¶ Intro / Opening
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¶ US Earnings Season Crushes Expectations
There's really no two ways about it. US companies are absolutely crushing it at the moment. We're well into earnings season in the States right now, one of the currently four times of year when listed American companies tell the world how they're doing. And the answer is very nicely indeed. Thanks very much. A good chunk above 80% of companies in the SP 500 have beaten what were already pretty lofty expectations for the money they're making. And it's not just in AI.
Today on the show, heaven knows, it pains me to say it, but it's the Buy America. This is Unhedged, the Markets and Finance Podcast. Financial Times and Pushkin. Katie Martin, a markets columnist at the FT in London, busily memorising the entire internet in advance of the FT alphabet. Tonight. All the way from over there in the land of bumper earnings, it is the big fella, Mr Robert Armstrong, who today has been put in a special chair for recording this podcast.
It's true. I'm I'm I'm a bad boy and I move around a lot when I talk and so our producer Jake has gotten me an a chair that doesn't move, so I will sit still. And what i if this doesn't work, what restraints are coming next is an open question. Like he's gonna zip tie my wrists to the arms of the chair
Yeah.
Whatever it takes.
Yeah, whatever it takes. This is this is the start of the fight back against a very wiggly
Exactly.
A wriggly Robert Armstrong.
At fifty four years old I'm still the wiggly boy at the back of the class.
Sit still!
I'm strong!
We digress. Rob, tell me, what the hell? What the hell? What like earning season is just like
Uh I have never seen an earnings season like this. Average S P five hundred earnings growth so far. is like in the mid twenties percentage range year over year. If you look at a chart of earnings growth, we were kind of Bumbling along at like ten, eleven percent earnings growth the last couple of quarters. And then it just took the absolute elevator this quarter. And uh it's been amazing.
I'm ashamed I didn't see this dramatic change coming, but there are a couple of fairly commonsensical explanations for this we could go through.
Yeah. But just a little bit more on the scale of this thing. So as you say, mid twenties percent uh in in the first quarter year on year. That's like a lot of earnings growth. It puts us at roughly a four year high. And one of the weird things about that is that sometimes you see these. explosions in in corporate earnings growth when you're coming out of a recession or you're coming out of some sort of shock. So like
COVID is over and the global economy reopens and waha, corporate America does incredibly well by comparison with the previous quarter or by comparison with the previous year. Now it's just like
We're not in a recovery. Just happening. I mean, just to put the size of what we're seeing right now in context, over the very long term, the average earnings growth rate for the S P five hundred in real inflation adjusted terms is something like seven, seven So we're going along maybe tripling or quadrupling the standard rate of growth this quarter. It is like an amazing event we're seeing. And It does go a long way to justify the dizzy heights that markets have hit.
Weirdly, it goes pretty much a hundred percent of the way towards justifying the dizzy heights in US stock markets at the moment. So we've talked about this on the pod before, but it is like double weird that you have stock markets like cranking higher. But without what we call multiples going higher. So investors aren't paying more for the same stuff. They're just tracking earnings. They're following fundamentals in in in corporate earnings.
Each dollar of profits costs you the same thing. And so there's just more of the process.
So so more profits, so line go up. So this is like You know, it's very unusual for markets to trade on fundamentals. Like normally they trade on like, you know, hope and expectations and hype and vibes and all this sort of thing. Yes. That's actually like not what's happening in in the States at the moment. So this is quite
¶ Key Sectors Driving US Growth
It really is quite extraordinary. So look, AI is a big part of it. Let's talk about like you know, there's tech companies that are making money hand over fist. Fine. I think we kind of expect that's gonna be a thing.
But there's also one of the sectors that's growing earnings at a very lively pace this quarter is industrial. Like these metal banging real world living in heavy metal kind of companies are doing great. And part of that I wrote about this in the newsletter last week is there's a handful of them where they're just building data centers and they're like putting in the air conditioners for the data centers and p throwing the wires in the ground and putting the building up and et cetera et cetera.
