5 Signs of Recession to Watch For in Second-Quarter Earnings

Earnings season kicks off this week with reports from JPMorgan Chase to PepsiCo . Here are some things that could indicate whether a recession is coming.

The first is inflation. With energy costs soaring, how easy is it to raise prices? Can they cover their own higher input costs? The question is whether the burden falls more on what shoppers end up paying or on companies’ margins.

The second is consumers’ appetites. Earnings estimates have been reduced most for the likes of Target and Amazon.com , which appear vulnerable to cutbacks in discretionary spending. But there are many ways households might cope. People may decide, for example, that they can switch to cheaper food brands or take shorter vacations to still be able to afford a new car.

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Among the banks, look for how demand for loans is holding up. Even though interest rates are rising, companies that expect to grow will still borrow to invest in future capacity. Or, if they don’t, borrowing is one of the first things to go down.

Then there is the question of jobs. We have seen lots of signs of cuts, especially in technology. The issue will be whether they are widespread and deep. Stronger-than-expected U.S. jobs numbers for June should relieve concern that a recession is imminent, according to Goldman Sachs economist Jan Hatzius.

Finally, we want to know what companies themselves think about whether a recession is coming and how that matches up with their own plans. It is possible for them to predict a broad economic downturn and still see plenty of growth for themselves. If enough companies think the recession is happening elsewhere and keep on spending, things might turn out better than feared.

Second-Quarter Earnings Are Here. What to Expect.

A parade of financial reports that start this week should add more clarity to Wall Street’s understanding of how companies are dealing with inflation, consumer spending, and a volatile supply environment, and company guidance for the rest of 2022 could be even more telling.

  • This week brings reports from JPMorgan Chase, Morgan Stanley , Delta Air Lines , PepsiCo, and UnitedHeath Group . Analysts estimate S&P 500 SPX –1.11% revenue to come in 10.4% higher than in 2021’s second quarter, according to Refinitiv. Excluding energy, sales are expected to have declined 2.4%.
  • Overall, S&P 500 sales and earnings per share are likely to have hit record highs in the quarter, but growth on both lines is expected to have slowed and profit margins to have narrowed.
  • The S&P 500’s consumer-discretionary group—including Nike , Target, and Amazon—has seen the largest downward estimate revisions, according to FactSet. Financials, consumer-discretionary, and utilities are expected to post the biggest declines in profit, The Wall Street Journal reported.
  • Analyst consensus estimates have earnings growth reaccelerating into the low-double digits in the third and fourth quarters.

What’s Next: Big lenders JPMorgan, which reports on Thursday, and Wells Fargo and Citigroup , which report on Friday, are seen as benefiting from a pickup in lending activity and rising rates, which makes lending more profitable for them.

Musk Ending Twitter Deal Is ‘a Disaster Scenario’

Elon Musk’s move to end his $44 billion deal for social-media platform Twitter is “a disaster scenario,” according to Wedbush analysts Daniel Ives and John Katsingris, who slashed their price target on Twitter shares to $30 as the company faces an “elongated court battle.” Shares closed on Friday at $36.81 and fell around 6.7% in the Monday premarket.

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  • Musk’s offer was for $54.20 a share. The Tesla CEO said on Friday he was terminating the merger agreement, citing “material breach.” Analyst Trip Chowdhry of Global Equities Research has an even lower price target of $20. Musk didn’t respond to Barron’s requests seeking comment this weekend.
  • Twitter responded: “We are committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plan to pursue legal action to enforce the merger agreement.” The parties had previously agreed Musk would pay a $1 billion termination fee if the merger failed.
  • Bloomberg reported on Sunday that Twitter had hired law firm Wachtell, Lipton, Rosen & Katz and intended to sue Musk as early as this week for his bid to end the deal. The case would be expected in the Delaware Court of Chancery.
  • Musk is arguing Twitter has more fake accounts than it has said, while Twitter said less than 5% of its accounts are spam. CEO Parag Agrawal has said Twitter can’t divulge the private information to externally verify the figures.

What’s Next: Tulane Law School professor Ann M. Lipton told Barron’s that Twitter will likely demand the full $44 billion price, saying Musk must show that Twitter’s information was so false that “they would have a long-term, significant impact on Twitter’s finances, and right now there’s no evidence” of that.

