Weekly Brief: Earnings Season Might Be Just Want Investors Wanted… Or Dreaded

Investors can finally take a break from fretting over inflation data: earnings season is here, and it could either be a well-needed bout of sunshine, or the getaway from hell.

🕰 Recap

• After a muted reaction to last Friday’s big bank earnings, Goldman Sachs caused a stir with its dire results on Tuesday
• Then on Wednesday, Microsoft confirmed that it’s the latest of the jumbo tech firms to shed jobs, casting doubt over the firm’s upcoming profit report
• But Netflix put on a sparkling show late on Thursday, with results suggesting the firm’s well and truly back in business

✍️ Connecting The Dots

Investors finally have something other than inflation to focus on: US fourth-quarter earnings season is now in full swing, so the next couple of weeks could be a welcome distraction from the relentless economic headlines. That’s not to say the news will be all piña coladas and sunglasses, mind you. In fact, if Goldman’s dreary results are anything to go by, investors risk getting caught in the rain. See, investment banks’ earnings are driven by current trends like trading revenues and corporate deal-making, which flourish when times are good and flounder when they’re bad. So Goldman’s report that profit was way worse than expected isn’t just grim for the bank: it’s a telltale sign that not much else is booming right now either.

There’s an even more ominous sign of what’s to come this year: Big Tech layoffs. After all, Alphabet announced on Friday that it’s culling 6% of its workforce, marking a full house for the titans. That matters: Big Tech’s customers plan their budgets with a long-term view, so cost-cutting efforts from Alphabet et al could signal that their clients are reining in spending. And if that’s the case, the pullback will ripple across the whole market.

When it comes to stock prices, though, the extent of any pain will come down to what investors expect for the year ahead – and what they’ve priced into markets already. According to analytics firm FactSet, analysts predict that S&P 500 earnings fell around 4% last quarter, and will continue to slip in the first half of this year. Still, investors may well be bracing for worse than those analyst forecasts suggest, so they’ll be paying close attention next week: it’ll be Microsoft’s turn to reveal its cards – hey, maybe those job cuts were just a master bluff.

🥡 Takeaways

1. Bad news is just bad.

There’s a strange phenomenon in the world of investing: good economic data often makes for bad headlines. Just look at the news last year: signs that the economy was in decent shape – think low unemployment – only signaled that interest rate hikes were still needed, which continued to pull down stock valuations and prices. Stock investors, then, found themselves crossing their fingers for bad news. But be careful what you wish for: ugly US data – like retail sales falling 1% in December from the same time the year before – has ramped up fears of an incoming recession, and no amount of rate-change-inducing bad news can make up for that.

2. Recessions happen, deal with it.

Still, a recession isn’t always a world-stopping event. In fact, there have been 11 US recessions since the Second World War, not including the pandemic-driven economic collapse of 2020. They tend to crop up every six years or so, and can cleanse the financial system of past excesses. After every single recession in history, economies and stock markets have recovered and gone on to better days. And there’s no reason why this one – if it does happen – should be any different.

🎯 Also On Our Radar

Politicians and corporate bigwigs gathered in Davos, Switzerland this week for their yearly gathering of great minds in a bid to….well, it’s not entirely clear. See, TV interviews showed dignitaries saying all the same things about cooperation, climate change, and global prosperity – without really saying much at all.