Earnings Season Just Got Real…

earnings and inventory

Market momentum is Yellow. However, we did experience another short-term turn into negative territory on Tuesday. Markets remain on high alert after traders dumped technology stocks ahead of today’s earnings reports from Alphabet and Microsoft. We still have two more big reports tomorrow: an updated policy from the Fed and a GDP number on Thursday.

Before I jump into earnings reports, I want to discuss inventory growth. On Tuesday, we received a pertinent warning from Walmart Stores (WMT) about the state of inventory levels and the state of the U.S. economy. High inventory levels are hammering away on retail companies. Take a look at this chart. 

In late 2021, companies ramped up purchasing due to supply chain bottlenecks and inflation concerns. A large chunk of economic growth in Q4 2021 was directly linked to companies building inventories. However, the calculus changed in the first and second quarters for many companies as consumers slowed down purchases. 

Now, multiple companies like Target (TGT) and Abercrombie & Fitch (ANF) have dramatically increased their inventories and must make a decision. They can either dump these products at much lower prices or pay to store these products… I anticipate that ANF will return back to 52-week lows soon and join rivals like American Eagle Outfitters (AEO) as these companies face declines in sales outlooks and earnings compression.

These will be very difficult conditions for the retail sector moving forward. The bottom is not there yet for this sector.

Earnings Season Kicks Off

This afternoon, we officially entered the deep water of earnings season. We received earnings reports from Alphabet (GOOGL) and Microsoft Corp. (MSFT).

Alphabet fell short of earnings and revenue for the second quarter, raising the prospect of a steep selloff on Wednesday. YouTube advertising came in at $7.34 billion, down from the $7.52 projections. In addition, the company’s cloud revenue remained weak as well. 

The cloud figures are critical for this market. I’ve warned multiple times that corporations are cutting back on spending. As they start to cut desks and consolidate the number of suppliers, revenue expectations are declining. The company’s revenue growth increased just 13% for the quarter, down from 62% in 2021. 

Looking ahead, we can anticipate more of the same.

The situation wasn’t much better for Microsoft. The software and cloud giant also came in low on Wall Street expectations, citing declines in advertising dollars, weakness in the PC markets, and the challenge of exchange rates between the U.S. dollar and global currencies. Revenue growth cooled as well.

Don’t be surprised if we see a selloff in both stocks on Wednesday morning.

Keep in mind that Microsoft warned about its financial conditions in June, and both companies have signaled challenges around hiring. These companies fell short of revised estimates that were already rather low compared to previous forecasts. It seems the next leg down is coming in tech.

Oh My

Finally, I spent the last 25 minutes listening to Brian Deese, the Director of the National Economic Council. I’d like my time back, please. When asked if the U.S. economy was heading into a recession, he ignored the question and said they pay attention – to what OUTSIDE economists are saying about the economy

What?! Why? The National Economic Council is supposed to be the cream of the crop, the people who are the best economists. Why do they care what Bank of America thinks? He actually read estimates from Bank of America to justify his stonewalling of the question…

But it gets worse. Then, he effectively attempted to change the definition of “ recession.” Anyone with a basic background in economics and a dictionary knows that a recession is defined by two straight quarters of negative economic growth. 

Neese argued that they look at different economic indicators… etc. Even if they are trying to argue that the numbers aren’t as bad as they look… allow me to retort. The last ten times that we had two straight quarters of negative economic growth… take a guess how many times we were finally told we had a recession?

If you said 10, you’re a better economist than Brian Deese. Because it was all 10. He also said that the U.S. is better off tackling inflation than any other nation – don’t let me ruin his day, but the United States is ranked 103rd in inflation globally. 103RD!

If the White House Press Corps is looking for someone to tell them the truth about the economy… I’m their guy. Have them shoot me an email…

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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