The “profit reckoning” thesis is in jeopardy.
Although a tsunami of key reports, including results from Apple and Amazon, could yet tilt the zeitgeist back in favor of the “next shoe” narrative (which, in a nutshell, says guide downs and margin misses are destined to force capitulation from company analysts, leading to a wave of downward revisions), so far that story “hasn’t quite worked out as planned,” as Nomura’s Charlie McElligott put it Wednesday.
Coke, McDonald’s, Microsoft and Google, all demonstrated varying degrees of resiliency in the face of macro headwinds, for example, which I suppose isn’t all that surprising. Coke is Coke, after all, and McDonald’s isn’t exactly fine dining. As one analyst put it this week, “when you get into a more difficult economic environment, McDonald’s usually performs well.” I’ll concede that point, although I’d be remiss not to note that the first cheeseburger price hike in 14 years feels apocalyptic — like everything else that’s happened in the 2020s. As for Microsoft and Google, they’re fine.
Just as notable, perhaps, were comments from Visa, a company which knows a thing or two about consumers. “The affluent spender continues to recover, particularly in the areas of restaurants, travel and entertainment,” CEO Al Kelly said on the call. “At the same time, non-affluent spend remained relatively resilient.” CFO Vasant Prabhu was unequivocal: “We’re seeing no evidence of a pullback in consumer spending.” Revenue rose 19% YoY, topping estimates (figure below).
Kelly summed it up in amusingly colloquial terms: “Consumers just don’t buy homes or used cars with their Visa card,” he said.
The implication was that although consumers now harbor an extremely negative view on buying conditions for houses and other large purchases, Visa could be insulated. “No macro stress was evident in quarter-to-date volumes,” Barclays said of Visa’s results. Analysts cheered news that travel volumes topped pre-pandemic levels. Spending overseas jumped 28%, better than anticipated.
All of this is “roiling the best laid plans of the top-down macro bears, who were poised for ugly prints and forward expectations due to the implications of a strong USD and a rapidly weakening economy,” McElligott went on to say, before noting that so far, “earnings have evidenced a surprising ‘better margins’ story for many corporations, as pricing is going up (via pricing power and anybody who’s not low-end swallowing costs), while too we now see input costs finally beginning to show some signs of fading, which is more than offsetting that macro ‘slowing volumes’ dynamic.”
Again, the verdict isn’t in just yet. Earnings seasons is far from over. So far, though, we’re just not seeing “it,” where “it” means the kitchen sink-style guides that’d be indicative of the kind of complacency company analysts were accused of prior to reporting season.
If there’s a downside, it’s the absence of… well, downside. “This was supposed to be the ‘buy the dip’ moment for stocks,” McElligott wrote. “But there’s no evident ‘dip.'”
Well companies have a way of managing earnings, so we may not get the kitchen sink type moment- but earnings growth could still be poor going forward. It may take a couple of quarters to play out and it may not be quite so dramatic as we saw before.
McD doesn’t have to raise the price. They just shrink the burger, reduce the number of fries, or serve a smaller drink. I suspect that a similar strategy is common at other companies too.