A broad swath of global industrial and consumer bellwethers reported stronger-than-expected earnings in their most recent quarter, as resilient spending patterns kept profits afloat despite high interest rates.
Giants such as Coca-Cola (KO-N), General Electric (GE-N) and Novartis exceeded expectations on Tuesday as reporting season picked up steam, with major technology companies on deck to report in coming days. Broadly, companies say demand has held up, belying long-held expectations for a recession that has yet to materialize.
Through Tuesday morning, 81 per cent of the S&P 500 companies that have reported results have beat expectations, compared with an average of 67 per cent since 1994. About one-quarter of S&P companies have released results and are surpassing analysts’ forecasts by more than 7 per cent, far above the historic average, according to LSEG I/B/E/S data.
Both Coca-Cola and industrial conglomerate 3M (MMM-N) raised their full-year outlooks. Telecom company Verizon (VZ-N) said it brought in more subscribers than expected as it also raised its forecast for free cash flow.
In Europe, Swiss companies Novartis and Logitech International both raised their full-year earnings forecast after reporting strong results. Luxury apparel maker Hermes said sales were up briskly in the third quarter.
European earnings reports are not as far along as in the U.S. So far, 50 companies in the EuroStoxx 600 have posted results, with 54 per cent ahead of estimates, in line with the typical average, according to LSEG I/B/E/S.
U.S. automaker General Motors (GM-N) reported a 5.4-per-cent increase in revenue and said its average vehicle selling price was US$50,750 in the most recent quarter, down slightly from the previous quarter.
“So far the consumer has held up remarkably well for us as evidenced by the average transaction prices,” said Paul Jacobson, chief financial officer at GM. As for rising interest rates, he said “it’s something we’re mindful of but not something we’re seeing in the immediate market for our vehicles.”
In recent days the U.S. Treasury benchmark 10-year note yield touched 5 per cent for the first time in 16 years as the U.S. Federal Reserve has raised short-term borrowing rates to slow the economy and rein in inflation.
Last week Elon Musk, chief executive officer of electric vehicle maker Tesla (TSLA-Q), noted the increase in borrowing costs, saying it would directly affect sales as people need credit to buy cars. GM’s Mr. Jacobson said rates were a concern as well, but also said spending was holding up.
3M CEO Michael Roman said back-to-school spending was less robust than in previous years. “We’re just looking at the uncertainty around what happens for the holiday season,” he said, adding that the shift from discretionary spending into staples like food has continued.
So far the rise in interest rates has not hurt the labour market, where unemployment remains at a still-low 3.8 per cent. Housing purchases, dependent on affordable mortgages, have slowed, and the equity market has been stagnant, having lost 6.5 per cent in the past three months, with the S&P 500′s forward price-to-earnings ratio dipping to 17.7, lower than the past few months.
“That 5 per cent number on the 10-year is eye-catching, and that’s why equities have stalled out here, but historically speaking, 5 per cent hasn’t been horrible for valuation,” said Robert Teeter, managing director of Silvercrest Asset Management, which has US$31.9-billion under management.
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