The US economy through the eyes of this earning season

The earnings season started again, as for every quarter, with corporates announcing results and updating their business guidance. Investors were very nervous worldwide due to geopolitics tensions such as Boris Johnson’s Brexit plans, US-China trade talks and Hong Kong protests against the Chinese government. Some bears are looking at signs for the longest-ever bull market’s end and they may be able to materialise some return on short positions.

The street has issued views about the earnings season, some analysts see room for growth and others are more cautious about inflated investors’ expectations.

As usual, the period started by some of the major banks and the biggest asset manager on earth (BlackRock). Let’s have a closer look at some numbers with particular focus on specific sectors taking into account US economic momentum. Hereafter, stock returns by sector in the period between October 28 and November 1, 2019.


Banks opened the earnings season as usual. JP Morgan Chase, Citi and Goldman Sachs reported as first ones. The financial sector is a good global economic sentiment proxy due to its high-cyclical feature. Financials’ core business focuses on helping clients investing their money, providing financing to companies and individuals, helping to raise capital or facilitating access to financial markets for corporates.

JP Morgan Chase’s financial results were above consensus hence leading to beat versus analysts’ estimates. The beat was mainly led by consumer banking whose growth offset the lowering rates environment hurting banks’ profitability. Revenues at $30.1 billion were up 8% year-on-year with net income reaching $9.1 billion and $2.68 EPS. The 25% YoY growth in the fixed income business showed solid and above expectations while the equity side was a lag. According to JPM’s CEO, Jamie Dimon, consumer spending is strong in the US but geopolitics might negatively affect results going forward also weighing on the overall economy’s health. On trade tensions, he said that it is too early to see whether it will be a recession driver.

Citi published results beating Wall Street expectations too. Revenues were at $18.6 billion and EPS at $1.97 versus consensus at $18.56 billion and $1.95 respectively. Costs saving led by reduced headcount was not enough to avoid a -1% YoY decline in trading results but still above consensus implying a -4% decline. The bank is not only eliminating positions but also investing in new technology that will help it save at least $500 million this year as it seeks to improve an efficiency ratio that has disappointed investors in the past according to Michael Corbat statements.

Looking now at Morgan Stanley, they announced what they defined the best third quarter for revenues in a decade. Profit was up 2.3% to $2.17 billion in the quarter, or $1.27 per share, compared with the expected $1.11 per share. MS revenues came in roughly $500 million above consensus at $10.1 billion and surprising investors given the difficulties faced by other Wall Street firms in the reporting quarter

Goldman Sachs posted disappointing results versus peers. The bank said profit slumped 26% to $1.88 billion, or $4.79 a share, below the $4.81 expected and the $6.28 of Q3 2018. Revenues also fell by 6% to $8.32 billion, but slightly above the $8.31 billion expected. The business divisions which mainly contributed to this result were investing & lending and investment banking segments while trading modestly exceeded expectations.

If we now take a quick look at BlackRock, the world biggest asset manager, the company achieved a record profit margin last quarter. Lower costs and increasing asset under management swelled AUM at the world’s largest fund manager to almost $7tn. The New York-based fund saw inflows for $89 billion, of which $84 billion into iShares, the company passive investing arm. Larry Fink, CEO and founder of the company, stated that eliminating trading commissions was extremely beneficial for this part of the business. At the same time, the net income fell around 8% YoY. The stock was up on the release as investors liked the 30% growth in the technology business, namely Aladdin, which represents nowadays 7% of the firm’s revenues.

Share prices’ returns YTD as of 10/11/2019 for Morgan Stanley (blue), Citi (orange), JP Morgan Chase (yellow), BlackRock (green) and Goldman Sachs (black)


As it involves corporates operating in different underlying businesses, although all related to consumer products, this is a broad and heterogeneous sector. Consumption is linked to the economic well-being, generating inflows for companies, taxes for governments and investments among others.

Starting with Nike, the stock surged to an all-time high, on the heels of the company’s better-than-expected earnings report. Revenue increased to $10.7 billion in the first quarter, up 7% on a reported basis and up 10% on a currency-neutral basis, driven by growth across all geographies. EPS for the quarter were $0.86, an increase of 28% driven primarily by top-line growth and gross margin expansion. According to the CEO, Mark Parker, the strong start is attributable to the investments in product innovation together with the digital experience that continues to deepen customer relation, leading to higher sales. This is also a consequence of Nike’s recent acquisitions of tech start-ups, signalling that Nike has been thinking outside the box and ahead of many of its peers. An example of those acquisitions is Celect, with which Nike can predict the style of sneakers and apparel researched by the customers divided by region.

