Year: 2023

US Sales Activity Accelerates In August US SMIs relating to Market and Sales Growth accelerated sharply in August, reflecting buoyant growth over a wide spectrum of economic activity.

Wednesday we get the flash PMI surveys (purchasing managers). This is the Sales Managers survey from World Economics, right from the very front line,  coming after the very strong July retail sales report:

• The Business Confidence Index increased 1.5 index points to 48.3 in August.
• The Market Growth Index continued to show solid growth in August rising to 53.5.
• The Sales Growth Index, at 53.5, grew to a 6-month high this month.
• The Prices Charged Index increased to a 17-month high in August.

Source: World Economics Data Shown as a Diffusion Index.

Pay for New Hires Is Shriveling After years of salary increases, business across the economy say they’re reducing starting salaries for recruits.

(…) The declines mark a stark turnaround from 2022, when compensation for three-quarters of advertised job titles rose from the year before, according to ZipRecruiter. In a July survey of about 2,000 employers conducted by the online hiring platform, nearly half said they had reduced pay for recent job openings. (…)

Data from Gusto, a payroll and benefits software company serving more than 300,000 small and midsize businesses, shows that pay rates for new hires are 5% lower than they were for new recruits for the same roles at this time last year. While professional-service roles have been most affected—pay rates for engineers and developers, for example, have dropped 18% in the past year—workers in other industries have also been hit. (…)

The company’s data shows pay in tourism and construction, for example, has continued to rise. (…)

The Atlanta Fed’s Wage Growth Tracker shows that switchers’ pay gap is back to normal but also that stayers’ wage growth has stabilized around 5.5% during the past 18 months.

• American Airlines pilots approve sweetened labor deal with big raises

The more than 15,000 pilots at American will get immediate raises of 21% with compensation increasing more than 46% over the duration of the four-year contract, including 401(k) contributions, their union said Monday. (…)

The agreement also includes improvements in scheduling and benefits.

American said on Tuesday retroactive pay for the pilots will cost it $230 million in the third quarter. The airline raised its unit cost guidance on Tuesday to a 4% to 6% increase compared with the same period last year, up from a previous forecast of a 2% to 4% increase, maintaining its annual guidance. (…)

US Corporate Debt Refinancing: Costly But Manageable

Since the end of 2021, IG and HY bond yields have more than doubled. This has raised concerns among investors over the refinancing impact for issuers with upcoming maturity walls. (…)

Unsurprisingly, our findings suggest that the incremental increase in coupon payments is the largest since 2010 for both IG and HY issuers. This makes sense given the speed and magnitude of the hiking cycle combined with the significant amount of cash added to balance sheets in 2021. (…)

With a historically low share of IG-rated bonds maturing within the next 2 years, the incremental hit to interest expenses should be manageable, especially when combined with a strong fundamental backdrop. Profits, debt service capacity, and liquidity are all healthy. In contrast, the notional share of HY-rated bonds maturing within the next 2 years is at the high end of the range. This backdrop suggests a faster transition to a higher funding cost environment for HY bond issuers relative to their IG peers. (…) (Goldman Sachs)

Spread widening coming?

S&P Joins Moody’s in Cutting US Banks A mix of pressures is making life “tough” for lenders, the ratings company said.

Many depositors have “shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs,” S&P wrote in a note summarizing the moves. Non-interest-bearing deposits have fallen 23% in the past five quarters, according to S&P, as a spree of Federal Reserve rate hikes prompted consumers to seek higher deposit rates elsewhere.

  

Data: FactSet, Investment Company Institute; Crane Data; Charts: Axios Visuals

The recent rebound in the nominal yield has been driven by the rebound in the 10-year TIPS yield from a low of 1.06% on April 6 to 2.00% today. The latter seems to be normalizing back around 2.00%, which is where it was during 2003-06, the years just before the GFC of 2008 set the stage for the TIPS yield to fluctuate around 1.00% to -1.00% from 2010-22.

