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Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, shares financial headlines and offers context for Canadian investors.
Bank on higher interest rates leading to increased profits
U.S. earnings season is in full swing, and the banks were some of the first to step up to the plate. They didn’t all hit home runs, but investors were likely quite pleased with their performance. (All values below are in U.S. currency, unless otherwise stated.)
- Bank of America (BAC/NYSE): Earnings per share of $0.81 (versus $0.77 predicted). Revenue of $24.61 billion (versus $23.57 billion predicted.) Shares rose more than 17% over the last five trading days.
- Goldman Sachs (GS/NYSE): Earnings per share of $8.25 (versus $7.69 predicted). Revenue of $11.98 billion (versus $11.41 billion predicted). Shares are up more than 6% over the last five trading days.
- JP Morgan (JPM/NYSE): Earnings per share of $3.12 (versus $2.88 predicted). Revenue of $33.49 billion (versus $32.1 billion estimate). Shares are up 16.5% over the last five trading days.
- Wells Fargo (WFC/NYSE): Earnings per share of $1.30 (versus $1.09 predicted). Revenues of $19.51 billion (versus $18.78 billion predicted). Shares up 11% over the last five trading days.
- Morgan Stanley (MS/NYSE): Earnings per share of $1.47 (versus $1.49 predicted). Revenues of $12.99 billion (versus $13.3 billion predicted). Shares up 3% over the last five trading days.
- Citigroup: Earnings per share of $1.50 (versus $1.42 predicted). Revenues of $18.51 billion (versus $18.25 billion predicted). Shares up over 9% the last five trading days.
The broad takeaway from these earnings results is that banks are using expanded interest rate margins (the difference between what they pay out in interest and what they charge for lending money) to boost profits and offset losses in other areas like investment banking. Bank of America has a larger retail banking business than the other banks, so it makes sense that its earnings surprise was more substantial. Morgan Stanley is much more investment banking oriented, and its bottom line was hit by the lack of IPOs and debt/equity issuances.
Given that Canadian banks are much more in the mould of Bank of America than they are dependent on the investment banking side of things, I would expect similarly good news in their future. TD Bank (TD/TSX) has the largest U.S. exposure of the Canadian “Big Six” and therefore should track a similar trajectory to what we’ve seen with these U.S. banks over the past week.
Canadians looking to invest in these U.S. banks can do so through TSX-listed ETFs, such as the Harvest US Bank Leaders Income ETF (HUBL), RBC U.S. Banks Yield Index ETF (RUBY) and BMO Equal Weight US Banks Index ETF (ZBK). They can also get exposure to JP Morgan, Bank of America and Goldman Sachs in Canadian dollars through Canadian Depository Receipts (CDRs) listed on the Neo Exchange.
Food costs continue to drive Canadian inflation
Consumers, investors and central bankers around the world are desperately looking for signs that tighter monetary policy is succeeding in bringing down inflation.
The good news Statistics Canada announced on Wednesday was that inflation dropped for the third month in a row.
The bad news was that it only declined slightly, from 7% to 6.9% (it peaked at 8.1% in June). Many economists speculated earlier in the week that inflation would drop by a larger margin. As a result of the relatively high inflation numbers, most market watchers are now predicting another 0.75% rate increase by the Bank of Canada next week.
With food prices up 11.4% year-over-year (the fastest rate since “Trudeau the Elder” was sitting on Canada’s iron throne), Canadians continue to feel the pinch at the grocery store.
Perhaps most important, core inflation was unchanged at 5.3%. With Bank of Canada governor Tiff Macklem calling the push against inflation “our biggest test in 30 years” last week, folks hoping to see interest rates come down soon probably shouldn’t hold their breath.
People still need medicine, cigarettes and shaving blades—even in a recession
A year ago at this time, it was common to hear high-flying tech and crypto investors say, “Have fun staying poor” to boring consumer-staple shareholders. Oh, how the mighty have fallen. Turns out that owning brands such as Aveeno and Gillette is a great way to have fun while not losing money.
- Johnson & Johnson (JNJ/NYSE): Earnings per share of $2.55 (versus $2.48 predicted) and revenues of $23.8 billion (versus $23.4 billion predicted).
- Procter & Gamble (PG/NYSE): Earnings per share of $1.57 (versus $1.54 predicted) and revenues of $20.61 billion (versus $20.28 billion predicted).
- Philip Morris International (PM/NYSE): Earnings per share of $1.53 (versus $1.36 predicted) and revenues of $8.03 billion (versus $7.26 billion predicted).
As more and more people gravitate towards proven profitable companies, these types of “boring” dividend machines are likely to become more highly valued by the average investor.
Don’t change the channel on Netflix
Finally we get to a few of the flashy big-name tech stocks that reported earnings this week.
- Netflix (NFLX/NASDAQ): Earnings per share of $3.10 (versus $2.13 predicted), and revenues of $7.93 billion (versus $7.84 billion predicted). Netflix shares surged 14% after the earnings announcements on Monday. Subscriber numbers increased more than expected due to popular new programming, such as the latest season of Stranger Things. Investors also welcomed the long-awaited announcement of a crackdown on password sharing.
- IBM (IBM/NYSE): Earnings per share of $1.81 (versus $1.77 predicted), and revenues of $14.11 billion (versus $13.51 billion predicted). Shares rose 6% in extended trading on Wednesday at the conclusion of the earnings announcement. Like many other companies, IBM cited the strong U.S. dollar as a drag on revenues, but it noted that its customers were mostly accepting of price increases.
- Tesla (TSLA/NASDAQ): Earnings per share of $1.05 (versus $$0.99 predicted), and revenues of $21.45 billion (versus $21.96 billion predicted). Despite all the noise surrounding the company’s CEO Elon Musk, Tesla managed to double net income on a year-over-year basis; yet the market still punished the company, with shares dropping 5% in after-hours trading following the announcement.
- When your stock’s value is built on massive growth expectations, missing your revenue targets is a big deal. This is especially true when bearish investors are looking to pounce on any negative indicators.
Musk was quick to point out: “I can’t emphasize enough we have excellent demand for Q4 and we expect to sell every car that we make for as far into the future as we can see.”
In his typically humble fashion, Musk also stated, “I’m of the opinion that we can far exceed Apple’s current market cap. In fact, I see a potential path for Tesla to be worth more than Apple and Saudi Aramco combined.”
Overall, we continue to see market valuations whipsaw between interest rate announcements (when they drop) and resilient earnings results (when when they spike).
I have seen little to change my mind about the long term. While there may be more quarters of slightly negative gross domestic product (GDP) in the U.S. and/or Canada (recessions, stagflations and bears—oh my!), the companies with large competitive advantages will weather the storm just fine. The valuation multiples compression that we’ve seen so far this year has taken a ton of the downside out of the market.
Who knows what will happen in the short term, but long term, it’s doubtful that you’ll regret buying at current prices. Given how much share prices have already fallen—while earnings have stayed relatively stable—we believe much of the downside risk has now been removed from the market.
Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.
The post Making sense of the markets this week: October 23 appeared first on MoneySense.
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