In our economic update this week, we discuss takeaways from the earnings season which is at the halfway mark, and provide our thoughts on the technology sector. Your link to the latest video from Eric Lascelles, Chief Economist with RBC Global Asset Management is also below, Updated views on recession, inflation, central banks and more.

In addition to our economic news, we’ve also included a few other interesting articles for you this week:

• Prescribed rate loans and the current low interest rate environment, Time to lock-in historic low rates.
• Canadian small business owners, Canadian Federal Budget 2022—3 Key Takeaways for Small Businesses
• Cybersecurity mitigation and crisis management, Understand cyber risks: Prepare, protect and educate your home and business.

This week we celebrated the retirement of an amazing team member, Kathy Cutler. Our office was decorated with balloons, flowers, and photos from throughout the years. We hosted a retirement celebration for Kathy on Wednesday and have shared photos from the event below.

As always, we end our weekly newsletter with a few good news stories from in and around our community.

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Economic update

It has been a challenging few weeks for global equity markets. There’s no one factor to blame, though inflationary pressures and the implications for central bank interest rate policy remain core issues. There are other challenges affecting the markets too, but we’ll save those for another day. This week we share our insights on the first quarter earnings results, which are now about halfway complete.

Earnings season

Prior to the beginning of the reporting season, the number of companies that had issued negative pre-announcements exceeded the number of companies reporting positive pre-announcements by a wide margin. As a result, investors were quite cautious heading into the season, believing that companies were witnessing deteriorating demand, or rising costs, or worse yet, a combination of both.

Fortunately, the results reported thus far have been somewhat reassuring. Earnings growth for the broader developed markets is now expected to be over 10 percent, nearly double the original estimate at the start of the reporting season. Moreover, some of the upside to forecasts has been driven by margins, suggesting cost pressures have not been as severe as expected, at least not yet. Nevertheless, there are clearly some industries where labour, commodities, and other inputs are either in short supply or witnessing meaningful pricing pressures, and this has led some companies to reduce their guidance on future earnings. On average, the results suggest that companies are still seeing decent levels of demand, particularly from consumers, and are finding ways to navigate through the cost pressures with a degree of resiliency.

The technology sector

The technology sector is worthy of some discussion. Investors have been anxious about this cohort given its significance in the global market as the biggest sector and home to some of the largest stocks in the world. The group broadly benefitted from the global pandemic, with consumers and businesses spending more on hardware, software, and services for some time. As a result, the earnings and stock prices of many companies across the industry appreciated remarkably in recent years.

This year has been a starkly different experience. The sector has been among one of the weaker performers, partly in anticipation of a moderation in earnings growth. That has indeed been the case with the pace of growth nearing the average of the broader markets. On its own, it is a reasonable figure, but it’s a far cry from the 40 percent earnings growth witnessed at this point last year.

There is another important factor pressuring the technology space: anticipation of higher interest rates. Stock prices tend to be driven by a discount rate that is applied to a stream of future earnings, cash flows, and dividends and this rate is heavily influenced by interest rates. All things being equal, a higher rate results in lower prices, and vice versa. Higher growth stocks, like some of those in the technology sector, are particularly sensitive because of the anticipated trajectory of their longer-term cash flows. As a result, it’s not surprising to see technology stocks under pressure in a year when bond yields have been rising and central banks are expected to raise rates rather forcefully.

Overall, investors should be comforted to some extent by the earnings season that has unfolded thus far. It suggests the operating environment remains reasonably healthy from a demand perspective. Nevertheless, the results have not been enough to offset the myriad of macroeconomic and geopolitical issues that continue to confront investors.

Updated views on recession, inflation, central banks and more In this video, Chief Economist Eric Lascelles reviews the latest economic headwinds. For the past few weeks, he has monitored the risk of recession amid ongoing supply chain issues and surging commodity prices. Now, fierce monetary tightening is driving the risk higher. However, he explores a scenario in which a recession may help keep inflation at bay. As central banks focus on managing inflation, he comments on inflationary pressures to watch, including The Great Resignation. Watch the video online: Updated views on recession, inflation, central banks and more

 

Time to lock-in historic low rates

Lock-in prescribed rate loans at 1% and potentially save on overall family taxes

You may be able to reduce your overall family taxes by splitting income with lower-income family members. One way to split income is by making loans to your lower-income family members for investment purposes and charging the Canada Revenue Agency (CRA) prescribed interest rate on the loan.

Read the full article online: Time to lock-in historic low rates

Canadian Federal Budget 2022—3 Key Takeaways for Small Businesses Upon the release of the 2022 Federal Budget, the RBC Economics team provided their insights and analysis on the initiatives, changes and spending plans that will have the biggest impact on Canadian small businesses in the near-term. Read the full article online: Canadian Federal Budget 2022—3 Key Takeaways for Small Businesses

 

Understand cyber risks: Prepare, protect and educate your home and business

Nearly half of Canadian small business owners anticipate becoming a victim of cybercrime in the next year. Here are some tips on how business owners can develop their cybersecurity mitigation and crisis management plans.

Read the article online: Understand cyber risks: Prepare, protect and educate your home and business

Best wishes Kathy Cutler This week we celebrated the 27 year career of Kathy Cutler, Senior Associate and dedicated trader. Kathy has been the backbone of our associate team for many years. She has seen the team grow from two to fourteen, and has been a steadying force navigating multiple roles in her career, leading the team’s trading operations, and represented a walking encyclopedia of team history and best practices. We wish you all the very best in retirement, Kathy, and look forward to many photos from all of your travels and lunches on our terrazza!

 

Community Corner

Each week, we like to share a few good news stories from in and around the community. We hope that they brighten your day!

• Plentiful poppies to honour of John McCrae's 150th birthday
• Putting hospital donors in the spotlight after successful 'Together, We Care' campaign
• Celebrating the iconic architecture of The Ward (9 photos)
• Drayton Fair returns Aug. 5 to 7 for ‘Another Day in Fairadise’
• Countdown is on for Girls Can Fly event at local flight centre
• Olympic hopefuls show off their skills
• Milton councillor taking on a 3,700-km quest to raise thousands for mental health

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.