The spread between the 10-year nominal and TIPS yields is deemed to be a measure of the annual average expected inflation rate over the next 10 years. The history of the 10-year expected inflation proxy shows that it mostly has hovered around 2.50% since 2003 except for during the recessions associated with the GFC and the GVC, along with the mid-cycle slowdown of 2014-16. During those three periods of economic weakness, the TIPS yield fell below 1.50%.

This simple model suggests that during normal times, the 10-year nominal bond yield should be around 4.50% with the TIPS yield at 2.00% and expected inflation at 2.5%. That’s where the nominal yield was most of the time from 2003-06, the years before the GFC-to-GVC period. It’s almost there now. The economy performed just fine back then and so did stocks.

Be warned: This is a simple model. We’ve recently discussed our concerns about profligate fiscal policy and the resulting mounting federal budget deficits. We think that inflation will continue to moderate, but we could be wrong.

Amid all the talk about term premium, inflation expectations and real yield, here’s another simple bond yield model:

Between 1985 and 2019, growth in nominal GDP averaged 5.0% and the yield on 10-Year Treasuries averaged 5.0%. The correlation between the two series was 68.7% when excluding the 3 recession episodes.

And speaking of TIPS:

America’s Fight Over Tipping at Restaurants Comes to Its Biggest Battleground Yet Chicago restaurants say they will have to boost prices and cut staff if a “sub-minimum wage” proposal becomes law.

(…) In Chicago, large businesses pay servers, bussers, bartenders and other tipped employees a minimum of $9.48 an hour—with tips making up the difference. If their tips don’t push their hourly pay over the minimum, law requires their employer to make up the difference.

Activists are pushing to eliminate the decades-old system in Chicago, and elsewhere. They say that it relies on diners’ goodwill to subsidize workers’ wages—and that sit-down restaurant staff should be able to earn the same minimum pay as other workers. (…)

Chicago’s City Council introduced an ordinance in July to phase out by 2025 the tipped wage for restaurant servers and others who receive tips, including employees of nail salons, carwashes, hair salons and parking services.

The ordinance would require employers of tipped workers to pay them the municipal minimum wage. Restaurant owners can then decide what to do with customer tips, including giving them to the server or pooling them to distribute to nonmanagerial staff, according to the Illinois Restaurant Association. (…)

If the ordinance passes, Chicago would become the second-biggest U.S. city to eliminate the tipped-wage system, after Los Angeles and the rest of California ended the practice in 1976. (…)

“The concern is there are going to be less hours, and prices will go through the roof. People can barely afford to eat out now,” said Ande Moore, a 51-year-old Chicago waiter and bartender who has been in the industry for 34 years.

Some Chicago restaurant owners have voluntarily started paying a set wage across staff, and said it is helping them attract and retain employees. Joe Frillman eliminated the tipped wage and instituted a 25% gratuity on dine-in checks instead of tips and fees at his Daisies restaurant in Chicago in late 2020. Distributing the gratuity to staff has improved staff loyalty and service, he said. (…)

The owners of Chicago eatery Thattu decided to forgo asking for tips on guest checks when they opened their restaurant in May. They instead charge more than other restaurants serving Indian cuisine, but many customers are pleased to not have to pay tips or other fees on their bills, co-owner Vinod Kalathil said.

Kalathil said: “Here is the true cost of dining out. You see it before you place your order.”

During a recent road trip through Vermont, New Hampshire, Maine, New Brunswick and Québec, we experienced the sharp increase in hotel and restaurant costs. Bar Harbor, Maine was particularly expensive (USD$38 lobster rolls!!!). Restaurants are still struggling with staff shortages. We have seen many suggesting 20-22% tips over the taxed total.

One high end restaurant in NH got creative (!), adding a 7.5% surcharge for “staff management” to which we were expected to add 18-22% tip. It wasn’t clear in whose pockets the surcharge would end up.

At the other end of the fairness spectrum (!), a high end restaurant owner in Qc imposed a 15% tip but, buried in the check’s fine print, revealed that 2.5% would be retained by the restaurant. When I told the server I wanted to tip her directly with cash, it proved impossible since the 15% was automatically added to the bill. When I secretly compensated her, she gave us a large appreciative smile and a clear signal she was unhappy with the situation. Go figure!

