Where's the Strong Economy/Consumer?
That's not the message emanating from many companies' results/guidance and commentary
I wrote last week about the oddity of simultaneous above-trend GDP growth and sales/demand weakness among a wide range of consumer-related companies, particularly given that consumer spending accounts for nearly 70% of GDP. Shortly after I published, Constellation Brands became the latest consumer company to cut its full-year sales guidance, citing “incremental macroeconomic headwinds” and “prolonged inventory destocking in wine and spirits markets.” Since PepsiCo reported its 2Q results three months ago, a virtual procession of consumer companies have reduced their full-year sales guidance, the result of either overoptimism on their part or dwindling disposable income among their customers (despite the recent decline in the rate of inflation), or both. Whatever the explanation, it’s unusual for so many large consumer companies to be reducing their sales guidance at the same time, particularly consumer packaged goods (CPG) companies that sell products for which demand is supposedly stable. I point this out because PepsiCo will report its 3Q results tomorrow morning; the company was among many CPG companies to lower full-year expectations in 2Q by saying it expected “approximately” 4% organic sales growth compared to its previous guidance of “at least” 4%. The list of companies below isn’t exhaustive, but is nonetheless representative of the general trend.
What about the fact that corporate profit growth has been accelerating in recent quarters despite these indications of consumer weakness? For one thing, that profit growth is skewed toward a select group of companies/sectors. FactSet’s John Butters noted in his recent update that the Information Technology (IT) sector is expected to report the highest earnings growth rate of all 11 S&P 500 sectors at 15.2% in 3Q (with NVIDIA expected to be the largest contributor to growth), and that Communications Services (which includes Alphabet and Meta) is expected to report the third-highest growth rate at 10.5%. In other words, technology is contributing a substantial share of the S&P 500’s earnings growth, which likely comes as no surprise.
For another, Butters noted that downward earnings estimate revisions for S&P 500 companies for the third quarter were greater than normal; the decline in the bottom-up EPS estimate during 3Q was larger than the 5-, 10- and 15-year averages. And Bloomberg reported yesterday that S&P 500 companies are expected to report 4.7% earnings growth in 3Q according to data compiled by Bloomberg Intelligence, which would represent the lowest growth rate in the last four quarters.
Two of the biggest U.S. banks will cap off the week’s 3Q earnings on Friday, at which point we’ll hear more about the state of banks’ loan and core deposit growth (which was just ~0.6% sequentially in 3Q judging by the Federal Reserve’s weekly, seasonally adjusted H.8 data) and any further deterioration in credit quality (along the lines of what Ally Financial and CarMax recently reported).