Private Wealth

Weekly Research Briefing: Ready for Earnings

October 18, 2022

From my earnings foxhole, the first releases read well. Pepsi put up a stellar report and the stock reacted. United Healthcare beat numbers and raised their forecast. Delta Airlines only had good things to say about the environment for travel and their future cash flows. And bank earnings showed few signs of worry in their credit results. So, while the economists are dialing in a recession and investors remain cautious on equities, knock on wood because the earliest earnings results and guidance do not look as bad as feared. That could always change this week as we expand to 15% of the S&P 500 reporting their numbers. But if bank credit quality is staying healthy, then I will put my biggest market worry back into its container for now.

The other top topic for the week was the CPI. Thursday's government statistic did not give the Fed or investors what it wanted in a more modest increase and the markets reacted immediately to show their displeasure. But the 3% sell-off in the S&P 500 was soon replaced by a 6% buying frenzy to close the day which was followed by a 3% sell-off on Friday replaced by a 3% advance on Monday. Having fun yet? Market volatility continues unabated as investors continue to size bets on the peak in inflation and future Fed rate hikes, the extent of the economic slowdown and potential damage to the labor and credit markets as well as corporate earnings. Stacks of chips are moving around the financial markets at an amazing rate while some investors place their bets while many others just sit and watch.

While the CPI did not deliver for the bulls, the statistic did highlight that the shelter/housing component is now powering the gains. And we all know what is currently happening to both housing and rental prices. Eventually this will be reflected in the shelter component. Deflationary effects remain in place elsewhere as we read and hear evidence from the Q3 earnings releases. Bottlenecks are easing and supply chains are freeing up causing a better environment for those companies who raised prices and kept most of their sales volume. Feeling their Scandinavian guilt, IKEA has even begun to cut prices again to their consumers given their now falling cost of inputs.

Not even sure what to say about the United Kingdom. I can only imagine how difficult it is for managers across all industries to analyze and manage risk when the game board changes so rapidly. It looks like the recent U-turn has allowed everyone to catch their breath and for the risk markets to stabilize. Now about that head of lettuce.

The Hamilton Lane Advantage

Discover our commitment to expanding investor access to private market investing.

Learn More

Thursday's CPI came in hot as shelter and medical came in higher than expected...

September core CPI rose 0.58% (month over month), well above consensus expectations of 0.4% and our forecast of 0.41%. The year-on-year rate rose three tenths to 6.6%, the highest since 1982. Shelter categories strengthened further (rent +0.84% vs. +0.74% in August, OER +0.81% vs. +0.71%), and we would highlight strength in other cyclical and wage-sensitive services categories including day care (+2.0%), car repair (+1.9%), and medical care (+1.0%). Car insurance prices also rose 1.6%, above our expectations and reflecting higher replacement and repair costs. Core goods prices were unchanged, as lower prices for used cars (-1.1%), IT commodities (-0.6%), and apparel (-0.3%) offset continued strength in new cars (+0.7%) and pet products (+0.9%). Headline CPI rose 0.4% (vs. consensus of +0.2%), as energy prices declined 2.1% while grocery (+0.7%) and employee and school cafeteria prices rose (+44.9%).

Goldman Sachs

Medical care joins shelter costs as a newer concern...

@LizAnnSonders: Medical care services component of September CPI jumped by 1% m/m, fastest increase since 1982

Reiterating this...

Shelter costs should slow soon...

We already know that higher mortgage rates have made new mortgages much more expensive...


The shock of higher monthly mortgage costs has frozen the home purchase market causing a buyer’s market...


Apartment pricing has even now turned negative on a quarter over quarter basis for most top cities..

Forty-eight years ago, the U.S. stock market waited for the peak in inflation before it recovered...


That being the case, Wells Fargo sees the peak in core inflation being right about now...

Wells Fargo

Ditto for Morgan Stanley...

@carlquintanilla: MORGAN STANLEY: Core inflation is “on track to decelerate significantly by middle of next year. .. we see drivers of disinflation on the horizon, most notably from a reversal in vehicle prices and a downshift in medical services.” [Zentner]

But while housing costs turn negative, Social Security recipients are about to see a major increase...

U.S. Social Security recipients will get the biggest boost to their monthly benefits in more than four decades, officials said following the release of key inflation data that showed U.S. prices rising more than expected. Retirees and other beneficiaries will get an 8.7% cost-of-living adjustment starting in January, the U.S. Social Security Administration said. That is the biggest hike since 1981, when benefits rose 11.2%, according to the agency's website.

