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This earnings season was always going to be a bit weird, because traders and investors are filtering everything through a forward-looking lens. They don’t much care about the meat of most earnings reports — the results achieved by the company over the third quarter — but instead are focused on guidance and are looking for answers in a couple of specific areas. They want to know whether a company expects to see a weaker economic environment going forward, and if there are still supply chain issues that restrict their ability to meet demand.
The market’s reactions to earnings reports have been largely based on those two things. That focus has led to many cases where a stock has moved in the opposite direction to what might seem logical based on EPS or revenue numbers. That happens every quarter to some extent because forward guidance always matters, but it has happened more this quarter where it seems to be the only thing that matters.
The good news is that as earnings season has progressed, stocks have formed a bottom and then rallied quite strongly. Indicating that the positives from a forward-looking perspective have outweighed the negatives.
That was certainly true of two big names that reported this morning. Both Coca-Cola (KO) and GM (GM) reported bottom line beats, although GM did miss on revenue. More importantly, though, both mentioned strong Q3 demand and said they expected that to continue. There was talk in both cases of forex headwinds and input price volatility that made forecasting tricky, but neither company saw any signs of consumer weakness ahead. In fact, in a letter to shareholders, GM CEO Mary Barra said “demand continues to be strong for GM products,” while Coca-Cola was optimistic enough to raise their full-year outlook despite those headwinds.
That contrasts with comments by some more tech-oriented companies that have so far reported, particularly those reliant on online advertising revenue, where a significant slowdown is expected. However, a strong outlook from consumer-driven companies at both the high and low end of the purchase price scale suggests that that is not about consumer weakness, current or anticipated, but more of an adjustment in advertising spend. So, what might have caused that?
The changes in Apple’s (AAPL) privacy policies are having more of an impact than anticipated, but could it also be that what we are seeing is a bubble in the digital ad space deflating? It sure looks like it, and if that is true, it is actually good news. It means that the weakness we have seen is both temporary and limited in scope, both of which make it more likely that the worst of the selloff in stocks is over. Social media companies and the like will adjust to the new environment before too long, and if consumer demand proves to be as resilient as both Coca-Cola and GM believe it will, advertising spending overall will increase. The digital slice of the pie may have shrunk, but the pie as a whole will grow.
In a more general sense, business to business sales look so far to have been a little weak last quarter, which has also weighed on some stocks. However, that was based on anticipation of consumer weakness, and if none is evident or expected in the reports of big, global brands, business activity will strengthen over the next few quarters. There could even be in a mini boom if there is pent-up demand.
The outlook a couple of weeks ago, when earnings season started, was not great. The Fed and other central banks were hiking rates and businesses were cutting back in expectation of that having a negative impact on the consumer. There were legitimate fears that the Fed may have already gone too far and that they would cause a painful recession if they kept tightening into a weakening economy. That is still a danger in the future, but reports and commentary such as seen this morning from Coca-Cola and GM indicate that we aren’t there yet, so there is hope.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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