BTW, “Help Wanted” signs were almost non-existent in the U.S. states we visited but still numerous in NB and Qc.

Interestingly, Indeed Job Postings have flatlined this summer (through Aug. 11), suggesting that U.S. job openings may have stopped falling.

SHRINKFLATION

• Goodbye Bathtub and Living Room. America’s Homes Are Shrinking. For many Americans, homeownership may be attainable only if they give up a dining room.

(…) Home builders are having to find ways to make their product more affordable to increase their pool of customers.

Shrinking the size of a new single-family home is an increasingly popular way to do it. Smaller homes can help cost-constrained buyers facing high mortgage rates. They also boost the bottom line for builders who are contending with spiraling labor and construction costs.

Since 2018, the average unit size for new housing starts has decreased 10% nationally to 2,420 square feet, according to Livabl by Zonda, a listing platform for new construction homes. Construction starts for new single-family homes declined in 2022. But starts for homes with fewer than three bedrooms increased 9.5% over the same period, according to a Zillow report.

Home sizes are shrinking the most in some of the hotter markets of previous years. The Seattle area, where the size of newly built homes is 18% smaller than it was five years ago, tops the list. New homes in Charlotte, N.C., and San Antonio shrank by 14%, Livabl by Zonda said.

Most builders and architects follow the same basic playbook to produce tighter, more efficient living spaces. They are axing dining areas, bathtubs and separate living rooms. Secondary bedrooms and loft spaces are shrinking and sometimes disappearing.

At the same time, they are increasing the size of multiuse rooms like kitchens and great rooms. Shared spaces like bunk rooms and jack-and-jill bathrooms, which are located between and shared by two bedrooms, are on the rise. In some cases, the kitchen island has become the only eating area in the home. (…)

For entry-level buyers across the nation, the cost of owning a home increased 72% from February 2020 to May 2023, according to an analysis by John Burns Research and Consulting that estimates monthly payments, maintenance and other costs of ownership.

And the smaller floor plans usually mean that buyers are getting less space for their dollar. Lower list prices might make the overall price cheaper, but buyers are still paying more a square foot, according to the U.S. Census Bureau. Inflation-adjusted cost a square foot increased about 2.5% on average between 2012 and 2020. In both 2021 and 2022, it increased nearly 4%, according to John Burns Research and Consulting.

Builders have also ramped up activity for other cost-saving methods, like starting home construction off-site and building more attached homes. In Lexington, S.C., buyers are willing to share a wall with a neighbor when it saves thousands and makes homeownership more attainable. (…)

But not on cars!

• The last $20K car

Five years ago, a price-conscious U.S. shopper could choose from among a dozen new cars selling for under $20,000.

Now, there’s just one: the Mitsubishi Mirage. And even the Mirage appears headed for the scrap yard, AP’s Tom Krisher writes.

Americans increasingly want pricey SUVs and trucks rather than small cars. So the Mirage is the lone new vehicle under 20 grand, which once marked a kind of unofficial threshold of affordability.

The Mirage, with hatchback and sedan versions, costs less than half of what the average U.S. new vehicle does. That average is now just above $48,000 — 25% more than before the pandemic struck three years ago.

CB Leading Economic Index Continues Decline as Uncertainty Grows

(…) “The US LEI—which tracks where the economy is heading—fell for the sixteenth consecutive month in July, signaling the outlook remains highly uncertain” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “On the other hand, the coincident index (CEI)—which tracks where economic activity stands right now—has continued to grow slowly but inconsistently, with three of the past six months not changing and the rest increasing.

As such, the CEI is signaling that we are currently still in a favorable growth environment. However, in July, weak new orders, high interest rates, a dip in consumer perceptions of the outlook for business conditions, and decreasing hours worked in manufacturing fueled the leading indicator’s 0.4 percent decline.

