What you need to know about earnings season and the U.S. consumer

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US economic growth in the third quarter was disappointing with supply chain disruptions and the Delta variant weighing on activity. The Atlanta Federal Reserve currently estimates third-quarter GDP to be just 1.2% after a strong annualized growth rate of 6.7% in the second quarter. While it won’t be enough to save the quarter, the US consumer came to the rescue again in September and provided a silver lining for the quarters to come.

Retail sales increased + 0.7% month over month and + 13.9% year over year compared to an expected monthly decline. The impact on consumer mobility of the Delta variant waned in September, with bar and restaurant sales increasing + 0.3% month-over-month and non-store sales including online, -2.5% month over month. Sales of bars and restaurants increased + 29.5% year-on-year.

However, not all of Covid’s retail sales impacts have gone away. Supply chain disruptions continue to disrupt the automotive industry. Auto sales fell -4.5% month over month and have now declined monthly for six straight months despite robust demand. While the lack of auto sales is currently a drag on the economy, growth is expected to be significantly boosted once the supply chain is normalized.

As Covid infections continue to rise in the United States and many other countries, the declining rate of change is an indication that things are already starting to improve. After eleven consecutive week-over-week increases in infections, the rate of increase in Covid cases in the United States has now declined for four consecutive weeks. Assuming the trend continues, this should continue to support economic activity.

The third quarter earnings season started in earnest last week with reports from banks almost exclusively. Bank profits have been almost uniformly high. Earnings reports led the estimate of third quarter mixed earnings, a combination of actual and estimated earnings, to 30.6% year-on-year, from 17.1% at the end of the quarter. Bank stock prices have been significantly correlated with returns, so falling interest rates likely made stocks gain less than one might have expected otherwise. As expected last week, banks once again showed strong credit measures and reduced loan loss reserves, which helped to beat consensus earnings estimates. Wealth management and investment banking fees were positive drivers. Net interest margins (NIMs) generally improved for the group as well. The NIM is the amount a bank earns in interest on loans relative to the amount it pays in interest on deposits.

This week, 80 companies in the S&P 500 are expected to report their earnings. While the past week has been dominated by banks, this week will offer a snapshot of more sectors. Forward guidance will remain essential with current concerns about the economic outlook and cost pressures. The impact of supply chain disruptions and all colors on the timing of standardization will be significant for the forecast. Finally, the effect of higher costs and the ability to pass on higher prices to protect profit margins will be closely scrutinized. Despite the good start provided by the banks, profit beats are expected to be weaker and less frequent than in recent quarters. However, real earnings performance is still expected to exceed these high levels despite a moderation in economic activity.

Besides the wins, there are tons of Fedspeak this week, with twelve appearances on the schedule. The highlight of Fedspeak will be Chairman of Fed Powell on Friday. The markets will be listening for any hints on the timing of the tapering and the first rate hike. With the debt ceiling crisis averted through December, Congress will focus on negotiating the hefty tax and expense bills. Globally, Friday’s Purchasing Managers Index (PMI) readings for the United States, Eurozone, United Kingdom and Japan will be interesting in gauging the strength of economic growth and the brake of variant infections Delta.


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