July 24th, 2023

Earnings Are Telling Us To Brace For 3rd Quarter Slowdown

Weak revenue and weaker forecasts now have this earnings season in trouble. What started positively with the banks quickly turned sour with the first round of tech, smaller banks, and a marketing giant (and I’m not talking about Google). It shouldn’t come as a surprise since we’ve been talking about the difficulty companies would face to raise profits in light of low GDP growth and an economy now in deflation. Let’s look at some earnings numbers and the one company that could be forecasting where the economy is heading.

American Express (AXP) had a fifth straight quarter of record revenue and beat earnings estimates and the stock sold off, down nearly 4% after earnings. Despite the good news, the stock has been relatively flat since February.

So, why did investors turn on the company and drive the stock down nearly 4%? As you may have guessed, they mentioned the dreaded concept of bracing for a slowdown in activity and an increase in debt from their customers.

Comerica (CMA) also fell as it said it expects Q3 interest income to be down.

Regions Financial (RF) reported on weaker than expected Q2 total deposits.

Ok, so why am I bringing up the banks?  The regional bank ETF, KRE, is one that we’ve traded in the Small Account Trader PRO service and did well during the initial banking crisis in March, but we’ve been surprised to see the ETF gain value since the beginning of July.

The banks are warning investors about their condition for Q3 and the ETF has been going in the opposite direction. You can see from the stock charts above, investors have been buying CMA and RF through July, so we shouldn’t be surprised to see KRE on the rise, but that trend may be coming to an end if people heed the company’s warnings.

The one that stood out to me though was the marketing and advertising conglomerate, Interpublic Group (IPG). They led the S&P 500 losers after reporting revenue below the consensus and it cut its full-year growth forecast to 1-2% from 2-4%.

Alphabet (GOOG) is involved in different areas, but they still get a large sum of revenue from marketing and advertising dollars. If IPG is warning about a pullback in the industry – companies not spending as much on advertising efforts – we could expect a rough road for Alphabet’s earnings. And if GOOG is about to take a 13% loss like IPG, you can expect the indices to drop and that will put fear into the broader market.

Alphabet reports earnings on July 25th.

Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.