​In an earlier edition of this newsletter, we drew attention to the current earnings season and argued that, as inflation continues to moderate, most investor attention would turn to other areas of the economy and data to try and figure out the next move.

There are a few potential candidates - we highlighted the jobs market as a leading contender a few times - but we argued that company revenues and profits might be a heavy focus.​

​As we wrote in January:​

Company earnings in the S&P 500 are starting to have a far more significant reaction on stock prices than either US inflation data (CPI) or the latest Federal Reserve meeting.

Well, we are coming to the end of the meat of the earnings lineup and so we thought we might circle back and look at what we found out.

There was actually quite a lot.

As a reminder, earnings data are released right before a formal "earnings call" whereby a company's top executives discuss their quarterly numbers and analysts and investors get to ask questions.

First, the good news:

Most US companies are clearly no longer referencing concerns about a recession on their earnings calls.

This is a big and very welcome change from recent quarters. Further, this plunge in recession references reinforces a theme we have pushed with other data for a few months: the US economy is holdings its own.

Clearly company executives have also noticed this at a more granular level.

Nothing new there perhaps but it's nonetheless positive to see it replicated across a large pool of different companies, teams, products, markets and sectors.

Next up, however, is the "improving but still concerning" category of news.

For instance, here is the "inflation" count on the same earnings calls:

There are two points to make here:

1. While it is declining compared to recent quarters, the citing of inflation as a concern is still both present and quite elevated.

2. More than that, there are evidently certain sectors that are clearly very focused on rising prices and are also, most likely, struggling as a result.

Think carefully about the above sectors before buying a single name stock or even a sector wide ETF. Will their profits be protected from further inflation?

This brings us to the actual bad news.

The first is that, somewhat unexpectedly and counterintuitively, overall sales growth is still incredibly high:

This is impressive but also concerning. Last year we were worried about a recession and here we are in 2023 and while sales growth is declining it is nonetheless still very elevated.

And by "very elevated" we actually mean higher than they have been for the prior three decades.

File under: things that do not get mentioned on the front page of the news website or in a news broadcast.

How could this possibly be a bad thing?

Well, because that level of sales reinforces the idea that, once again, inflation is not whipped yet. Corporations are doind a historical abnormal amount of business.

There is also the fact that sales growth may continue to decline as growth does inevitably slow - thanks to interest rate hikes.

See here:

"Margins" or the profit margin that companies make per unit of sale have already been eroded thanks to inflation. Historically, the next step is that sales growth also drops.

That isn't good. It may not happen but, considering the obstacles in front of companies, it might not be wise to bet against it, even if the economy stays resilient.

So, where does this leave us?

It leaves us squarely in No Man's Land - halfway between an inflationary spiral and an economic recession.

Everything is alright now - perhaps more than alright, in fact - but inflation has dealt corporate profits a serious dent and executives are understandably concerned about further damage and the likely reality that economic growth will inevitably slow from here.

If inflation does come down further, then both company revenues and the stock market will stabilize. If not....

The problem is that, for many companies, their internal sales figures suggest falling sales is the only route to falling inflation.

Is it any wonder executives could be excused for being tense? They are dealing with a lot of uncertainty right now.

Perhaps this is why, though recession fears have diminished, we are experiencing a bull market in swearing on those same earnings calls?

What does this signal?

It is interesting that swearing writ large is higher today than the Financial Crisis. Perhaps it says more about the decline of certain society wide standards than anything else.

For now, let us turn to two of America's most important companies to see how one of the cleanest takeaways of the present economic condition is that it is affecting individual companies very differently.

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.