Earnings Watch: Wall Street has ‘a lot more conviction and confidence in the demand environment,’ analyst says
As corporate America prepares to report second-quarter results this week, many items at the store are still more expensive. It’s still tougher to borrow money, still tougher to buy a home. The upcoming U.S. election has occasionally stirred markets, as voters show signs of turning away from President Joe Biden after his faltering performance in last month’s debate against Donald Trump.
But as big banks like JPMorgan Chase & Co. and air carrier Delta Air Lines Inc. lead off those results, Wall Street analysts say profit growth at many of the biggest companies will be just fine.
Among the companies in the S&P 500 index, profit per share for the second quarter is expected to grow at its best rate since the early days of 2022, when Russia’s invasion of Ukraine initially spurred steep price increases for food and energy. Profit margins, or the share of sales that end up as profit, are seen creeping closer to the levels seen during that year and the circus that was 2021.
Wall Street analysts tend to lower their profit estimates as companies get closer to reporting quarterly results. That process, depending on who you ask, is a tempering of optimism as financial realities settle in, or a way to make it easier for companies to surpass expectations, or something that does both.
Either way, ahead of the second-quarter results, analysts have lowered those estimates less than usual.
“The fact that estimates have come down so little tells us that management teams and then the analysts covering most companies have a lot more conviction and confidence in the demand environment,” Sheraz Mian, research director at Zacks, said in an interview.
Wall Street, for now, expects S&P 500 companies overall to put up earnings per share growth of 8.8%, according to a FactSet report on Wednesday. If that number sticks, it would be the biggest gain since the 9.4% increase in the first quarter of 2022, that report said.
Profit margins are expected to come in at 12% for companies in the index. Some economists over the past few years have suspected that companies have kept prices high to fatten those margins, despite consumers’ struggles to keep up.
Those gains boil down, in part, to easier comparisons against last year, as cost cuts filter through to the bottom line. But as with previous quarters, they’ll be driven by handful of massive technology companies as well, whose stock prices and bottom lines have also benefited from artificial-intelligence hype.
Taken together, the results from JPMorgan JPM, -1.33% will offer an early look at the economy overall, after a big rally for big-bank stocks and the broader market through this year. But that run higher could make investors less forgiving if companies miss quarterly expectations.
Sentiment at the Federal Reserve is also mixed over when to cut interest rates, potentially reaccelerating buying and borrowing, which could mean more lending but lower profits on loans for the banks. Friday’s June jobs report could set the Fed on a firmer path toward an interest rate cut later this year.
JPMorgan Chief Executive Jamie Dimon, during a conference in May, said that if interest rates hold or drip slightly, as expected, the banking industry would likely be fine. But he said stagflation — or higher prices mixed with lower economic growth — could still catch a big part of the world off-guard.
“The surprise will be stagflation,” Dimon said at a conference in May. “I’m not saying it’s going to happen. I just give the odds much higher than other people. I look at the amount of fiscal and monetary stimulus that’s taken place over the last five years as being so extraordinary.”
For Delta DAL, -2.89%, the results will arrive as some airlines warn of fractures in travel demand. Elsewhere within consumer spending, results late last month from sneaker maker Nike Inc. NKE, +0.25% and drugstore chain Walgreens Boots Alliance Inc. WBA, +1.44% didn’t exactly suggest consumer confidence.
Meanwhile, the days following the debate have seen signs of a revival of the so-called “Trump trade,” as some new polls pointed to a bigger post-debate lead for the former president. Biden on Friday said he would not drop his bid for a second term, despite growing pressure to do so.
Yields on government bonds rose following the presidential debate, the Wall Street Journal noted last week, as traders prepared for the possibility of higher prices and debts under Trump’s plans for tax cuts and tariffs. Analysts at Keefe, Bruyette & Woods noted an uptick in smaller bank stocks, as some investors bet on the greater likelihood of deregulation and mergers and acquisitions.
Mian, however, said the recalibration of investors’ bets was unlikely to affect the conversation on earnings calls in the weeks ahead.
“When the conventions come around, then it’s really front and center,” he said. “Then everybody starts crunching the data for the what-if scenarios for this side versus the other.”
This week in earnings
Ten S&P 500 companies, including one Dow member, report results in the week ahead, according to FactSet. While Delta and the big banks will grab much of the market’s attention, PepsiCo. Inc. PEP, +1.10% and Conagra Brands Inc. CAG, +0.39% — the company behind foods made by Healthy Choice and Duncan Hines — will also report results during the week, as shoppers continue to grapple with higher grocery bills.
The calls to put on your calendar
JPMorgan, the big banks, and the search for ‘boring’: Fresh off the latest round of Fed stress tests last month, JPMorgan, Citigroup Inc. C, -0.67% and Wells Fargo & Co. WFC, -1.71% all report quarterly results on Friday. Those results will arrive as Wall Street awaits a rebound in net-interest income and loan growth, and further signs of an uptick in deal-making, which has been helped by mergers and AI investments.
While the Fed said its latest stress tests showed the nation’s biggest banks were “well positioned” to stomach a severe recession, the central bank also said that the banks “would endure greater losses than last year’s test.”
Concerns persist about consumers’ ability to keep up with credit-card and loan payments. And even as banks try to reduce their exposure, worries endure about vulnerabilities to lending bound up in office real estate, which has been upended by remote work, and troubles among smaller banks downstream.
“The larger banks are more diversified, they have less of it,” Christopher McGratty, a bank analyst at Keefe, Bruyette & Woods, said of commercial real estate. “The smaller banks are more concentrated and have more of it. So the margin of error for the smaller banks, if you want to look at it that way, is lower.”
Still, bank analysts at Oppenheimer, in a research note late last month, said that after a handful of bank-industry conferences that left the outlook for net-interest income largely intact, “the watchword for the quarter is ‘boring,’ and that is a good thing.”
“Loan growth is slow, but as expected,” they said. “Credit is normalizing, as expected, but still excellent. Deposit costs are still inching up, but as expected.”
The numbers to watch
Delta’s (increasingly premium) revenues and margins: Delta Air Lines DAL, -2.89%, which reports second-quarter results on Thursday, has had a way of avoiding airline investors’ biggest tantrums, thanks in part to how much it upsells wealthier travelers. But the airline will report as Southwest Airlines Co. LUV, -5.74% grapples with waning demand for leisure travel and after American Airlines Group AAL, -0.72% cut its profit outlook for the quarter.
Over the years, Delta’s main cabin has become a smaller profit driver overall, as the carrier pushes its premium seating classes and reaps the benefits of its credit-card partnership with American Express Co. AXP, +0.26% Both will likely be a focus during Delta’s earnings call.
TD Cowen analyst Helane Becker, in a research note last week, said that Delta would likely put up stronger operating margins than its rivals in the second quarter. But she also pointed to greater competition and the thing that airline investors hate the most — discounted fares.
“We believe premium demand is still outpacing main cabin demand,” she said. “Corporate traffic appears to have had a solid first half, but our channel checks imply that that growth has eased the further we’ve moved from January budget resets.”
“While traffic has continued to be strong,” she continued, “our checks also indicate that there has been elevated discounting of late, especially by American and Southwest.”