Global equity and bond markets have started November on a better note than the experience of the previous two months. The U.S. Federal Reserve held interest rates steady in its policy update this week, following the path of other central banks. The message from policy makers has been consistent: they are balancing the risk of over-tightening financial conditions with the need to ensure that policy is sufficiently restrictive to bring inflation sustainably under control. Below, we share some takeaways from the third quarter earnings season which is over halfway complete.

 

Overall, corporate earnings results have been positive, particularly compared to cautious investor expectations. The better-than-expected U.S. earnings results come on the heels of similarly better-than-expected U.S. economic data. The most recent U.S. GDP figures, which represent the most common measure of economic growth, grew at an annualized pace of nearly 5% for the July-through-September period. This rate was not only higher than expected but represented the highest rate of quarterly growth since late 2021. The strength was driven by an ever-resilient consumer, which continues to surprise to the upside. The data has not been as inspiring in Canada, where comparable GDP figures have been weaker.

 

Despite positive headlines around the U.S. economy and corporate earnings results, the overall tone of the outlooks and commentary from management teams has been guarded. The commentary reflects an elevated level of uncertainty with respect to the future path of the economy given higher borrowing costs, inflation pressures, geopolitical risks, and pressures in some foreign markets like China and Europe. Many businesses acknowledge that the U.S. economy and consumers have been stronger than expected, but many question how long the consumer resilience can be sustained.

 

Some potential cracks in consumer strength have started to emerge, with delinquencies trending higher in credit cards and auto loans. Nevertheless, banks continue to characterize the latter increases as being a normalization of credit trends, rather than troubling. The labour market remains healthy, but changes are occurring at the margin, with management teams commenting on the lower levels of employee turnover and slower pace of hiring. Several companies have intensified their focus on costs and have reduced their capital spending plans as a result. In Canada, the unemployment rate has risen from 5.0% in the spring to the most recently reported level of 5.7%.

 

The actions noted above may be music to the ears of central banks. Central banks raised rates aggressively and quickly over the past year or so to cool economic activity and thereby reduce inflationary pressures. Businesses have been adapting to the tighter environment. On the other hand, U.S. consumers have been largely undeterred by higher rates and the higher cost of living, at least to this point. It may be a matter of time before consumers begin to adjust their behaviours in a bigger way by reducing their spending, leading to weaker demand for goods and services. This outcome may require some patience to see it play out.

 

If you have any questions, please do not hesitate to contact us.