The Transcript Q3 2022 Letter
What we learned from the Q3 2022 earnings calls
Summary: 3Q22 earnings season is now effectively over. As we do each quarter, below is a letter to summarize some key takeaways from those earnings calls. The Macro section is available for our free subscribers and the rest is available only to our premium subscribers. Enjoy it!
In recent weeks we’ve noticed some cooling in the economy. Right now it’s difficult to say whether the cooling is purely healthy or represents the start of a recession. But it does appear that the inflationary period that we’ve been experiencing since 2021 is in transition. The ultimate magnitude of the cooling will largely depend on Federal Reserve policy. The Fed continues to signal that they have not seen enough drop in inflation to justify a change in direction for interest rates and so remains hawkish. The Fed is planning to slow the pace of increases but was very clear that their focus is on how high to raise rates and how long to keep them there. There have been some signals from Fed Governors that rates may need to remain high throughout 2023.
"These rates are going to stay -- keep going up -- and they’re going to stay high for a while until we see this inflation get down closer to our target. We’ve still got a ways to go. This isn’t ending in the next meeting or two -- So everybody should just take a deep breath and calm down. We’ve got a ways to go. This is kind of what happened to us in 2021. We thought it was going to come down, it was starting to come down, and then it exploded and we were caught flat-footed and we had to pivot very quickly. So everybody should just take a deep breath and calm down. We’ve got a ways to go yet." - Federal Reserve Governor Christopher Waller [21st Nov: More Cooling]
Capital markets do not appear to be pricing in prolonged higher interest rates. The S&P 500’s current multiple is 21.4x trailing 12-month earnings, equivalent to a 4.2% earnings yield. This compares to a 3.7% 10-year treasury yield. Both are very low compared to a mid-7 % annualized inflation rate. If the Fed raises rates to positive real levels, there is still significant re-pricing required. A 7% earnings yield implies a P/E multiple of 14.3x, which would be a 33% decline from current levels. For now, though, there are few if any signs of a recession in non-financial sectors. Aggregate S&P 500 earnings in Q3 were not all that bad. The S&P 500 earned $44.79 per share last quarter. This was down 9.7% from $49.59 in 3Q21 but was 4.8% higher than in 2Q22 and 31.8% higher than in 3Q19. The general economy seems to reflect this: things may not be quite as strong as they were in 2021 but we’re still much wealthier (nominally) than we were in 2019. For the consumer, in particular, this may explain why we have continued to see robust spending despite recession fears.
"...what we continue to see is a very strong consumer. Consumer spending is healthy -- for what we've seen from our operating metrics through the first week of November what we're seeing is generally consistent with our expectations as we had laid out in Q3." - Mastercard CFO Sachin Mehra [21st Nov: More Cooling]
"The consumer is healthy. The consumer is healthy. I don't see it necessarily taking off, but if there's any pullback, it's very, very, very, small, if there is any. So I think the consumer is still out in force." - Fiserv (FISV 0.30%↑) CEO Frank Bisignano [21st Nov: More Cooling]