The heart of earnings season will start to get underway this week. This will be an interesting quarter as it comes against the background of a stock market that’s suddenly a little shakier than it has been in the recent past. Volatility has really picked up towards the end of the quarter and early October, which wont be captured by the numbers, so forward looking commentary takes on added significance in the next few weeks.
Here are a few of the questions that I’ll be looking for answers to as I read through earnings calls:
Macro
Has the US economy been slowing?
On this question I’ll be focusing especially on signs that the consumer may be hitting a wall. The reason I’ll be focused on the consumer is that the consumer sector is typically the first to show signs of weakness heading into a recession. I’m not as interested in later cycle sectors like construction and other industrials as those will tend to be lagging indicators. I expect those sectors to show signs of strength, but they aren’t as significant data points in answering this specific question.
How much has the global economy been slowing?
Specifically, I’m interested in hearing more about Europe and China. In regards to Europe, I’ll be looking for indications of whether or not the market’s pervasive pessimism is warranted. Often in an economic recovery there is a growth scare a couple of years after the initial rebound (think 2011 in the US). Along those lines, there is a chance that Europe’s current weakness is just a growth scare and that the region isn’t slipping back into recession. In China, any commentary that doesn’t suggest that the wheels are coming off the economy is a win.
Will movements in foreign exchange affect earnings?
Early indications are that a strong dollar could impact earnings but only if the dollar stays here for a long time. I don’t expect to see much impact in 3Q, but I’ll be keeping an eye on this.
Financials
How is credit quality?
With US banks, my focus will shift from loan growth back to credit quality for the first time in a long time. I’ll be interested to see if credit quality remains strong or if there are early indications of delinquencies. In line with the consumer question above, I’ll be paying particularly close attention to credit card portfolios. I’m also interested to see if other analysts’ questions start to take on a credit focus as well.
Consumer
What is the state of the consumer?
As mentioned above, I’ll be particularly focused on the consumer this quarter. I’d like to hear what management teams have to say about how business performed in late September and early indications of October. Signs that consumers are trading down or that traffic is slowing are particularly salient data points at this point in the cycle. It will be important to pay attention to commentary on how the upper middle class/upper class is reacting to a mild increase in stock market volatility.
Are growth companies still growth companies?
This question bridges consumer and technology to some extent. Are the Facebooks (NASDAQ:FB), Netflixes (NASDAQ:NFLX) and Teslas (NASDAQ:TSLA) of the world able to deliver on growth expectations? For advertising based and social media models–how are advertisers feeling about their ROI on these platforms?
Energy
How is the change in the price of oil affecting the industry?
This is probably one of the most interesting industries to watch this earnings season. The price of oil has fallen to where some companies have said in the past that shale oil plays become less economic. It will be interesting to hear how companies are reacting to the change in price. I’d pay attention to what EOG (NYSE:EOG), Schlumberger (NYSE:SLB) and Core Laboratories (NYSE:CLB) have to say as thought leaders in the sector.
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