This week was all about earnings announcements and with few exceptions, they were much better than expected. As we continue to be reminded, the economy is much more resilient than we sometimes appreciate. While economic data does show slowing growth, in line with the Federal Reserve’s policies to tackle inflation, it is not yet cause for concern. The earnings announcements made so far suggest a better economic backdrop than many had suspected. Since the news was dominated by earnings announcements this week, let’s start there.
Among the companies reporting include Coca-Cola, Novartis, PepsiCo, 3M, UPS, Verizon, McDonald's, Sherwin Williams, Microsoft, Visa, Google, Chipotle, and Exxon Mobil. Recognizing the elephant in the room, the biggest driver of growth in Q1 was pricing power. Virtually all companies reporting said, in one way or another, that consumers haven’t slowed spending even in the face of higher prices. Chipotle is perhaps the best example of this, seeing its revenue climb 17%, with continued strong sales and forward guidance. This bodes well for others like Mcdonalds, Coca-Cola, and PepsiCo. As for technology companies, we’re seeing strong growth in cloud computing, artificial intelligence (AI), and advertising revenue.
While much is going right, there are some industries that aren’t doing as well. One example is semiconductors which experienced a downturn starting last summer. Companies like Qualcomm, Intel, Taiwan Semiconductor, and others are seeing softness with regard to computers, phones, and other electronic devices. The exception is NVIDIA Corp which is at the forefront of both AI and cloud computing. Some industrial companies are beginning to show signs that the economy is weakening such as UPS which reported lower total package volumes in the quarter and demand weakness in Asia. Some healthcare companies that did very well during COVID providing medical devices, medical supplies, and vaccines are now finding those markets drying up too.
As for those companies doing poorly, I’d include many of the smaller niche companies that trade on momentum. Some examples of that include Snap Inc, Mobileye Global, Crocs Inc, and Pinterest. Whether it's ad revenue that is disappearing or consumers foregoing niche purchases, these companies with higher valuations are among the first to fall. All the companies named fell double-digits this week. And lest we forget, Bed Bath & Beyond filed for Chapter 11 bankruptcy this week. It is aiming for a reorganization, but it is hard to see how the company emerges from this. After years of mismanagement, it seems the company may have finally succumbed.
And lastly, many of the larger banks have already reported and as we discovered, they did quite well in the wake of the smaller regional banks with issues. The larger banks like JPMorgan seem to be a beneficiary as savers look for safer places to put their money. Too big to fail is on everyone’s mind these days. First Trust appears to be faltering again despite a $30B infusion from many of its bank peers. It seems $100B in deposits left the bank in the first quarter. Unlike, SVB which failed earlier this year, First Trust does not want to be taken into receivership by the FDIC. It is holding out hope that it will either receive a bailout from the Federal Reserve or find a suitor to merge with. I have no doubt that the Treasury and Fed will be working behind the scenes this weekend to find a resolution.
In closing, I came across an article that analyzed data to determine which states have the lowest median home prices. That’s not to imply these are bad states in any way, but instead to suggest there are areas of the country that don’t have the high cost of living found on the coasts. The most expensive places to buy a home, not surprisingly, are Hawaii, Utah, Colorado, and California. After all, who doesn’t want to live in these beautiful places? Homebuyers looking for a bargain will have better luck in the Midwest. The cheapest state nationwide is Illinois, followed by Ohio and Oklahoma. Median prices fall below $200,000 in each of these three states. Ohio has a lot going for it. Aside from the Reds and Bengals, it turns out median home prices are another reason to live here. Now you know.Bruce J. Mason, MBA