Hammerstone Report

James Bullard is a fan of front-loading rate hikes, but after that, he suggests the Fed's work could be done...

In what were tempered remarks for one of the Fed's most hawkish voices recently, Bullard said that at that point he would let further increases rest on incoming data.

"I do think 2023 should be a data-dependent sort of year. It's two-sided risk. It is very possible that the data would come in a way that forces the (Federal Open Market) Committee higher on the policy rate. But it's also possible that you get a good disinflationary dynamic going, and in that situation the committee could keep the policy rate and hold it steady," Bullard said a day after the U.S. government reported that consumer price inflation remained above 8% last month.

The possibility of a fifth larger-than-usual increase in December is "a little more frontloading than what I've said in the past," he added.

But the trajectory mapped out by Bullard would still leave the target policy rate at the median level that Fed officials projected last month they would need to reach - evidence of a broad consensus at the central bank around at least a temporary stopping point after a year in which they have ratcheted rate expectations steadily higher.

Even if some of Bullard's colleagues want to reach that point in smaller interim steps and not until early next year, Bullard said he regards faster increases as warranted because the U.S. labor market remains strong, and "there's just not much indication that we're getting the disinflation that we're looking for."


A majority of top economists are now predicting a U.S. recession due to the Fed's rate hikes...

The U.S. is forecast to enter a recession in the coming 12 months as the Federal Reserve battles to bring down persistently high inflation, the economy contracts and employers cut jobs in response, according to The Wall Street Journal’s latest survey of economists.

On average, economists put the probability of a recession in the next 12 months at 63%, up from 49% in July’s survey. It is the first time the survey pegged the probability above 50% since July 2020, in the wake of the last short but sharp recession.


The Fed's Mester sees recession as possible, but necessary...

(US) Fed's Mester (FOMC voter): Reiterates does not expect Fed to lower rates in 2023; Yet to make any progress on inflation

  • Expects weak growth over next couple of years
  • Fed committed to using all tools to lower inflation; Size of Fed rate rises will depend on economic conditions
  • Watching financial vulnerabilities but stress still low
  • Monetary policy needs to be moved to restrictive levels
  • Fight to lower inflation painful, but must happen; Possible shock could tip us economy into recession
  • Job market still remains very strong, outstripping supply
  • Unemployment at 4.5% by end of 2023, move higher in 2024
  • Expect to see higher than usual market volatility

Q&A: Fed faces no trade-offs right now with its dual mandate

  • Longer term inflation expectations look to be anchored, can not take anchored inflation expectations for granted
  • Inflation is way to high, runs the risk of becoming embedded in the economy, hikes not aggressive relative to where inflation stands
  • Can't say how far balance sheet will need to shrink
  • Currently does not expect economy to run into recession, sees fundamental state as still good
  • US economy doing ok, job market strong

Q&A with reporters: Not ready to say yet about how big Nov rate rise should be

  • Need progress on inflation before downshifting hikes
  • Troubled by breadth of inflation rise
  • Does not see evidence of market disorder right now; Does not see big market risks looming at moment


I am looking forward to this 'Risk-On' day...

IMF Chief Georgieva: Stopping the Ukraine war is a straightforward way to get the world economy in better shape.


...but in the meantime...


- In 2023, for many countries and many people, it will feel like a recession

- What we see perhaps is a fundamental shift from the world of the last decades that was relatively predictable with strong rules-based international order, low inflation, and low interest rates, to a world that is more volatile, more fragile


The U.K. Prime Minister has a new address...

It looks as if the head of lettuce is going to outlast the recently appointed PM...

Senior UK business figures are calling on Liz Truss to stand down as prime minister after she was forced to scrap almost all of her economic policies amid chaos on financial markets.

Three days after being appointed chancellor of the exchequer, Jeremy Hunt dropped most of his predecessor’s tax cuts on Monday, and scaled back the UK’s energy-support program. Truss had already reversed a corporation tax freeze at the end of last week when she dismissed Kwasi Kwarteng as chancellor.

“I don’t see how the Prime Minister can successfully disassociate herself from the failed implementation of policies, u-turns and mistakes by firing the chancellor and blaming him,” Martin Sorrell, chairman of S4 Capital Plc, told Bloomberg News. “They were joined at the hip.”