The leading index continues to suggest that economic activity is likely to decelerate and descend into mild contraction in the months ahead. The Conference Board now forecasts a short and shallow recession in the Q4 2023 to Q1 2024 timespan.” (…)

As explained before, the CB LEI is goods-sensitive with 4 of its 7 non-financial components being measures of new manufacturing orders (3) and manufacturing hours worked (1). What used to be a reliable indicator has been “fooled” by the post pandemic switch from goods to services.

Actually, the recent LEI trend has better reflected the manufacturing softness in China which experienced America’s pandemic boom-bust cycle on goods.

The sharp acceleration in U.S. retail sales since May is likely helping clear the inventory overhang throughout the system (manufacturing, wholesaling, retailing) and we can expect new orders to turn positive in coming months. S&P Global’s July U.S. Manufacturing PMI indicated that “the rate of decline [in new manufacturing orders] softened to the
slowest in the current three-month sequence of contraction.”

The August and September PMI surveys (flash PMI on Aug. 23) could offer the first indications that the global manufacturing contraction is coming to an end. The CB LEI will likely benefit but this would primarily help China.

• Jeremy Grantham Says Fed Is Kidding Itself on Avoiding a Recession Fed ‘almost guaranteed to be wrong’

The slow-moving influence of rising interest rates will end up torpedoing the economy, dashing Federal Reserve expectations that a recession can be avoided, according to renowned Wall Street curmudgeon Jeremy Grantham. (…)

“The Fed’s record on these things is wonderful. It’s almost guaranteed to be wrong,” said the co-founder of the Boston-based investment firm Grantham Mayo Van Otterloo, in response to a question about Chair Jerome Powell’s view that a downturn is avoidable. “They have never called a recession, and particularly not the ones following the great bubbles.” (…)

He called the post-pandemic surge in equities “in many ways about equal to the 2000 tech bubble,” but said its deflation has been interrupted by speculation on artificial intelligence and economic stimulus that he linked to next year’s presidential election. (…)

Personally I think AI is very important,” he said. “But I think it’s perhaps too little too late to save us from a recession.” (…)

The deflationary impact of last year’s fall in tech stocks is “too big,” he said. As higher rates continue to depress other corners of the market, particularly real estate, the US economy will see “a recession running perhaps deep into next year and an accompanying decline in stock prices.” (…)

Jeremy is right about the Fed’s poor forecasting record. On the other hand, the bite that rising interest rates usually take on the economy is mitigated this time by two unusual factors:

• the housing market has bifurcated with existing home sales dropping 20% since June 2022 while new home sales, normally hard hit by rising rates,  jumped 28%. Homeowners with low mortgage rates (courtesy of the Fed’s QE) cannot afford to sell their homes so people needing homes turned to new houses helped by builder incentives. YtD, new permits for single-family houses are up 24%.
• Rising rates are boosting savers interest income following years of financial repression (Fed’s QE again!). Since March 2022, personal interest income is up 10.0%. At the margin, boomers are revenge spending on entertainment, dining out and travels.

As a result, employment and wages in sectors generally most sensitive to interest rates remain strong. For example, since the Fed embarked on its tightening journey, construction jobs are up 3.6% with wages up 7.4%. Manufacturing jobs are up 2.1% with wages up 6.4%. Trucking: +2.7% with +6.1%.

Meanwhile, service-providing employees, representing 86% of all non-farm employment and which numbers have declined only in major crisis, grew 3.3% with wages up 5.7% YoY on average in the last 3 months.

In all, aggregate weekly private payrolls rose 8.2% since March 2022 and are up 5.2% annualized in the last 3 months.

Headline CPI inflation is up 5.8% since March 2022 but moderated to +3.3% YoY in July. Core inflation, up 6.9% since March 2022, was +4.7% in July.

Slower inflation pushed real labor income up 3.4% in June from the 2.0-2-3% range, buoying the American consumer right when excess savings are almost depleted and just in time for the important back-to-school and holidays seasons.

But the glass-half-empty view says that inflation has moderated but not because the Fed succeeded in slowing demand or even slowing the components of demand, employment and real wages. The unemployment rate is right where it was in March 2022 and the composition-adjusted Atlanta Fed Wage Growth Tracker, at +5.7% on average in the last 3 months, is just shy of its +6.0% March 2022 reading.

