We hope you enjoyed the Civic long weekend!
In this newsletter, we're examining the second quarter earnings season. We examine the impact inflation and the economic environment has had on U.S. company capital decisions, as well as breaking down the banking sector results for the second quarter and how this may reflecting a normalization of trends.
We're also celebrating the success of this year's Wheels of Hope Golf Classic, which raised over $110,000 in support of the Canadian Cancer Society. We were proud sponsors of this event and are proud of our involvement in helping cancer patients in need get transportation to their life-saving treatments.
Lastly, we are sharing the most recent Financial Markets Monthly focusing on central banks and their approach to interest rate increases. This thought leadership piece speaks to the policies in Canada, the U.S. and around the world, the conditions needed for sustainable low inflation, and the willingness to raise rates should it be needed.
Economic Update
Global equity markets have pulled back slightly so far in August. The past few weeks have been marked by the U.S. credit rating downgrade by Fitch, one of three leading rating agencies. Although we foresee limited near-term consequences, we share its concerns regarding U.S. debt, spending, demographics, and governance issues. Meanwhile, recent U.S. economic data continued to indicate solid albeit slowing employment growth and easing inflation. Below, we discuss the second quarter earnings season, which has now wrapped up.
Earnings and the state of the markets
There are a few reasons we evaluate earnings trends. First, we strive to harness the compounding effects of dividends and earnings streams from the equity in our clients’ portfolios, as these tend to drive long-term equity returns. Secondly, earnings results and insights gleaned from the commentary of management teams across various sectors often help us to assess the state and direction of the business environment.
Results impacted by stricter business policy and capital spending
The bulk of U.S. companies have now reported their results. The earnings growth rate for the U.S. equity market for the second quarter looks to have been a decline of roughly 4% year-over-year. This marks the third consecutive quarter of relatively weak earnings results, contrasting with the robust growth from late 2020 to 2022. Nevertheless, as with the last few quarters, the results surpassed low expectations. While inflation poses less of a challenge than last year, management teams expressed continued vigilance about cost containment. Several companies suggested that economic uncertainties are making investment and capital spending decisions challenging. Still, many businesses highlighted a stable domestic economic backdrop, with signs of weakness few and far between.
Banking indicating a ‘normalization of trends’
The banking sector is particularly revealing as a gauge of economic health because banks directly service the consumers and businesses that drive the economy. The earnings results from the banks were positive, even for the smaller regional banks that had been strained by deposit outflows earlier this year. Most banks expressed comfort about the consumer, suggesting households are in good shape with deposits that remain elevated, spending that is gradually slowing, and rising credit card balances – reflecting a normalization of trends according to many management teams. Meanwhile, commercial loan demand has slowed, which is not too surprising given the increase in interest rates and the many companies that took advantage of low rates over the past few years to pre-fund their future cash needs. Lastly, credit losses are slowly rising in certain loan categories, but remain below historical averages. Many banks raised their provisions for future credit losses, yet very few indicated that they were seeing anything concerning.
In summary
In summary, the most recent results and commentary suggest a healthier than expected operating environment. As time goes on, we remain cautious about potential vulnerabilities for consumers due to higher borrowing costs. But admittedly, the resilience demonstrated to date continues to be surprising. Any deterioration in the backdrop, should it occur, may still take some time to develop. In the meantime, we want to be prepared for a range of potential outcomes by ensuring all of the allocations within our clients’ portfolios are appropriate.
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Over $110,000 raised by 37th Annual Wheels of Hope Golf Classic
On July 24th, we were proud to be sponsors for the 37th Annual Wheels of Hope Golf Classic held at Victoria Park East Golf Club in Guelph.
In support of support the Canadian Cancer Society, the Wheels for Hope program transports cancer patients to and from their life-saving treatment centres free of charge.
If you're interested in learning more about Wheels of Hope, check out our full video below:
Central banks hit "hopeful pause" on rate hikes
Robust economic data seemed to bring sunnier days in July. For the most part, global equity indices inched higher as recession fears eased.
And yet, U.S. banks continue to report tighter lending standards and slower commercial & industrial loan demand—a sign businesses are growing more cautious. Read more about this in the most recent installment of Financial Markets Monthly.
Reminder - Summer Hours
A friendly reminder that Elinesky Schuett Private Wealth is recognizing summer work hours through to September 1st, 2023. Please note that during this time, our offices will be closing at 4pm on Fridays. Thank you for your understanding.
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.