The founder of advertising giant WPP Plc said he’d like to see Rishi Sunak, who lost to Truss in the summer’s Conservative leadership election, take over.

Former BT Group Plc and easyJet Plc chairman Mike Rake said the prime minister should “do the right thing for the country” by stepping aside.

“She has lost the confidence of markets and seems to have lost the confidence of the public and MPs,” he said.


Now onto earnings... Bank of America had many good things to say about the U.S. economy...

"The fed has to raise rates to slow down inflation and they are working against this large powerful, powerful force which is the largest economy -- that is just employed, spending money and going on -- The toughest challenge for the Fed is actually one of the best things about the US economy -- is that it’s in pretty good shape" - Bank of America CEO Brian Moynihan

The Transcript

And their credit quality figures showed little to get concerned about both on the consumer and commercial side...

Bank of America

The J.P. Morgan earnings release also found strength in the U.S. economy while noting the potential speed bumps...

“In the US, consumers continue to spend with solid balance sheets, job openings are plentiful and businesses remain healthy. However, there are significant headwinds immediately in front of us – stubbornly high inflation leading to higher global interest rates, the uncertain impacts of quantitative tightening, the war in Ukraine, which is increasing all geopolitical risks, and the fragile state of oil supply and prices. While we are hoping for the best, we always remain vigilant and are prepared for bad outcomes so we can continue to serve customers even in the most challenging of times."


The J.P. Morgan CFO sounded well on credit quality...


Other reporting banks also had good things to say on credit quality...

“The U.S. economy, however, remains relatively resilient. So while we are seeing signs of economic slowing, consumers and corporates remain healthy as our very low net credit losses demonstrate, supply chain constraints are easing, the labor market remains strong." - Citigroup CEO Jane Fraser

"We haven't seen any change in our credit book -- we really haven't seen deterioration in the performance of the book across anything." - PNC Financial Services CEO William Demchak

"Our credit remains pristine. Nonperforming assets were only 6 basis points at quarter end. Net charge-offs were only $1 million during the quarter. For perspective, this is just a fraction of a single basis point of our $159 billion loan portfolio." - First Republic Bank CEO Michael Roffler

"Credit quality remains strong," - Wells Fargo CEO Charles Scharf

The Transcript

Wells Fargo's provision and charge-offs looked fine in the Q3...

Wells Fargo

And so did U.S. Bancorp's...

@TheTranscript_: $USB CEO: "Results were driven by strong growth in net interest income supported by loan & deposit growth and the benefit of higher interest rates...Credit quality remains strong and in the third quarter our net charge-off ratio improved on both a sequential & YoY basis"

U.S. travel statistics continue up and to the right...

Delta Airlines noted the strength in their earnings...

"...while we are mindful of macroeconomic headwinds, the travel industry is experiencing a countercyclical recovery. Global demand is continuing to ramp as consumers shift spend to experiences, businesses return to travel and international markets continue to reopen. Demand has not come close to being quenched by a hectic summer travel season." - Delta Air Lines CEO Ed Bastian

The Transcript

And not just a Delta Airlines tailwind...

The Daily Shot

American Airlines expects to beat its Q3 estimates...

[AAL] Raises Q3 Rev +13% (prior +10-12%), TRASM +25% (prior +20-24%), CASM +14% (prior +12-14%) - filing - Raises Q3 pretax margin ~4.5% (prior +2.0-4.0%)

  • Capacity: During the third quarter, the Company flew 68.6 billion total available seat miles, down 9.6% versus the third quarter of 2019, compared to its prior guidance of down 8% to 10%.
  • Liquidity: The Company expects to end the third quarter with approximately $14.3 billion in total available liquidity.


Disneyland Resort's is taking advantage of all the strength in travel demand to raise prices...

1-Day Ticket, The prices vary based on the date, but have increased by an average of $10 per ticket. The lowest price available is still $104, but select dates that were previously $104 have been raised to $114. Prices range from $104 to $179.

2-day, 1-park tickets have increased from $255 to $285.

3-day, 1-park tickets have increased from $330 to $360.

Disneyland News Today

PepsiCo beats earnings as strong pricing offsets cost inflation...

If all companies reported numbers like Pepsi, this earnings season would be a piece of cake. Very strong pricing had only a slight impact on volumes and while the gross margin was hit by cost inflation, it was more than made up for at the operating margin. Fritos and Cheetos are clearly a global necessity.