So there is a handful of industrial stocks that have just gone banana. Because literally they're beyond their capacity to serve the construction needs of the data center industry. You know, you can't put the air conditioners in fast enough. Caterpillar, which makes industrial machinery for mining, construction and such in a characteristically yellow color.
Also makes generators that produce backup energy. So they'll roll up with a huge backup generator for your data center. They can't sell them things fast enough. And that's been like the best, you know, one of the very best stocks in the S P has been Caterpillar.
Yeah, so in fairness you did call this one. Banks have been doing very well as well.
Yeah, they've been great. So two things working in banks' favor. One is if you're a bank that has a trading desk, so you're one of the big global banks. It's been a volatility playground out there. A trading desk doesn't need markets to go up. They need them to go zigzag. because you make money on the zig and the zag. And so it's been a volatility carnival uh in the in the first going into the second quarter, so they're feeling great.
The yield curve is still positive, which means short term rates are lower than long term rates. That helps banks that borrow short and lend long. Uh and you know, the economy is good enough that loans are growing. So financials are growing their earnings at twenty percent. You know, it's a good look for them. So that gets you two big sectors right there. Industrial's good, financial's good, before you even started talking about technology.
¶ Market Dynamics: Traders, Fund Managers & Tech
On that point about the zigzags in in markets, I was talking to some um fund managers last night and they were saying the whole zigzag thing is absolutely doing their head in. So like you've got like a portfolio of stocks and one of them will just like Dump fifteen percent in a day. for like no reason, like on some like random headline out of Iran.
And they're left thinking, What's going on? Has something changed? Should we be selling the stock? Should we be buying the dip? What should we be doing? And then like two hours later, oh, it's recovered now. It's fine. It's nothing. And so that I guess goes a long way towards explaining why
The vibes are not that great, but the earnings growth is doing well enough to keep markets is that like fund managers are just sitting on their hands saying, This is a nightmare, I don't know what's going on Um but the zigzagging thing is perfect for bank earnings, sure.
For the tr for the traders, it's great. For the fund managers, for the people like us who are paid to make sense of what the hell is going on, this is very difficult. But for the trader They're like, Great, you wanna sell a stock down or up fifteen percent for no particular reason? I'm here for you. And by the way, The bid ask spread on that stock will be high. So that that goes straight into my pocket. Thank you very much. Thank you for playing the stock.
Thank you for playing the stock market.
We should talk about it the demand for tech services. So there's this whole AI story running in the background. But all the kind of normal stuff the big companies do, uh Google sells ads Microsoft sells software, etcetera on down the line, meta runs ads against social media sites, all that part of the economy is doing well. So while they're spending all this money on AI data centers, the big companies are earning loads of money just doing the thing big tech companies do.
So that part that that's probably the strongest growth store. is the you know the the technology growth story. There are exceptions here. You know, there's all these worries about certain software companies will get murdered by AI and et cetera, et cetera. But the basic background in demand for digital services is very
¶ Skepticism and Economic Headwinds
Let's spend a little while on a phrase I'm told that I use too often, which is fun sponges. There are people out there who are like I just can't bring myself to believe that everything is as rosy as it looks. One organization out there that's saying that is Hussman, Global Advisors, I think is their full name.
They are in the fun sponge business and have all
They are in the business of soaking up fun and a pretty reliably kind of debby downers uh about market direction. As they pointed out in in a little note they did the other day, it is weird to have this level of earnings growth when you're not coming out the other side of some sort of recession or shock. That is legitimately actually quite weird. Yeah.
And also it sort of assumes that AI won't come and kill certain sections of the stock market. So when you've got like a decent spread of companies that are doing well No one's pricing in this possibility that that AI could end up chewing them up. So they're kind of reasonable-ish. pushbacks I think, but you just can't you can't fight the the direction.