There seem to be only 2 scenarios from here:

1. Goldilocks, where the immaculate disinflation sustains the economy at a moderate enough pace that would allow a gradually easier Fed;
2. Stubborn inflation fueled by steady demand, … until inflation and interest rates rise enough to really strangle consumers.

Everybody is focusing on core inflation (black below) given the FOMC’s 2% inflation target but the big unknown for the economy is inflation on essentials, food, energy and shelter prices, which together account for 55% of the CPI.

Over the past year, all the major components of the CPI index have moderated but “essentials” prices have slowed the most, from +10.3% to +4.5%, significantly contributing to lower headline CPI inflation but also to higher discretionary income.

• Energy inflation swung from +41.3% in June 2022 to -12.3% in July.
• Food inflation slowed from 10.4% to 4.9%.
• Shelter inflation rose from 5.6% to 7.7%.

Good luck forecasting energy prices from here but it looks like the oil benefit is behind us. Oil prices troughed at $67.12 (WTI) on June 12, they are now $81, 21% higher.

The also elusive food inflation seems to have run its disinflationary course this summer. Grocery prices declined 1.9% a.r. between February and June but rose 2.0% a.r. in July.

Rent inflation is widely expected to decline significantly as the lags in the BLS methodology work their way to the CPI. Very significant given rent is 33% of the CPI and 41% of core CPI. This expectation is essentially based on private measures of new leases, some 10% of all leases.

I am far from convinced that this strong consensus will prove right (see Rent Rant).  So far, the BLS measure continues to run at a 5.0-5.5% annualized rate, in line with wages which have a 99.8% correlation with CPI-Rent since 1985.

If you look closely at the first chart above, you see how inflation on essentials took off in 2007-08, doubling total CPI inflation while core-CPI remained stable at 2.5%.

Move to the second chart above and notice how rising inflation on essentials dragged down real labor income and then real spending in 2007-08, even though core inflation stayed under control.

So there is a smart humility in Larry Summers’ comment last week that the economy “looks very strong right now to me, and I don’t think in the next few months we’re going to have a recession. What happens beyond that is less clear from the statistics.”

Everybody rolls with their fingers crossed
That’s how it goes
Everybody knows

(Leonard Cohen)

 All by myself
Let the rain hit me
I’m going insane
Nobody knows

(Russ)

• NABE Survey Shows More Confidence Fed Can Pull Off Soft Landing Seven in 10 economists have confidence US can avoid recession

That marks a big reversal in sentiment since NABE’s March survey, which showed a similar share indicating they were skeptical of avoiding a downturn.

Nearly three in four respondents said current monetary policy is about right, up from nearly 60% in the March survey.

Almost three-fourths of respondents see inflation above 3% by the end of the year.

The July 28-Aug. 7 survey included responses from 167 NABE members.

Bloomberg:

(…) Over the past two years, consumers have drawn down the more than $2 trillion in extra savings they accumulated during the pandemic in order to keep spending in the face of sky-high inflation. That’s enabled the economy to push ahead even as the Federal Reserve jacked up interest rates at the fastest pace in four decades.

But as the cash cushion shrinks, consumers are becoming more dependent on their paychecks to maintain their standard of living. (…)

Economists are divided over how worried to be. Some see that strain paired with other looming hurdles – like the resumption of student loan payments in October for millions of borrowers – leading to a recession. With credit costly and hard to get due to the Fed’s actions, consumers will be prompted to curtail their outlays, pushing the economy into a contraction, they contend. (…)

Other economists are more optimistic. They see falling inflation and a still resilient job market providing consumers with the wherewithal to keep on spending, even as their cash stash shrinks. (…)

INFLATION WATCH

The Cleveland Fed’s Inflation Nowcasting:

Goldman Sachs’ analysis of inflation trends was spot on in recent months.

However, the June and July CPI reports and the June PCE report overstate the slowing in the core and especially in the heavily scrutinized core services ex-housing aggregate, which Fed officials have highlighted as the last piece of the inflation puzzle where more proof of improvement is still needed.