[PEP] Reports Q3 $1.97 v $1.85e, Rev $22.0B v $20.9Be; Raises FY22 outlook; Notes global business momentum remains strong

  • Raises FY22 core constant currency EPS $6.73 v $6.66e (prior: $6.63)
  • Raises again FY22 Organic Rev +12% (prior: +10%)
  • Affirms FY22 Total cash returns to shareholders of $7.7B, comprised of dividends of $6.2B and share repurchases of $1.5B
  • Raises expectation for a 2.5% foreign exchange translation headwind to impact reported net revenue and core EPS growth based on current market consensus rates (prior 2.0%)
  • Organic Rev +16% v +9.1%e (consists Organic Volume -1%, Effective Net Pricing +17% - 8K filing)
  • Frito-Lay North America Organic Rev +20% (consists of Organic Volume flat y/y, Effective net pricing +20%)
  • Core Gross margin -20bps y/y
  • Core Op margin +31bps y/y

Organic Rev by division:

  • North Americas Beverages +13% y/y
  • Frito-Lay North America +20% y/y
  • Quaker Foods North America +16% y/y
  • Latin America Foods +22% y/y
  • Europe +15% y/y
  • Africa, Middle East and South Asia +17% y/y
  • Asia Pacific, Australia and New Zealand and China Region +8% y/y


But not everyone winning as suppliers into housing and auto demand are seeing weakness...

Here is Leggett & Platt who is big in bedding and auto seating materials.

[LEG] Cuts FY22 outlook due to lower volumes; Saw home furniture demand softened significantly in the last few months

  • Cuts FY22 $2.30-2.45 v $2.71e, Rev $5.1-5.2B v $5.33Be, EBIT margin 9.5-10% (prior $¬2.65-2.80, Rev $5.2-5.4B, EBIT margin 10.5-10.7%)
  • Cuts FY22 cash from ops $400-450M (prior $550-600M)
  • Rev decrease is primarily due to lower volume than previously expected
  • EPS decrease is primarily from lower volume, reduced production, slower than anticipated cost recovery in Automotive, and operational inefficiencies in Specialty Foam
  • CEO: "The increasingly challenged global economic environment and consumer backdrop is expected to result in lower than previously anticipated sales and earnings in the third and fourth quarters of 2022. Demand in the US bedding market is fairly stable but remains at relatively weak levels as industry headwinds persist, including inflationary and monetary policy impacts on consumer spending and consumer sentiment as well as higher inventory levels. Given the bedding demand environment and slowing market for steel generally, we are cutting production in our Rod and Wire businesses to reduce inventory.
  • "Our Specialty Foam business has experienced larger demand impacts as a result of previous pandemic-related supply issues and channel specific pressures. Lower demand in Specialty Foam in combination with operational inefficiencies, which are being addressed by continuing integration work, are taking longer than originally expected to resolve.
  • "Demand in International Bedding has declined more significantly amid geopolitical and macroeconomic disruptions in Europe. Home Furniture demand has softened significantly in the last few months with slower consumer demand and excess inventory at retail.
  • "Volume and cost recovery are improving sequentially in Automotive, but at a slower rate than anticipated. While improving year-over-year, industry production forecasts remain dynamic as supply chain and geopolitical impacts bring continued volatility.


Fastenal sells broadly into the construction and industrial trades...

So, a good inflationary read that they did not increase prices further this quarter.

[FAST] Reports Q3 $0.50 v $0.48e, Rev $1.80B v $1.79Be; Did not take any broad pricing actions in Q3

  • Daily sales +16.0%
  • Gross margin 45.9% v 46.3% y/y; Op margin 21.0% v 20.5% y/y
  • We opened 3 branches in the Q3 2022 and closed 24 branches, net of conversions.


