Earnings Season To The Rescue?

Capital markets have been a bit more cautious over the past week. The S&P 500 is about 1.7% below its intraday record high and the Nasdaq is about 2.7% lower. Tech & communications stocks, especially AI-related, are sitting on huge year-to-date gains as well as lofty valuations. Investors are beginning to debate whether an unhealthy asset bubble might be forming. Not surprisingly, the bond market has rallied, pushing yields lower. Treasuries tend to get more love when stocks get shaky.

The best prescription for this situation may be a correction. Stock prices don’t follow a straight line; sometimes bull markets get ahead of themselves. The S&P 500’s ratio of current price to earnings expected over the next 12 months has climbed well above its long-run average. What that means in simple terms is that investors are bidding up stock prices faster than the underlying companies can grow profits. The very palpable FOMO that started in AI stocks has spread to all forms of crypto, private credit & equity, SPACs, gold, and other metals. These assets are more expensive by the day, and a healthy reset may be in order.

Other factors may be contributing to this newfound caution. First, the US government shutdown has restricted the flow of normal economic data that investors depend upon. For example, we’d love to know whether hiring activity slowed or unemployment claims spiked this month. But unfortunately, the Bureau of Labor Statistics suspended operations and won’t release the data. At the risk of over-stating the problem, there is a sense that investors are proceeding with one eye closed, at least temporarily. And that should cause a bit of volatility.

Next, trade policy uncertainty is still with us. Last week China tightened restrictions on the export of rare earth materials to the US. President Trump responded by threatening a 100% tariff on all Chinese goods, “over and above any tariff that they are currently paying.” For most investors the continual back-and-forth is becoming too difficult to keep up with. This afternoon I had to scroll far down the Wall Street Journal home page to find any mention of it. Nevertheless, headlines can be shocking, at least temporarily.

Finally, we’re beginning to see some cracks in private credit. An auto parts supplier called First Brands just melted down and declared bankruptcy. It seems mismanagement, rather than a bad economy, caused the event. But the eye-opener was the company’s undisclosed billions of dollars of off-balance sheet debt that obviously won’t get paid back. Also in the news is Tricolor Holdings, a heavily indebted subprime auto lender that collapsed last month and exposed its lenders to serious losses. As a result, JP Morgan Chase announced a $170mil charge-off. A host of other lenders—both bank and non-bank—have been impacted, including UBS, Jeffries and Firth Third.

Very few people really care about First Brands or Tricolor, but every investor should care about excessive and undisclosed debt. As Coinbase’s chief legal officer once said, “If you look at every financial crisis we’ve experienced in the US in recent memory, it has largely been caused by two things: opacity and debt.” These twin dangers are clearly lurking in private credit. Chase CEO Jamie Dimon said, “When you see one cockroach, there are probably more.”

Overall, the credit environment in the US, both for consumers and businesses, has been benign. That is, banks & credit card issuers aren’t seeing a lot of delinquencies. Unemployment has been low, wages are rising and borrowers don’t appear extended. But the problem with private credit is that it’s private, or opaque. And it’s likely hiding some players who are both extended and reckless. Mr. Dimon says that if and when we finally do experience an economic downturn, private credit investors and lenders could take a big hit.

And yet, despite this issue JP Morgan Chase (JPM) still managed to report much better than expected third quarter results today. Total revenue rose 9% y/y and earnings per share were up 16%. Looking under the hood, investment banking (m&a) revenue surged 17%, trading revenue grew 25%, total loans grew by 7%, and net-interest income rose 2%. It was a very high quality report, only marred by management setting aside more cash than anticipated for future loan losses. Given that fact along with aforementioned investor caution, the stock fell 2% in today’s session.

Dominoes Pizza (DPZ) also reported Q3 results this morning, beating Wall Street analysts’ expectations with 6.2% y/y revenue growth. International same-store sales edged up 1.7% and US accelerated 5.2%. The brand continues to grow with 29 new US, and 185 new international stores. The stock shot up 3.9% today.

Blackrock (BLK), one of the largest investment managers in the world, posted strong Q3 results and the stock rose 3.4%. The company attracted $205bil of new assets, pushing total assets under management to nearly $13.5tri. Gains were stronger than expected across all major asset classes, from public to private to digital. The quarter was only dented by higher acquisition spending that kept a lid on profits.

Despite some recent market anxiety over a possible correction, trade policy, and opaque private credit risks, strong Q3 earnings from major companies like JPMorgan Chase, BlackRock, and Domino’s highlight continued underlying economic resilience. While investors remain cautious, corporate results suggest the economy may have more strength than recent market volatility indicates.