by Krystal Daibes Higgins, CFA
Vice President, Equity Research
U.S. stocks ended higher this week as investors digested news of solid corporate earnings against a more hawkish-than-expected Fed and better-than-expected labor data. Throughout the year, rising rates and macroeconomic headwinds overwhelmingly pressured asset prices and valuations, even for companies that have demonstrated earnings resilience. In addition, as the Fed continues to combat high inflation by raising interest rates, calls for a recession continue to grow louder. While the domestic and global economy is slowing, one of the benefits of earnings season is being able to look through the lens of company management versus headline news. The advantage management teams offer is both a birds-eye and ground level view of the economy, supply chains and consumers. To that end, one of the key themes emerging this quarter is the continued strength of the U.S. consumer.
Namely banks - typically the first industry to begin reporting quarterly reports - have made notable statements about consumer health the quarter:
“Credit quality remains strong … while we’re closely monitoring trends with economic conditions expected to weaken, given inflation, geopolitical instability, energy price volatility and rising rates, our customers continue to be resilient with overall strong credit performance and solid cash flow.” – Wells Fargo
“We just don’t see anything that you could realistically describe as a crack in any of our actual credit performance.” [Company management went on to note an environment of very strong consumer spending and that consumer balance sheets remain solid.] – JPMorgan Chase
“The current credit environment is benign. In fact, our net charge-off ratio in the third quarter remained near historic lows and we are not seeing any meaningful early-stage metrics that cause concern.” – US Bancorp
“Early- and late-stage delinquencies remain well below pre-pandemic levels. These are decades-old lows and we’re just now seeing a gradual move off these lows and early-stage delinquencies. Late-stage delinquencies are still 40% below pre-pandemic levels. Asset quality metrics remain strong as well.” – Bank of America
While banks provided a constructive view on the consumer segment, they also acknowledged that there could be weakening trends as we head into 2023 as the intended effect of rising rates have a greater impact on further slowing the economy. As a result, many have increased their capital reserves in anticipation of more challenging economic conditions.
Another theme that has emerged in third-quarter earnings reports is the easing of supply-chain disruptions. While disruptions continue, we are beginning to see more stability as inventory lag times shorten, product availability increases and China’s lockdowns become less restrictive. While these modest supply-chain improvements will not have an immediate impact on easing inflation, it is an encouraging trend that will ultimately help curb inflationary pressures.
Takeaways for the Week:
The consumer segment remains resilient as credit quality and spending remain solid
Supply-chain disruptions continue, but we are beginning to see stability