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One Foot on the Brake & the Other on the Gas [VIDEO] Thumbnail

One Foot on the Brake & the Other on the Gas [VIDEO]

This economy reminds me of a recent driving lesson I gave my 15 year old daughter.  She's a few months away from starting driver's ed classes, so I thought it would be a good idea to get her a little hands on experience - in a golf cart. Chances are you've had a similar experience with a child, grandchild, niece, nephew or even your younger self. This is how it went.  One foot on the gas with the other foot on the break.  Lots of starting, stopping and lurching about, but we managed to uncomfortably cover some distance.

The current economic backdrop looks and feels a lot like a first time driver in a golf cart.  The Federal Reserve has been riding the brake since early 2022 with 10 straight interest rate hikes totaling 5 percentage points, prior to pausing this month.  Higher interest rates increase borrowing costs, tighten financial conditions and slow economic growth. Rising rates have also weighed on consumer sentiment as the probability of recession climbs.  At the same time consumers and the job market are pressing the gas as spending remains strong and unemployment low.  The S&P 500 has rallied more than 20% since its October 2022. The recent whirlwind of conflicting data has many scratching their heads. 

First quarter earnings were surprisingly healthy

Figure 1 shows 78% of S&P 500 companies reported Q1 earnings that surpassed Wall Street estimates, up from 68% in Q4 2022 and above the 20-year average of 67%:

% of S&P 500 Companies Beating Estimates

The above-average number of earnings beats is encouraging, but there is more going on beneath the headlines. Figure 2 shows first quarter earnings estimates for the S&P 500, Nasdaq 100, and Russell 2000 were revised lower throughout Q1:

YTD earnings revisions

Those downward revisions by Wall Street analysts clearly set the bar too low, leading to more companies beating expectations. Estimates were gradually revised higher as more companies reported first quarter results and analysts scrambled to self correct. The upward revisions, combined with the 78% beat rate, suggest Wall Street analysts were betting on more brake and less gas and got the opposite.  While Wall Street analysts rarely get right, this data highlights the complexities of the current economic environment.

Companies provided context on first quarter earnings calls

Here’s what some well-known companies said about the current economic environment during their earnings calls:

  • UPS (Logistics): “… volume was higher than we expected in January, close to our plan in February and then moved significantly lower than our       plan in March…”
  • Caterpillar (Machinery): “Backlog ended the quarter at $30.4 billion, flat relative to the fourth quarter of 2022.”
  • Bank of America (Diversified Bank): “Consumers' financial positions remain generally healthy. They are employed with generally higher wages,       continue to have strong account balances and have good access to credit.”
  • Chipotle Mexican Grill (Restaurant): “… we're seeing new customers come in and we're also seeing existing customers increase their frequency.”

Per the excerpts above, UPS’s declining package volumes suggest consumer spending weakened as the quarter progressed, while Caterpillar’s flat backlog indicates construction, mining, and drilling activity may have be peaked. I can hear the brakes squeaking, can you?

On the other hand, Bank of America and Chipotle reported the U.S. consumer was financially healthy during the 1st quarter as account balances were strong people ate more meals away from home.  Is that the sound of engines revving?

Economic data still mixed

The mixed messages explain why analysts, consumers and investors alike remain cautious as we all try to figure out where the economy is headed.  With one foot on the break and the other on the gas, at least most of us don't need to contend with a clutch anymore.

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