Earnings Season Better Than Feared

Stocks open lower this morning following a week-long rally. Currently, the Dow is down 220 points and the S&P 500 is down 1.1%. Today’s weakness is not, however, accompanied by a spike in the VIX or gold, or bonds for that matter. The culprit seems to be a stronger dollar, which tends to push stocks and commodities lower. In addition, the bond market is selling off as interest rates throughout the economy push higher. The 2-year Treasury yield is up to 4.53%, the highest since 2007.

Auto lender Ally Financial confirmed fewer Americans are financing car purchases, an obvious result of higher rates. This constitutes the second of the one-two punch dealt to the auto industry, the first having been Carmax’s report of falling sales as a result of ridiculously high used car prices. Dealers, suffering from low inventory—due to snarled supply chains and semiconductor shortages in the wake of Covid—got away with mark-ups while they could, but those days are over. You are about to see deflation in this sector.

I suppose it’s the same with housing, which is now paying the cost of low affordability and higher mortgage lending rates. With rates approaching 7%, the weekly number of new mortgage applications is down to 1997 levels. Homebuilders are pulling in their horns. The number of newly started single-family homes under construction has fallen to the slowest pace since May 2020. It’s not all bad news, of course. The industry under-built in the wake of the Financial Crisis and even now can’t fully satisfy demand, which is why few economists and analysts believe a true crash is coming. But clearly the industry will experience a significant setback. Homebuilder stocks are already down about 35%.

Earnings season is in full swing. CNBC ran an article this morning titled, “Earnings Aren’t Yet Painting Anything Like a Picture of an Apocalyptic Profit Slowdown.” Just under 60 of the S&P 500 companies have reported third quarter results, with aggregate sales & earnings growth of about 12%. That’s certainly not terrible. I’ll highlight a few reports below.

Truist Financial (TFC), formerly known as BB&T Bank, reported mixed third quarter results. Higher interest rates helped raise profit margins, and loan growth (+4.3%) was better than expected. In addition, credit quality remains strong. But other business lines tied to housing and capital markets were clearly weak, and operating expenses increased. Total revenue grew 5% from a year-ago, whereas profits fell 13%.

Lockheed Martin (LMT), which has recently been panned by analysts, just reported better than expected quarterly results and the stock surged 7%. Q3 revenue rose 3% and earnings soared over 200%. Wall Street was sort of caught off guard here. Lockheed’s solid cashflow and strong balance sheet—not to mention management’s plan to buy back stock shares—should be attractive to investors.

Netflix (NFLX) reported decent results yesterday, and the stock is up 13% today. The streaming service added 2.4 million new subscribers last quarter, and expects another 4.5 million this quarter. Management is increasingly sensitive to growing profitably, saying it will not spend freely on new content until growth picks up. The CEO noted huge investment in streaming by new competitors, but estimates “they are all losing money.” Netflix has been in the doghouse after subscription growth plunged early this year. To drive growth it will soon debut a low-cost subscription option subsidized by advertisements.