One reason that the latest data exaggerate the slowing is that residual seasonality has biased the inflation numbers lower in the summer. (…) we think the seasonal factors currently imply overly large price increases, which biased seasonally-adjusted core inflation lower in each of June and July by 10-15bp. Even apart from this bias, airfares declined at a pace that is unlikely to be sustained in coming months. Over the remainder of the year, the seasonal bias is likely to instead boost monthly core CPI inflation. (…)

Another reason that the recent softness is unlikely to be fully sustained is that the CPI’s health insurance component is due to reset sharply higher in October, when the CPI will use new data on health insurer profitability to determine the rate of monthly health insurance inflation for the next twelve months. We expect a large turnaround from -4% to +1%, which would be worth about 4bp per month on core CPI and 12bp per month on core CPI services ex-shelter.

Beyond the disappearance of these temporary downward pressures, we also expect upward pressure on core services ex-housing from health care and education services, where prices tend to lag the cost environment because both government-administered and private prices are reset infrequently. (…)

We expect shelter inflation to slow to just over 0.4% per month in 2023Q4 and to continuing falling through 2024, ending the year at around 4% year-on-year. (…)

In combination, these pressures are likely to boost core services ex-housing meaningfully in the months ahead. In CPI terms, we expect it to accelerate from a three-month average of 14bp to a 46bp average over the next six months. In PCE terms, we expect it to jump to 36bp in July but then slow slightly on average in the following months. While Fed officials likely put more weight on the PCE version, where the increase will be more moderate, the CPI version attracts attention in markets and the media because it is released earlier in the month.

Car Prices Might Be Unsustainable for Buyers Surging loan delinquencies signal that many consumers can’t afford their auto loans.

(…) For the average American, paying off a new car at current prices demands 42 weeks of income, according to data from Cox Automotive, up from around 33 before the pandemic. 

Bargains have been hard to come by on the used-car lot as well, where the average vehicle listed for about $27,000—up more than 30% from prepandemic levels, according to Cox’s data. 

Higher interest rates have made the situation more difficult for buyers. Today’s average new car loan has a monthly payment north of $750, with an interest rate of 9.5%. For used cars, the average rate is above 13.7%, according to Cox. The average term for loans issued over the past three years is nearly six years, according to data from Experian.

These numbers could explain a mystery bedeviling auto lending. Seasonalized rates of severe delinquency for auto loans are the highest since at least 2006, but the jobs market is strong. (…)

So far, higher prices have been a positive for automakers and dealers. Share prices for public dealership groups have surged this year. (…)

This chart indexes CPI-New Vehicles, CPI-Used Vehicles and vehicle sales at Feb. 2020 = 100. Respectively: +21.6%, +41.6% and -5.2%.

• Historic credit tightening (Axios)

An analysis from Evercore ISI finds that the shift in bank lending standards has been the swiftest, and most dramatic, of any recent episodes of monetary policy tightening.

“This sort of tightening in credit standards is something that the U.S. economy has not experienced during the past monetary tightening cycles of the last few decades,” Marco Casiraghi, a policy and macro strategist at Evercore ISI, tells Axios. “It’s reasonable to expect this will eventually bite, to some extent.”

In previous periods when banks tightened credit, the Fed lowered rates to encourage bank lending to grease the wheels of the economy.

“This is what makes this cycle different from others. In the past decades, conditions at some point became very tight, but it was not because of the Fed,” says Casiraghi.

Then, “the Fed was trying to undo that, in some sense, because they were cutting rates to try to make credit flow to the economy. Here, we have the opposite.”

Data: Evercore ISI; Chart: Will Chase/Axios

(…) “the tightening in credit standards observed now is twice as large as what it was” compared to the 2004-2006 tightening cycle, Casiraghi says.

Demand for loans has plummeted more than in previous tightening cycles, too, Evercore found — likely as a result of credit becoming more costly and difficult to get.

“The current magnitude of impact seems to be suggesting the passthrough to the bank lending channel in the US so far may be … more timely and stronger than in the past,” Casiraghi wrote in a note.

