3 factors to keep in mind heading into the busiest week of earnings
The past couple weeks of earnings has revealed a resilient consumer, toned down remarks of a recession and a sense it’s not all doom-and-gloom for profit margins. As we look ahead, some of the biggest names in tech will report this week, including Club holdings Alphabet (GOOGL), Apple (AAPL), Microsoft (MSFT), Meta Platforms (META) and Amazon (AMZN). Here are some notable factors to watch as we review their releases. Inflation can impact Foreign exchange volatility Forward guidance 1. Inflation can impact Investors and consumers alike are concerned with rising prices as inflation continues to come in hot. The latest consumer price index reading in June rose a higher-than-expected 9.1% on an annual basis, the highest pace since 1981. Some of the challenges exacerbating inflation stem from Russia’s prolonged war in Ukraine, China’s Covid lockdowns and an aggressive Federal Reserve, all of which have impacted company earnings. But earnings reports from companies like International Business Machines (IBM) show that companies are still delivering strong sales despite macro challenges. IBM’s second quarter revenue of $15 billion was up 11% year over year and its EPS of $2.31 exceeded expectations of $2.27. Another outperformer was Investing Club holding Danaher (DHR), which reported a knockout quarter of $7.8 billion in revenues, up 7.5% year over year despite China’s lockdowns. Its EPS of $2.76 exceeded analyst expectations $2.35. A major pressure point for companies that’s linked to inflation is rising labor costs. Since labor is one of the biggest price tags, one of the first things you see companies do to manage expenses are layoffs or slowing down hiring. Throughout the first half of the year, we have seen companies like Meta, Alphabet, Apple and Microsoft announce plans to scale back on hiring. Bottom line: Inflation can be a headwind for companies, but this isn’t a reason to sell. We know the Fed needs to raise rates aggressively and slow the economy down to combat inflation, explaining why the Investing Club has added several defensive names with pricing power and limited economic sensitivity. These can be consumer staples like Club holdings Constellation Brands (STZ) and Costco (COST), or healthcare stocks like Eli Lilly (LLY), Humana (HUM) and Johnson & Johnson (JNJ). The energy sector has also benefited from inflation as prices of oil and gas have increased earlier this year. On Thursday, we’ll get a first read on U.S. economic activity in the second quarter. The gross domestic product report will show how much the monetary value of goods and services increased or decreased in the U.S. economy during the second quarter. GDP decreased 1.6% year over year in the first quarter of 2022, which means if there’s another negative reading we could technically be in a recession. 2. Foreign exchange volatility The U.S. dollar has reached a 20-year high, briefly hitting parity with the euro in July. A strong dollar can be a burden for multinational companies. A higher dollar means U.S. exports are more expensive for other countries, making U.S. products more expensive abroad. A higher price tag on goods could weaken demand and result in a drag on corporate profits. It also means profits from overseas are reduced when they are converted back into dollars. Companies with an international presence could take a hit to their bottom lines. Of the 33 companies in the Charitable Trust, a majority report sales overseas. We did a deep dive on each name last week. Several companies that have already reported in the second quarter have noted foreign exchange as a headwind. Netflix (NFLX) said in its letter to shareholders that one of the main reasons the streaming service missed on revenues was the “appreciation of the U.S. dollar.” In its second quarter press release, Johnson & Johnson also cited the “strengthening U.S. dollar” as impacting its full year adjusted profit estimate. Analysts have been cutting price targets for companies like Alphabet and Microsoft, noting foreign exchange from a strong dollar as a culprit. Bottom line: Despite the challenge of a stronger greenback, it’s one that could be short-lived. Plus, Wall Street tends to look past foreign exchange-related weakness and instead focus on the health of the underlying business. However, if it ends up impacting demand, that could result in lower analyst estimates. 3. Forward guidance Forward guidance is forward looking statements that companies provide during quarterly earnings announcements that help forecast their upcoming quarterly earnings results or for the rest of the fiscal year. In an earnings statement, the company may outline revenue estimates and other anticipated company changes. For example, in its second quarter earnings release on Thursday, Danaher provided upbeat guidance for its third quarter 2022 and full year 2022 revenue growth in the “high, single-digit percent range.” An example of a depressed forward-looking statement came from JPMorgan (JPM) last week when the bank’s CEO Jamie Dimon said, “we have temporarily suspended share buybacks, which will allow us maximum flexibility to serve our customers, clients and community through a broad range of economic environments.” Investors want to pay attention to forward guidance and the post-earnings conference calls because they can help provide insight into headwinds and tailwinds the company could face in the short-term and long-term. This guidance can also help assess consumer activity. We think knowing the strength of a consumer can help gauge how companies may perform in the future. Some of the catalysts for earnings revisions this quarter have been supply chain issues, a slowing economy, or rising input expenses. That said, the future is getting tougher to predict due to tight financial conditions, so forward guidance can help clear up some uncertainty about how companies can navigate macroeconomic challenges and be a key market driver. Bottom line: With persistent inflation, fears of recession and a hawkish Federal Reserve, we wouldn’t be surprised to see companies guide conservatively for the second half of the year. That said, come next week we are preparing for tempered forward guidance. (Jim Cramer’s Charitable Trust is long GOOGL, AAPL, MSFT AMZN, META, DHR and JNJ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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