Buzzword bingo: The keywords to listen for in third quarter earnings calls

As we round the corner into October, it’s pumpkin spice but not-so-nice in the outlook for third quarter earnings.

Q3 earnings calls with investors are likely to be stuffed as full as Thanksgiving turkeys (can you tell we are in an autumn mood?), with inflation woes, supply chain concerns, and all-but-certain fretting about a possible recession. Some companies, such as Nike and Bed Bath & Beyond, have already stepped up to the carousel, reporting earnings on September 29. The big banks, often bellwethers of the macroenvironment given their connections to much of the economy, will report in mid-October, with JPMorgan, Morgan Stanley, and Citigroup reporting on the same day.

The past few months have set up this moment of chaos: AllianceBernstein wrote in its global macro outlook that despite the “higher interest rates, lower equity prices, and wider credit spread,” all parts of solving the inflation problem, it’s “premature to sound the all-clear.”

And if we look at second-quarter earnings for any indicators, while corporate profits were up 6.2% QoQ, they were still lower than the 9.1% expected, according to research from the Bureau of Economic Analysis.

Earnings calls will focus hawkish eyes on the question of a (shh) recession. Wall Street titans such as Ken Griffin said in late September that there will be a recession—it’s just a matter of when. Even business leaders alluded to the economic downturn—240 companies in the S&P 500 cited “recession” on their Q2 earnings, the highest number in 10 years.

“What most people are looking for are indications of how deep the recession may or may not be getting,” Gina Martin Adams, chief equities strategist at Bloomberg Intelligence, told CFO Brew. “The first is, is a slowdown in economic growth occurring, and if so, how much is it impacting your revenue line?” A key sign of weakness? Layoffs, Adams said.

Perhaps in comparison to last quarter, analysts and investors will be “on guard” for currencies’ impact on earnings, and may pay particularly close attention to companies with significant European exposure, given the expected high energy costs and volatile currency swings across the pond, Adams told CFO Brew.

So if there are third-quarter buzzwords to watch for, “recession” probably tops the list, along with “inflation” and “currency” risks. Probably better not to turn it into a drinking game, though; you’d likely end up pretty intoxicated just from the mentions of “recession” alone.

“Profits are growing much more slowly in 2022,” JPMorgan’s Chief Global Strategist David Kelly said in the firm’s outlook. “While energy companies will continue to benefit from high margins, elsewhere, these headwinds should cut into profits.”

Adams said that there’s a “tremendous amount of fear already” in the markets, in anticipation of this earnings season. “Much like second-quarter earnings season when companies miss, they’re more likely to be forgiven in this environment, and companies that beat really celebrated, because of the near-term psychological shift that we’ve been through over the course of [September].”

It’s probably safe to say that analysts and investors will stick with bear costumes for Halloween, but company executives may have theirs stashed in their closet, and we’ll have to wait for their grand entrance to the party.—KT