out of what you have in your house if you're trying to manage your cash flow, using a razor blade cartridge and extra shave or 2 is a logical consumer reaction when the consumer starts to get tight.” Edgewell Personal Care

So we’re seeing lower consumer spending across the goods spectrum - from consumer staples to consumer discretionary companies.

While most retailers are yet to report, we’ve already got a fair glimpse at what’s happening with the consumer. Spending is moderating.

The San Francisco Fed recently published an article that showed all the excess savings that were accumulated during the pandemic era are now gone.

They conclude that the relatively strong job market, however, means that there is considerably less pressure on the consumer. But, they also add that this could be a cause for higher debt. And this is exactly what we’re starting to see.

“Credit card balances, which are now at $1.13 trillion outstanding, increased by $50 billion (4.6%).” - NY Fed (Q4, 2023)

Not only are credit card balances rising by the most of all the debt groups but, we’re also seeing higher delinquency rates. The NY Fed states that this is more prevalent among young borrowers.

So if we’re seeing all these signs of deterioration, why do we still view this as “Mixed Consumer” data?

It’s because there is a part of the economy that has spending power and continues to hold up consumer spending quite well. With higher interest rates, the top 25% of the economy continues to garner more wealth and when we look at the overall numbers, we’re certainly seeing a “strong economy”.

But, we maintain that the average consumer, and in particular the lower income group continues to weaken - hit by the double whammy of sticky inflation and higher interest rates. We introduced this concept of a K-shaped economy at the beginning of the year (it’s not our concept but, it applied quite well here). This emphasizes that spending by the top part of the K is holding up the lower part of the K of consumers and we think the situation continues to become more dire.

Articles this Week - In case you missed it

Closing Thoughts - Small Caps Beware

We’re seeing volatility decline in line with this thinking and, the market has become complacent once again. We’d be cautious about rate-sensitive sectors and small-cap growth. There are plenty of places to invest, and avoiding what could come under pressure if yields continue higher is not a bad idea.

YTD the Russell 2000 small cap index has increased 1.4% compared to the S&P 500 at 9.5% and the Nasdaq-100 at 8%. Yields are weighing on smaller companies and we don’t think this phase is done.

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.