It's true. Like where you know, th th there there is a case to be made that this is a bit of a sugar rush, that all this stuff can't go on forever. You know, the oil companies are an example of this, right? Not so much in the first quarter, but in terms of what they're talking about, how it's going now in the second quarter, there's a shortage of the stuff that they make. They're gonna print it, right? But
Yeah.
one day, as uh the guy in Apocalypse Now says, this war is gonna end. A at which point oil prices are gonna go down, right? So that's a temporary phenomenon. And I guess if you wanted to be a Debbie Downer about the United States in particular, you might say the consumer is not quite what the consumer used to be. So we saw that in the first quarter GDP report that the rate of growth
of consumption is slowing. It's gently kind of returning towards trend. And in the other scenario in which the war doesn't end and oil prices go up, that's likely to get worse. Yeah. I think by the way the US consumer is doing fine right now. McDonald's earnings just to grab a consumer company out of the air were fine. They saw, you know, real terms sales growth in the United States.
How much of that was down to you?
Fifteen per cent. My son my son accounted for twenty percent of US McDonald sales this quarter.
Yeah.
They they they have like a concierge following him around any time he gets hungry. They just put a big Mac in his hands.
Yeah, yeah. It's an y you can't go wrong with uh teenage boys and Big Macs. But I guess another thing that's going on here is that The US is kind of sucking growth out of the rest of the world to some extent. So, you know, Europe and Asia, as we've discussed on this pod several times. We're on the sharp end of the energy shock and you keep hearing these warnings, so
you know, Robin Wigglesworth who was on this pod the other day, he was writing about this the other day on AlphaVille. There's like plenty of analysts out there saying, Okay, oil prices are kind of bobbing along at the moment, but there is a risk that one day we walk into the office and it's
twenty dollars high or it's fifty dollars high. Like this thing doesn't have to move in a smooth fashion, it can just hockey stick higher and then surely we have a problem with the US consumer then and surely we have a problem with with corporate margins then.
It is true, but to get to your US sucking the growth out of the rest of the world. If you are a US industrial company that uses natural gas as a feedstock, so you make chemicals or you make fertilizer or you make whatever it is you make. Uh you are at a massive competitive advantage to your peer company in Europe because we got gas coming out of our ears locally. You know, we're trying to send it away as fast as we can. And so that that goes directly to your point.
of the energy shock hitting different regions of the world differently. And you know, America's just lucky that we discovered that we're basically floating on a huge pool of natural gas in this country. Or at least in Texas and Pennsylvania we So that's something really compelling. But look, we're you know, to your point, we're not gonna grow earnings at twenty plus percent forever. This is a blip.
Surely.
Yeah, yeah
Surely, yeah, yeah, yeah, yeah. But we still have this thing where like the stock market is like yay, everything is awesome and the energy market is like hell world, hell world.
And there is a Robinson.
Winter is coming.
There is a moment. If we don't get there is going to be a moment. If we don't get the Strait of Hormuz a little bit. where inventories simply run dry in the world. Right. You know, Malcolm Moore did a great piece about this for us a couple of days ago. We are drawing down inventories still. And so and at some point, maybe it's in September, you know, as one street energy analyst said it was sometime in September.
Inventories go as low as they can go. And so the only flexibility left in the system is demand destruction at that point. You just have to use less of the And we are seeing some demand destruction in energy in Asia right now, some in Europe, none in the United States. But if we get to that day in September where I mean as Malcolm pointed out, you can't run the system on zero inventories.
You know, like the pipe has to be full of something. You know what I mean? You can't run the tanks dry. There has to be some gas in the cars at any given time. I mean I would say you've put your finger on the terrible scenario, is that the whole situation is predicated on the strait being open sometime in Right. Just wide open in June. If it's closed shut in September, what what do you call it? Squeaky bum time?
At that point.
Yeah.
One thing that I think is interesting here is the hype and hope has kind of been knocked out of stock markets and it's just the earnings that are doing the heavy lift. I wonder how much higher we would be if we had the good vibes on on on top of the earnings. You know, so things look great but they they could look a lot greater. Yes. But one
Katie, let me interrupt you. We should be glad it's not Right. The market is in a sustainable place right now, and that's something to be celebrated. Bad vibes plus good earnings is a market I want to own. Right? Because good vibes turn to bad vibes. Right. Yeah. And you don't you can't predict when. So if the vibes are only so so and earnings are good, that helps me be calm.
