It Could Be Worse

It Could Be Worse

over 4 years ago3 mins

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Analysts were steeling themselves for a second-quarter “earnings recession” – but this week’s results from major US banks and tech companies have started to change some minds...

🕰️ Recap

  • Investors were braced for US companies to report falling profits for the second quarter in a row

  • This week, Citigroup, Goldman Sachs, and JPMorgan lifted the curtain on their second quarters, with mixed updates

  • On Wednesday, Netflix’s earnings exceeded forecasts – but investors were turned off by the addition of fewer new subscribers than predicted

  • On Thursday, Bank of America and Morgan Stanley posted better-than-expected quarterly profits

  • And Microsoft, the US’s biggest company, shot the lights out with its quarterly report on Thursday

🔗 Connecting the dots

Just last week, analysts were forecasting a 3% average drop in US companies’ second-quarter profits – which, following a slight decline in first-quarter earnings from a year ago, would represent an earnings recession. And analysts didn’t expect things to improve any time soon: they’d been bracing for declines later on in the year too, lowering their third-quarter profit predictions.

But banks, so often the villains of the financial world, were last week’s unlikely heroes. Collectively, US banks’ second-quarter profits hit a record high, and their rising stocks whipped up a tailwind behind markets. That’s despite expectations for an upcoming rate cut, which would limit their interest incomes.

Tech stocks – the biggest one in particular – also played their part. Microsoft’s better-than-expected quarterly profit pushed its stock price and the US market higher, and helped offset the more-than-10% drop which rocked Netflix following its Wednesday update.

Next week, investor focus will turn to other tech giants, which remain under siege by regulators. Facebook is about to receive a record $5 billion fine for its part in the Cambridge Analytica scandal, all while getting grilled about its plans for its non-cryptocurrency cryptocurrency Libra. And things aren't going much more smoothly for Amazon: European regulators have launched an investigation into whether the retail giant is inappropriately using third-party merchants’ data.

🥡 Takeaways

Banks were upfront about the fact they wouldn’t make as much money from loans in 2019 as they’d thought, and investors took the revelation in their stride – probably because record profits suggested banks were willing to cut costs in order to preserve earnings. But when it came to Netflix – whose revenue, profit, and forecast all beat investors’ estimates – investors were quick to sell off its stock. It doesn’t take much digging to see why: the media giant added fewer new subscribers than it had promised in April, which means future earnings growth may prove tricky. New competition is already starting to jostle for center stage, and there’s only so much further Netflix can only raise its prices…

Investors have, on the whole, quickly reversed course from their earlier pessimism. Rather than expecting a fall in profits, they’re now predicting profit growth, rethinking their estimates in light of the first few promising results. But with a number of large industrial companies set to report in the coming weeks, some investors worry that sentiment – and estimates – may take a turn for the worse again. The earnings of industrial companies are typically more affected by slowdowns in economic growth than tech firms’, and may dash any hopes of seeing overall growth in profits.

🎯 Also on our radar

Shares of Singaporean airline services provider SATS fell 6% on Friday, which may have set off alarm bells for investors. Since the company provides airlines with in-flight meals, its earnings are directly linked to global travel demand – meaning it’s considered to be a pretty reliable bellwether of the world’s economy. SATS’s quarterly profit fell from the same time last year. That’s in part down to disruptions at one of its major customers, but more importantly, it’s also down to lower cargo volumes, which could hint at a looming economic slowdown.

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