Big banks like Wells Fargo, JPMorgan, Citigroup and Morgan Stanley, along with consumer-driven businesses like PepsiCo, Delta Air Lines and Walgreens, will be among the companies reporting their quarterly earnings this week.
Earnings calls aren’t known for being theatrical experiences — think C-suite executives talking about “economic headwinds” or “wait-and-see” periods with monotone voices. And those phrases are euphemisms that can mean a lot, especially in banking.
“These are kind of boring financial utilities. But banks touch practically every corner of the economy,” said Sheraz Mian, director of research at Zacks Investment Research.
That’s why Wall Street, regulators and the Federal Reserve pay so much attention to them when they report their financial results. Banks have an incredible amount of data on how much everyone’s spending, how much is going on credit cards or how much is being borrowed.
The hope? That households and companies are borrowing less. “A seemingly negative sign with respect to a bank’s results, if they tell us that demand is slacking off, will be a positive for the economy,” Mian said.
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A positive because it could mean the Fed’s interest rate increases are working to quell inflation.
Earnings reports for consumer-driven businesses can also tell us a lot because consumer spending accounts for about 70% of U.S. economic activity.
“Are companies still raising prices?” said Arun Sundaram, senior equity research analyst at CFRA Research. “Or are we at a point where the consumer is pushing back enough where manufacturers and retailers can’t raise prices anymore?”
And if they can’t, how is that affecting business? One key word Sundaram will be listening for is “restructuring.” “That can mean layoffs,” he said.
Now, there are caveats. We shouldn’t rely too much on what companies are saying because sometimes they’re dealing with problems that are unique to them, according to Ilia Dichev, a professor of accounting at Emory University. Often, they’re just too sunny.
“Companies and managers, in general, tend to be overoptimistic,” he said.
Instead of paying close attention to any one company’s earnings, Dichev said, we should zoom out and look at the bigger, collective picture.