¶ Debating SEC Reporting Changes
Eventually vibes always chicken out. Listen, one other thing I wanna talk about is like the reason why we've got such great earnings out of companies at the moment is that they are reporting earnings, which is a thing they currently do on a quarterly basis. One of the biggest US financial regulators, the Securities and Exchange Commission, the SEC, is moving forward with these plans to cut reporting requirements for US companies so that they might only have to report
Semi annually instead of quarterly. This isn't a done deal yet, but it's pretty close to being a done deal. And the theory behind this is and I end I think this is something that you sympathise with, Rob, like, is that let's let's free corporate America from the shackles of writing long tedious earnings reports that that nobody reads and uh this will enable them to do more innovation. I guess my thinking on that is Show me the evidence that this is currently hurting.
Yeah.
I don't get it. Like and and I think like some investors that I speak to say look, one of the reasons why the US stock market is is the MacDaddy and it's like base, it is home for a lot of global investors. is precisely because it reports every quarter. Doesn't matter what kind of crisis is going on, doesn't matter what war there is where
So help them. US companies always report every quarter. That's not necessarily the case in in Europe, for example, some of them are are less frequent than that. So I dunno, construct the argument for me that this makes any sense to remove this.
Well, I wonder how much it really helps investors. At some point The information is just causing a lot of mindless trading on increments of information that actually aren't that important. And to the degree that investors could keep their eyes firmly locked on the long term rather than the tiny squiggles that happen in a given quarter, maybe that would be good. I by the way, I'm sympathetic to your point. The US market sure doesn't look broken.
So why would you try to fix it? But let me ask you this, Katie. Let me turn the question on you. Those big European companies that report only twice a year and then sort of have mid mid period sales updates. Is that such a bad system? Are you left wanting more by those big European f firms?
I'm not necessarily left wanting more, but I do think the context here matters, right? So in the States at the moment, like regulations are just falling away left right. So it just strikes me that right now, like allowing companies to say less in the state Mm. Feels like potentially storing up problems. I don't know. I could be worrying about nothing, but I do think the context matters and I do think there's no evidence of harm currently.
So just yeah. Let's just keep going and hope the good time.
Yeah, but that's not gonna happen. They're gonna change it whether we like it or not. Speaking of things that are gonna happen whether we like it or not, we are gonna have to come back in one sec with Lord.
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Yeah. a story. Listen to the flip side.
¶ Long-Short: Open Bars and Stagflation
Okie doke, it is time for long short that part of the show where we go long a thing we love or short a thing we hate. Rob, we received complaints that we ran out of time for your long short the other day. So
Well, here I... I think, Katie, I've reached an age where I am short the open ball. I was at an F T cocktail party last night, an F T weekend event. It was a very nice event. But it's open bar and I have these two vectors of my personality which are likes to drink bourbon and is cheap. And those two lines cross at open bar where I'm like, I have to have a couple of uh uh extra bourbons because they're free.
Yes. And this you know, this was uh maybe uh an acceptable situation twenty years ago for me physiologically, but I've gotta be short it now. And like drinking more is not a money saving strategy, as it turns out.
No no. Okay, well I'm s I'm sorry to hear that. I am uh I am long deer. Deer. The economist writes to inform us that the British deer population is exploding. Is it? Led by those those cute little munt jacks on a wheel.
Those are
He pitched a friend of mine off his bike and and and knocked him out. Anyway, the Economist tells us that the rise and rise of the deer population is a case of Stagflation.
Oh God, that was all worth it. I was like, where's Katie going with this? But we got to stagflation. Uh I just it was all worth it.
Pretty clear to me that someone in a newsroom somewhere started with a gag and like worked their way all the way back from that. To until they could could justify writing four hundred and fifty words about the British deer population. I'm not above. Going with the pun first and coming up with the
It's a time honored strategy. You can't lean on it too often, but once in a while you can slip that by the dough.
Oh yeah. Anyway, stagflation. Hats off to those boys and girls at The Economist. That's a good gag. Righto, listeners, we are gonna be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topa Forehead. is the FT's global head of audio. Special thanks to
Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free, and a 30-day free trial is available to everyone else. Just go to FT.com slash unhedged offer. I'm Katie Martin. Thanks for listening.
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