Last week’s earnings calls: solid commentary from the financials was overshadowed by private credit concerns
Based on our transcript reading, on the broader macro the Financials that reported generally see a resilient economy and healthy and consistent US consumer, while acknowledging macro uncertainty and the unevenness or K-shaped nature of the underlying economy. These companies generally highlighted strong capital markets activity and pipelines, good credit quality, potential tailwinds from lower interest rates, and improving loan demand and corporate sentiment. One bank stood out for noting greater comfort among their customer base in making longer-term decisions due to increased certainty over tariffs and trade. Another stood out when they described how some of their clients had deferred capital expenditures and had been renting, but that they’d been getting requests for financing to shift from rent to own. Yet another said clients had continued engaging in capex but that “it was heavily in tech, software, transportation and equipment, while spending on new buildings remained in decline.”
Lessons from early 2023
The financial community is in the midst of a discovery process on the private credit concerns that emerged last week, and for now we will simply have to wait and see how things unfold. There are no perfect historical examples that we, from a US equity strategy perspective, can point to. That being said, we spent some time last week reviewing stock market performance around the regional bank crisis of early 2023 as a starting point for thinking through broader market risks.
What else we’re thinking about – fading earnings revisions and sentiment
Deterioration has become even more evident for the top 10 market cap names in the S&P 500 – a proxy for the AI / mega cap growth trade – which have been the workhorses of the US equity market from an earnings perspective. As a reminder, the deterioration in earnings sentiment, which surged from typical non-crisis lows in late April to typical non-crisis recovery peaks in mid-August has been one thing that has kept us on guard for a tier 1 pullback in US equities this fall, along with stretched valuations, weak seasonals, choppy bitcoin trends, weaker US equity flows, recent declines in our sentiment indicator, and jittery investors in our meetings that we’ve worried would be inclined to take profits soon.
