The market has held up well to this point as we have kicked off second quarter earnings season. While we are still early in the reporting process, several themes are already becoming apparent.
Impacts of a Strong Dollar
Johnson & Johnson (JNJ) lowered their forward guidance because of the strong dollar and also noted on its conference call that the greenback had reached parity against the euro for the first time since 2002. Netflix (NFLX) cited the strong currency as a headwind as well. I expect plenty of American multinationals to follow suit as they report results.
One interesting thing about achieving the highest inflation levels in 40 years is that it was done with a strong currency. This is more an indictment on how bad growth prospects are in Europe and Japan, rather than testament to strong economic growth trends here.
The Effects of Rising Interest Rates
Investment bank results have been dinged as rising rates have slowed the IPO market to a crawl. The SPAC market, which had a huge heyday in 2020 and 2021, is all but dead. Mortgage rates above 5% have slowed the housing market substantially.
Wells Fargo's (WFC) earnings got clipped thanks to a slowdown in the housing sector as they are a huge player in the mortgage market. I expect homebuilder results will be solid when they report, as they work down order backlogs. However, I also believe forward guidance from this sector will be quite tepid. On the flip side, higher interest rates are helping net interest margins at banks and also should boost portfolio returns at insurance companies.
Job Growth Will Slow
The slowdown in mortgage and refinancing activity have already triggered large 'force reductions' from the likes of Rocket Companies (RKT) . I expect that to continue if not accelerate. In addition, companies are reacting to the clear fall in economic activity to curtail hiring plans.
Apple (AAPL) this week stated it was curtailing its hiring efforts for certain divisions and will not fill some open positions. Microsoft (MSFT) also was just out stating "'that U.S. companies were in a 'new era' of hiring that includes significantly fewer job seekers entering the American workforce."
Small business optimism has fallen for six straight months. The NFIB Small Business Optimism Index for June had its lowest ratings for business conditions over the next six months in the 48-year-old history of the survey. Given small business provide nearly all the net job growth in this country, I expect a steep decline in monthly job gains in the months ahead. One more headwind for the consumer which has already lost buying power to inflation for 15 straight months and accounts for roughly 70% of economic activity in the nation.
And those are some trends that are emerging, reading the entrails of the early reports so far during this earnings season.
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