Investment Insights Investment Strategy Notes from the Kitchen

Stocks Falter on Earnings Disappointments

  • Jul 20, 2022
  • Andrew Gillham

Markets faltered last week as a shaky start to the quarterly corporate earnings reporting season dampened investor sentiment. The blue-chip S&P 500 and technology focussed Nasdaq indices fell 0.6% and 0.1% respectively.

PepsiCo kicked off earnings season, reporting a 5% increase in net revenue to $20.2 billion. The drinks and snacks company revealed it offset higher input costs by raising the prices of its products by 12% during the quarter without much pushback from customers. CFO Hugh Johnston warned more price hikes are inevitable, although the company may also adjust product sizes as an alternative in some cases.

Thereafter, earnings reports from Wall Street’s leading investment banks grabbed the spotlight and the hit to revenues from the slump in dealmaking was a common theme. The rout in markets during the first half of the year sapped appetite for mergers, acquisitions and public listings.

JPMorgan’s second-quarter net income of $8.2 billion was almost 30% lower than the same period a year ago and it suspended its share buybacks after the Federal Reserve raised its capital requirements for the three largest US banks.

However, the extreme market volatility was a silver lining for the trading divisions of Wall Street’s banks. Goldman Sachs’ net income nearly halved to $2.9 billion but it beat more pessimistic analysts’ forecasts on the back of a 32% surge in trading revenues.

Closer to home there was some cheer this week for investment bankers as GSK spun off its consumer health division Haleon in the largest listing in Europe since Glencore’s London IPO in 2011.

The demerger, officially set in motion three and a half years ago by GSK’s CEO Emma Walmsley, has attracted some controversy with activist investors building up stakes to try to push GSK to sell Haleon. GSK rejected a £50 billion offer for the unit from Unilever in January.

Haleon, home to brands including Sensodyne toothpaste, Panadol and Advil, immediately becomes the world’s largest stand-alone consumer health business with a market capitalisation of £30 billion. Shares started trading at 330 pence on Monday morning but finished the day 6.6% lower at 308p.

Away from company earnings, inflation remained a hot topic, especially after it was revealed US consumer prices rose 9.1% from a year earlier in June, the fastest pace in more than 40 years. The spike higher was driven by energy and food prices and puts more pressure on the Federal Reserve to take more assertive action to halt runaway inflation.

Markets were already expecting the Fed to hike interest rates by another 0.75% to 2.5% at the end of July but the latest inflation print has led some to speculate a 1% increase is on the table.

The widening interest rate differential with other G7 economies drove more flows into the US Dollar and it briefly traded through parity versus the Euro on Thursday afternoon for the first time since 2002.

US President Joe Biden also sought to play a role in reducing one of the key inflationary pressures during his visit to the Middle East last week. In his first face-to-face meeting with Mohammed bin Salman, he urged Saudi Arabia’s Crown Prince to take further steps to increase the supply of oil but left empty handed.

Brent crude had dipped below had fallen back below $100 a barrel ahead of Biden’s trip but has recovered to $106 due to the lack of any commitment to boost production. Saudi Arabia asserted oil policy decisions must be made within the OPEC+ coalition.

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