MGM, Wynn Fall as Macau Shuts Down Casinos

Casino stocks dropped Monday after Macau, the world’s biggest gambling hub, shut almost all of its businesses to try to contain the spread of its biggest Covid-19 outbreak in two years.

  • City officials said over the weekend that more than 30 casinos will close for at least a week, and ordered residents to stay home for all but essential trips. Macau, which has a population of about 650,000, has maintained strict Covid-containment measures throughout the pandemic.
  • It reported 59 new positive cases of coronavirus disease on Monday, according to the Novel Coronavirus Response and Coordination Centre. That brings the total number of cases recorded since June 18 to 1,526.
  • Macau’s gambling industry has been hit hard by adhering to China’s strict zero-Covid policy aimed at stamping out Covid-19 at any cost. In Monday premarket trading, Wynn Resorts and MGM Resorts both fell more than 3%. In Hong Kong, Sands China , Wynn Macau , and MGM China all tumbled.

What’s Next: Citigroup analysts suggested most investors are willing to look past the current Covid-19 outbreak, even if it delays a full recovery for the Chinese gaming hub, and they have confidence earnings for the island’s casinos will come back. Barron’s recently said it may be the right time to bet on Las Vegas Sands .

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Omicron Subvariant Is Still Driving U.S. Covid-19 Cases

The highly contagious BA.5 subvariant of Omicron is driving an increase in coronavirus disease cases, but numbers could be vastly understated because so many Americans are testing at home or not testing.

  • The U.S. reports a weekly average of 103,913 cases a day, up 1.4% over the past two weeks, according to The Wall Street Journal’s analysis. In New York City, a seven-day positivity rate of more than 15% has prompted officials to recommend people wear masks indoors again.
  • Actual infections could be much higher. Eric Topol, a professor at Scripps Research who tracks pandemic trends, calls BA.5: “the worst version of the virus that we’ve seen,” the Washington Post reported.
  • At least BA.5 isn’t causing a major spike in hospitalizations or deaths. Covid-19 patients occupied an average 36,606 hospital beds and 4,139 intensive care unit beds last week. The average number of deaths is 419 a day, 21% higher than two weeks ago, the Journal reported.
  • Newer subvariants are still able to infect people who have been vaccinated or previously recovered from coronavirus disease. Nearly 54% of circulating viruses are BA.5 or BA.4 (16.5%), according to estimates. Infectious-disease experts say people aren’t taking enough precautions to limit the spread.

What’s Next: The Food and Drug Administration has asked vaccine makers to produce boosters targeting the BA.5 and BA.4 subvariants for this fall. But Washington University epidemiologist Dr. Ziyad Al-Aly said another new variant could be dominant by then. “This virus keeps outsmarting us.”

‘Thor: Love and Thunder’ Draws $143 Million on Opening Weekend

Marvel’s Thor: Love and Thunder drew in $143 million in its North American theater debut, and a total of $302 million worldwide, another sign that Hollywood and theater operators are seeing a return to normal. Comscore estimates domestic moviegoers spent $236 million to head to the theaters this weekend.

  • Love and Thunder, a Walt Disney film directed by Taika Waititi, opened on 4,375 screens starting on Thursday. It pulled in more than 10 million viewers, representing 57% of all moviegoers. Another 22% went to see Minions: The Rise of Gru, an EntTelligence report estimates.
  • Starring Chris Hemsworth, Tessa Thompson, and Natalie Portman, Love and Thunder had a reported production budget of $250 million. The first Thor film opened to $65.7 million in sales in 2011, Thor: The Dark World (2013) pulled in $85.7 million, and Thor: Ragnarok (2017) garnered $122.7 million.
  • Minions’ Gru sequel, distributed by Comcast ’s Universal, pulled in $45.6 million in its second weekend, bringing its domestic box office total to $210.1 million. Paramount ’s Top Gun: Maverick has taken in $597.4 million and could have surpassed $600 million by Monday.

What’s Next: JPMorgan analysts warned that theater operators may see a “cooling” of numbers because there are fewer blockbusters lined up to debut in the second half of the summer. B. Riley analysts noted the only other films showing promise are DC League of Super-Pets and Bullet Train.