U.S. Investors Confront Weak Economic Growth and Weaker Earnings

Barry Adams
21 Apr, 2023
New York City

Investors appeared to be in no hurry to buy stocks amid growing realization that higher interest rates are likely to stay longer and corporations may have to operate with lower margins. 

While investors debated the health of the U.S. economy and how that will impact future earnings streams, some of the largest companies reported weakening sales and falling margins this week. 

Most companies have been reporting surging sales for the last two years in a row and many have benefitted by passing on price hikes greater than the increase in input costs. 

But the cycle of double strikes, rising volumes and prices, appears to have started reversing, with the decline in unit sales most often mentioned in the earnings announcements. 

If the economy enters into a recession, then the second strike of lower price will also dent earnings one more time, knocking the overall earnings lower than in 2019, pre-Covid levels.  

Investors are still in the early guessing game of how far corporate profits have to decline and how low market valuations have to adjust to reflect new and lower future earnings trajectory.  

Benchmark indexes are set to close down for the week but still up for the year as more economic data suggested this week that the U.S. economy is heading for a contraction. 

Market averages are little changed after a week of earnings where most companies are reporting earnings that met lowered expectations. 

About 210 companies have released earnings this week, but investor expectations may have to be revised lower in the event the economy slows down or even heads into a milder recession. 

Jobless claims inched slightly higher, indicating labor market tightness but Conference Board's index of leading indicators declined suggesting that the economy is heading into a contraction.  

Investors have still not adjusted earnings estimates in the event of an economic slowdown or even a mild recession, rendering broader averages vulnerable to more declines.   

 

U.S. Indexes & Yields 

The S&P 500 index edged up 1.24 points to 4,132.55 and the Nasdaq Composite index inched lower 2.43 points to 12,054.76.  

The yield on 2-year Treasury notes inched lower to 4.11%, 10-year Treasury notes edged down to 3.50% and 30-year Treasury bonds traded at 3.73%.   

Crude oil edged higher 72 cents to $78.11 a barrel and natural gas held at $2.24 a thermal unit.  

 

U.S. Stock Movers 

Procter & Gamble rose 3.7% to $156.50 after the consumer products maker reported better-than-expected quarterly results. 

P&G said revenue in the fiscal third quarter ending in March increased 4% to $20.1 billion, driven by 10% increase in prices and 3% decline in volume. 

Net income attributable to common stockholders increased 1% to $3.39 billion from $3.35 billion and diluted earnings per share rose to $1.37 from $1.33 a year ago.  

The company revised its full-year sales guidance to increase 1% from the previous estimated range between decline of 1% and in-line. 

CSX Corporation increased 2.8% to $31.69 after the railroad operator reported first quarter results. 

Revenue increased 9% to $3.7 billion and net earnings rose 15% to $987 million from $859 million and diluted earnings per share rose to 48 cents from 39 cents a year ago. 

PPG Industries increased 0.8% to $142.55 after the company lifted its full-year outlook. 

Revenue increased 2% to $4.3 billion and net income soared to $264 million from $18 million and diluted earnings jumped to $1.11 from 8 cents a year ago. 

The company guided flat sales in the second quarter and earnings per share between $1.92 and $2.02 and adjusted earnings per share in the full-year 20223 between $6.95 and $7.25, excluding amortization charges and non-cash pension settlement charges.   

 

5th Weekly Gains In European Markets, Private Sector Activities Expanded 

European markets struggled and investors digested a fresh batch of earnings amid growing economic anxieties. 

The latest PMI surveys in the Euro Area and UK showed service sector growth accelerated in April but manufacturing remained under pressure on weakening demand for goods. 

The HCOB Eurozone Composite PMI increased to 54.4 in April, highest in 11 months. 

The HCOB Germany Composite PMI rose to 53.9 in April from 52.6 in March, indicating accelerating business activities in the private sector after service sector activities rose to a 12-month high. 

The S&P Global/CIPS UK Composite PMI increased to 53.9 in April from 52.2 in March, indicating the fastest pace of expansion since April 2022.  

The index above 50 indicates expansion and below 50 shows deceleration. 

Investors also welcomed positive quarterly results from EssilorLuxottica and Mercedes Benz reported sharply higher industrial free cash flow. 

 

Poor Weather Contributed to March Retail Sales Decline In UK  

Retail sales in the U.K. fell more than expected in March, the Office for National Statistics reported Friday.

Poor weather contributed to stretched consumer budgets, negatively impacting retail sales.  

March retail sales, including motor fuel, decreased 0.9% from the previous month after rising for two months in a row. 

February retail sales growth was downwardly revised to 1.1% from the previous estimate of 1.2%. 

Retail sales, excluding motor fuel, declined 0.6% from the previous month, after rising 2.1% in February. 

Retail sales volume in the three months to March  increased 0.6% from the previous three-month period.   

 

Europe Indexes & Yields 

European markets were in holding patten in Friday's trading but benchmark indexes are set to close higher for the fifth week in a row. 

The DAX index increased 0.5% to 15,881.66, the CAC-40 index increased 0.5% to 7,577.0 and the FTSE 100 index added 0.1% to 7,914.13. 

The yield on 10-year German Bunds eased to 2.44%, French bonds decreased to 2.96%, the UK gilts to 3.71% and Italian bonds to 4.32%.

The euro held at $1.096, the British pound at $1.284 and the Swiss franc  

Brent crude edged up 6 cents to $81.16 a barrel and the Dutch TTF natural gas futures rose 24 cents to Є40.90 per MWh.  

 

Europe Stock Movers 

Glencore Plc decreased 1.1% to 496.54 pence and the resource company reported first quarter production that met investors' expectations. 

Coal production declined 6% to 26.9 million tons and zinc production fell 15% to 205.3 kt or (thousands of tons) and copper production eased 5% to 244.1 kt. 

Holcim AG declined 0.3% to Sfr 58.74 and the Swiss cement and construction materials company reiterated its full-year outlook. 

Tele2 AB declined 1.1% to SEK 104.70 after the company reported less-than-expected 3% increase in first quarter revenue from a year ago. 

Mercedes Benz Group AG rose 0.4% to €68.46 after the luxury automaker reported "strong" first quarter preliminary results. 

Earnings before interest and taxes rose to €5.5 billion, largely driven by vans division and industrial free cash flow increased to €2.2 billion, surpassing market expectation of €1.2 billion. 

SAP SE increased 1.3% to €117.14 after the German software company lowered its annual outlook following the sale of its Qualtrics unit. 

EssilorLuxottica SA increased 6.6% to €187.0 after the French-Italian company reported a first quarter sales increase driven by the sales rebound in China.