The Transcript Q1 2023 Letter

What we learned from the Q1 2023 earnings calls

Summary: As the Q2 2023 earnings season starts in earnest this week with the big banks reporting, we share our key learnings and the key themes we have seen in the Q1 2023 earnings calls. As always, your feedback is always welcome.

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Macro

The US stock market is enjoying a surprisingly excellent year. The Fed continues with relatively hawkish rhetoric, but the promise of AI is driving equity indexes higher. In many circles, AI is considered to be the largest technological innovation since the internet. Indeed, it may even be bigger than the internet. Its effect on the economy, jobs and growth could be profound. Because of this, capital markets are discounting visions of the future from science fiction as much as earnings calls. And it’s very possible that this is not as crazy as it sounds. The underlying economy of today continues its “resilience” in the face of tighter monetary policy. Consumer spending doesn’t appear to have meaningfully changed this year.

"Our consumers have remained resilient, due in part to average bank account balances, credit card debt, and unemployment levels that are more favorable than they were before the pandemic" - General Mills CEO Jeff Harmening [July 3rd: The Year After Next]

“I think there's more reason to be optimistic than pessimistic as you think about the state of the U.S. consumer" - Kellogg CEO Steve Cahillane [June 21st: Keeping at it]

Inflation has fallen by a lot, but core inflation is still running meaningfully higher than the Fed’s 2% target.

"I think the important thing to note in our guidance around inflation is that we see it moderating, but there will still be inflation above sort of the historic levels we would expect to see in our category..." - General Mills CFO Kofi Bruce [July 3rd: The Year After Next]

“Inflation remained high, up low double digits in food categories…On a 2-year stack basis, food inflation remains over 20%, and continues to pressure discretionary wallets." - Walmart CFO John Rainey [May 22nd: Cautious Outlook]

“...the headline inflation numbers are coming down because we’re lapping higher prices year-over-year but prices are still high.” - Walmart CFO John David Rainey [July 3rd: The Year After Next]

Earlier in Q2, the Fed paused to wait and see how banking stress could impact the economy. That stress has not persisted. So with stock markets surging the Fed seems to be increasingly prepared to raise interest rates again. Along with further increases in rates, Jerome Powell has signaled that rates should stay at these levels at least into 2025. This is still not reflected in longer maturity interest rates. If 10-year treasury yields were to rise to reflect higher long-term interest rates it is possible that even AI will have a hard time keeping equity indexes surging.

"Inflation seems pretty sticky and embedded globally. I don't see that getting resolved relatively quickly." - Goldman Sachs CEO David Solomon [July 3rd: The Year After Next]

International