All Over the Board
Investors anxious to put concerns about the broader economy behind them and focus on the “micro” view of company earnings were treated to a barrage of numbers this week that varied in impact as far and as wide as the industries represented. In many ways, what investors are seeing in the early days of earnings season is representative of key themes year-to-date: heightened levels of mergers and acquisitions are exemplified by Dell’s record-breaking $67 billion deal for EMC, hit-or-miss economic data that once again has Wall Street prognosticators pushing the first Fed rate hike further into the future, and an earnings picture that’s as eclectic as a Picasso. And no list of key themes from 2015 would be complete without acknowledging closely-followed remarks from oilfield services leader Schlumberger opining about tightening oil markets that point to a brighter future ahead for beleaguered energy investors.
Changing of the Guard
Retailing doesn’t typically jump off the front pages of business news this early in reporting season but what came out of the folks from Bentonville, AR earlier this week turned heads. Investors have known for some time the challenges Wal-Mart Stores Inc. faces with Amazon’s web-based retailing model, smaller format dollar stores that have chipped away at its store traffic, and rejuvenated competitors like Kroger that have made life tough on the company that derives 55 percent of its sales from the grocery aisle. That said, few foresaw the bomb that management dropped on investors when it slashed earnings guidance next year by 12 percent amid new forecasts calling for flat sales and a prolonged decline in profits. While the degree of Walmart’s business deterioration is surprising, what isn’t is how investors responded: taking the stock down by 10 percent Wednesday and destroying $22 billion of market capitalization in the process. Investors tempted to bottom fish this one should be forewarned – the workout for Wal-Mart will be neither quick nor painless.
In a related vein, broader retail sales data reported this week was disappointing, declining sequentially even after adjusting for lower priced gasoline. Notwithstanding the weaker tone of September retail sales, we continue to believe that the consumer is in good shape, benefiting from the aforesaid decline in fuel prices, a healthy job market, and low interest rates.
Banking on Earnings
On the banking front, investors received earnings updates from the money center banks this week and, by and large, the results hewed to our expectations: weak results in trading and capital markets offset by solid single-digit loan growth amid challenged net interest margins. Bank of America and Citigroup stood out to the upside while J.P. Morgan and Goldman Sachs struggled with challenges in fixed income, commodities, and currency trading. The major banks appear to be doing everything they can to reduce discretionary expenditures in the face of ongoing pressure to core net interest income that is being disadvantaged by zero interest-rate policy from the Fed. We remain overweight financials with the expectation that rates will rise, boosting margins and unleashing substantially better levels of profitability.
Our Takeaways from the Week
- The floodgates of earnings season opened this week, as money center banks and various other blue chip companies reported third quarter results
- Disappointing retail data and nearly non-existent inflation have investors deferring rate hike expectations into 2016