Looking now at Coca-Cola, the results topped analysts’ estimates. Revenues were $9.6 billion against a consensus of $9.5 billion and the EPS were at $0.56, in line with estimates. Healthier options such as smaller cans and no sugar sodas have seen sales increasing given the higher attention paid by the customer to healthier options. Zero Coke Sugar saw double-digit volume growth in the quarter. On the other hand, because of high plastic usage, the company is conscious that the water business may have weaker performance in the future, so they are currently working on more sustainable solutions in this field.

On a different note, McDonald’s had a quarter below Wall Street expectations for the first time in the last two years. McDonald’s U.S. business, which is responsible for roughly a third of the company’s total revenue, collapsed after ending one of its nationwide limited-time value deals. In the first half of the year, the Chicago-based company referred to this promotion as a key sales driver. Revenues were at $5.4 billion (vs $5.5 expected) with EPS of $2.11 (vs $2.21 expected). Moreover, recently the company fired the CEO after he had a consensual affair with an employee, as this was violating the corporate policy. Therefore, not a great moment for the company differently from competitors such as Burger King’s owners Restaurant Brands International whose shares are rising on strong business performance.

Finally, as we approach holiday season there was Hilton, one of the biggest companies worldwide in the hotel industry, which reported earnings above Wall Street estimates. The adjusted EPS at $1.05 were above the consensus estimates of $1.02 and improved 13% YoY. Revenues totalled $2.39 billion, against $2.37 billion expectations. Moreover, the reported figure improved 6.3% from the number of the Q3 of 2018 helped by the higher comparable revenue per available room (RevPAR, a key metric in the sector).

Payments companies

Last but not least, the payment companies such as American Express, PayPal and Visa are good indicators of consumption as people use credit cards or other digital payments services to make their purchases.

American Express, the company associated with high net worth individuals, showed good results for the quarter. Cardholders are spending more and they are paying more on their balances, lifting the company’s third-quarter revenue and earnings per share just above Wall Street’s expectations. Net income rose to $1.76 billion, or $2.08 a share, from $1.65 billion, or $1.88 a share compared to the same period of last year. Revenues grew in all the three divisions of the company: Consumer Services by 11%, Commercial Services by 7% and Merchant and Network Services by 5%. According to Chief Executive Steve Squeri, “The trends we saw in the business this quarter continue to be consistent with an economy that continues to grow, albeit at a more modest pace than last year”.

Looking now at Visa, the payments company reported better earnings and revenue than expected, while cross-border payments volumes grew but less than expected. Revenues grew 13% YoY to $6.14 billion and Net income by 6.3% YoY to $3.03 billion. The EPS were at $1.47 against analysts’ expectations of $1.43. Alfred Kelly Jr, CEO of Visa, stated that extended and expanded partnerships with their largest clients globally together with partnerships with emerging companies across the payments ecosystem contributed to the good results posted, a trend that is expected to continue in the future.

PayPal, which facilitates payments on apps like Uber, eBay, Hulu, and Spotify among others, reported a 19% rise in its revenue at $4.38 billion, above analysts’ expectations of $4.35 billion. Shares, therefore, rallied the following day, given also the higher customers’ traffic than forecasted. The number of payment transactions per active account that measures consumer engagement also rose 9% to 39.8. Net income rose to $462 million from $436 million the previous year.

Returns YTD, as of 10/11/2019, for PayPal (blue), Visa (purple) and American Express (red)

The economy is still doing well

After the analysis of some of the third quarter’s earnings for this year, we can see that the US economy is still in good shape. This situation can be generalised somehow as we do not see any signs worldwide of an incoming recession, differently from a couple of months ago. According to a report issued by Bank of America Merrill Lynch, 77% of the corporates delivered better-than-expected earnings as of the 31st of October when more than 2/3 of the companies of the S&P 500 reported their results.

All CEOs from the companies analysed were confident on the economy, in particular in the US, stating that it is still growing although they acknowledge the slowing pace, due to geopolitical reasons.

So, one question is still present in investors’ minds: when will this so expected recession come to mark an end to the longest bull market ever?



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