EARNINGS WATCH

From Refinitiv/IBES

Through August. 18, 472 companies in the S&P 500 Index have reported earnings for Q2 2023. Of these companies, 79.0% reported earnings above analyst expectations and 15.9% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 73% of companies beat the estimates and 22% missed estimates.

In aggregate, companies are reporting earnings that are 7.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 4.2%.

Of these companies, 63.5% reported revenue above analyst expectations and 36.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 29% missed estimates.

In aggregate, companies are reporting revenues that are 1.7% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.2%.

The estimated earnings growth rate for the S&P 500 for 23Q2 is -3.4%. If the energy sector is excluded, the growth rate improves to 3.0%.

The estimated revenue growth rate for the S&P 500 for 23Q2 is 0.4%. If the energy sector is excluded, the growth rate improves to 4.3%.

The estimated earnings growth rate for the S&P 500 for 23Q3 is 1.3%. If the energy sector is excluded, the growth rate improves to 6.9%.

Trailing EPS are now $216.46. Full year EPS: $220.48e. Forward EPS: $231.73e. Full year 2024: $246.42e.

In an otherwise good earnings season, guidance has been negative:

In the last week, 6 of the 12 additional pre-announcements were positive and 5 negative.

Q2 was a resilient quarter on the earnings front (again) which saw both a beat rate and an earnings surprise rate reaching a multi-quarter high. Q/Q earnings growth was also positive for the second consecutive quarter. Ex-energy year-over-year (y/y) growth also turned positive after four quarters of negative growth, highlighting improved breadth in earnings growth. All in all, earnings growth in the first half of the year turned out better than originally forecasted.

The largest contributors to the earnings surprise rate are as followed: JPMorgan Chase & Co, Amazon.com Inc, Berkshire Hathaway Inc, Microsoft Corp, Apple Inc, General Motors Co, and Intel Corp. This group contributed roughly one-third of the overall earnings surprise this quarter.

The ‘Magnificent-7’ saw Q2 earnings of $67.1 billion (+38.5% y/y, +11.4 q/q).  This group consists of Apple Inc, Amazon.com Inc, Alphabet Inc, Meta Platforms Inc, Microsoft Corp, NVIDIA Corp, and Tesla Inc.

The ‘Magnificent-7’ saw Q2 revenue of $344.6 billion (+9.8% y/y, +2.2 q/q).

This contrasts to a weaker revenue quarter which saw the revenue beat rate reach a multi-year low along with an in-line revenue surprise rate. The revenue beat rate was the lowest since 2020 Q1 and will be a trend to monitor in Q3 given the debate around pricing power and the follow-through impact on margins. Y/Y revenue growth also reached a multi-year low, due to difficult year-over-year comps. Finally, real revenue growth (adjusted for inflation) was negative in Q2.

The Q2 blended net profit margin (combining estimates and actuals) is 11.1%, a slight tick-up from 11.0% at the start of earnings season (Exhibit 6).

Source: @LizYoungStrat via @DisruptorStocks

• A major test comes this week as Treasury investors place their bids for two risky auctions: 20-year bonds and 30-year inflation-protected debt, demand for which is notoriously unpredictable. If investors shy away, even higher yields will be needed to lure them back. (Bloomberg)

ODD LOT

• Apple holds 57% of the phones market versus Android’s 42% in the U.S., according to web traffic analysis site Statcounter. The data skews worse for Android when narrowed down to teenagers. According to a survey of 7,100 American teens last year conducted by investment bank Piper Sandler, 87% of teens currently have an iPhone, and 87% plan on sticking with the brand for their next phone. But the stigma regarding Android phones is mostly an American phenomenon, at least to the degree to which it affects purchase habits. Worldwide, per the same Statcounter report, Androids represent the significant majority of all smartphones, holding a 71% share of sales compared with Apple’s 28%. (WSJ)
• In a new CBS News/YouGov poll, Trump voters were far more likely to view him as a source of truth than they were religious leaders.

Image: CBS News