U.S. Economic Growth Risks Weigh as Q1 Earnings Season Begins

 | Apr 18, 2023 01:42

  • Discover Financial Services and Tesla feature bullish early earnings date confirmations in advance of what could be a challenging first quarter reporting period

  • With S&P 500 earnings estimates continuing to retreat, firm-specific clues can offer insights into economy-wide trends

  • Broadly, keeping tabs on unusual earnings events can help money managers manage risk during this profit recession

    • A Fed pause is on the table. That was the dream scenario for so many market bulls, but with recent disappointing manufacturing data and rising consumer credit costs, it's clear that an imminent slowdown in real GDP at home is in store.

    Overseas, the growth outlook is arguably on better footing, hence the downtick in the U.S. dollar lately. Rallying oil prices following a surprise production cut by OPEC+ only further harms large manufacturers and American consumers.

    A Recession Reality?/h2

    There’s no doubt that Q1 profit reports from major S&P 500 companies will be scrutinized, but outlooks provided by executives as to the state of the consumer heading into a rocky period of economic activity and what will likely be a rising unemployment rate is also key. Consider that the Fed’s outlook calls for a prolonged period of economic contraction while the consensus Wall Street forecast suggests that a technical recession may be sidestepped, with just Q3 real GDP turning lower.

    Decision Time/h2

    But how will those making hiring and capex decisions view the landscape? With a mini banking crisis freshly in the rearview mirror, aggressive actions anticipating robust manufacturing and services sector activity might be hard to come by as the first quarter reporting gets underway this week. Monitoring all the crucial corporate events is imperative for risk managers and traders alike.

    Can the Consumer Hang in There?/h2

    First up in our review of what lights up our risk radars is Discover Financial Services (NYSE:DFS). We all know this credit card issuer which also has its toes in other areas of the banking industry. Like so many stocks in the Financials sector, it endured steep selling pressure last month following the fallout from Silicon Valley Bank and Credit Suisse (SIX:CSGN).

    DFS hasn’t snapped back ahead of its April 19 reporting date, though. What makes DFS stand out to us is that it confirmed its earnings date early – that is a bullish signal according to our research on earnings date confirmation timing.¹ The confirmation date Z-score is –2.28. That’s among the earliest we are tracking for the upcoming reporting period. But while this is slightly earlier than their recent confirmation trend, it’s still within their normal range.

    Discover caters to mid-range credit score cardholders, above that of Capital One (NYSE:COF) but below the high credit quality of American Express (NYSE:AXP) customers. Perhaps charge-offs and reserve build-ups will not be quite as drastic as some fear. Also keep Thursday, May 11 on your calendar as that’s when the Illinois-based firm holds its annual shareholder meeting.

    Discover: 4-Year Stock Price History: Steep March Decline/h2