  • We estimate adverse weather that impacted the southeastern US reduced our quarterly growth by 10 to 30 basis points. We experienced higher unit sales in the third quarter of 2022 that contributed to the increase in net sales in the period. This was due to good underlying demand in markets tied to industrial capital goods and commodities, which more than offset softer markets tied to consumer goods and relatively lower growth in construction.
  • Foreign exchange negatively affected sales in the third quarter of 2022 by approximately 60 basis points.
  • We did not take any broad pricing actions in the third quarter of 2022, and price levels in the market remained stable. The favorable impact of product pricing moderated in the third quarter of 2022 relative to the second quarter of 2022 due to comparisons against initial price events that began in the third quarter of 2021.
  • Spot prices in the marketplace for many inputs, particularly fuel, transportation services, and steel, began to decline during the period. Due to our long supply chain for fasteners and certain non-fastener products, however, it is likely to take several quarters before this is reflected in our cost of goods. The impact of product pricing on net sales in the third quarter of 2021 was 230 to 260 basis points.
  • The overall impact of product pricing on net sales in Q3 of 2022 was 550 to 580 bps compared to Q3 of 2021, due to actions taken over the past twelve months intended to mitigate the impact of marketplace inflation for our products, particularly fasteners, and transportation services.
  • Adjusting for storm impacts and a difficult government comparison, our September daily sales rate was healthy on strong manufacturing trends. However, feedback from the field suggests there are pockets of increasing customer caution.


A mid-teens percentage of the S&P 500 will report this week. Buckle up...


When markets get highly correlated, babies get thrown out with the bathwater making opportunities for long term investors...

Stocks have been trading together because investors are largely focused on macroeconomic news—and conflicting economic data have led them to flip-flop their bets on whether the Fed will maintain its pace of rate increases.

“Markets are being chased all together, which is rare,” said Chris Murphy, co-head of derivatives strategy at Susquehanna...

The prospect of higher rates has led to few outright winners in the market. A Bespoke Investment Group analysis of the Russell 3000 found that a basket of stocks with low valuations, high-dividend yields and large market caps fell about 15% on average from their summer highs in mid-August to the end of September. In comparison, the average stock in the index dropped almost 19% through the same period...

One factor that has pushed correlations higher: the popularity of exchange-traded funds. Investors in index-tracking funds who want to increase or decrease their exposure to stocks during periods of turmoil can buy or sell only broadly—not pick and choose shares.

The tandem moves extend well beyond stocks. Government bonds, which are considered a haven during times of financial turmoil, have slipped alongside stocks for three consecutive quarters for the first time since 1974, according to Strategas Research.

The Bloomberg U.S. Aggregate bond index—which tracks a basket of government and investment-grade corporate bonds—is down about 15% this year. Gold, another haven, has fallen 8.1%.

“There’s no way out. We just have to sit through the pain,” said Seema Shah, chief global strategist at Principal Asset Management, of the simultaneous declines in stocks and bonds.


Stocks have rarely seen this many down trading days...


The 60/40 sucks in 2022...

The Price is Right: why investors need a hug…2022 annualized return on “60/40” portfolio -34.4%, worst in past 100 years (Chart 3); even for cash/commodity/stock/bond “25/25/25/25” defensive “permanent portfolio” -11.9%, worst since 2008.

BofA Global

Barron's Big Money poll showed that institutional clients think their clients are worried about the market...


Mom is also worried about the market...

Plenty of 'growth company' babies being discounted...

Goldman Sachs

And the political cycle is in play...

@edclissold: The market is entering the most bullish phase of the 4yr presidential cycle. But macro backdrop is terrible. Which will win?

While the markets move lower, M&A experts are licking their chops to buy their favorites in industries that they know well...

Here is the #2 player in Identity and Access Management being bought for 7x Revs.

[FORG] To be acquired by Thoma Bravo for $23.25/shr in cash valued at ~$2.3B

- FOG entered into a definitive agreement to be acquired by Thoma Bravo, a leading software investment firm, for $23.25 per share, in an all-cash transaction valued at approximately $2.3 billion. The offer represents a premium of approximately 53% over ForgeRock’s closing share price on October 10, 2022, the last full trading day prior to the transaction announcement, and a premium of approximately 44% over the volume weighted average price of ForgeRock stock for the 30 days ending October 10, 2022. Transaction details

- The transaction, which was unanimously approved by the ForgeRock Board of Directors, is currently expected to close in the first half of 2023, subject to customary closing conditions, including approval by ForgeRock’s shareholders and the receipt of required regulatory approvals. Upon completion of the transaction, ForgeRock’s common stock will no longer be publicly listed and ForgeRock will become a privately held company.


And another IT Security company being bought for 9-10x Sales...

[KNBE] Confirms to be acquired by Vista Equity Partners for $24.90/shr valued at $4.6B

- Announced that it has entered into a definitive agreement to be acquired by Vista Equity Partners in an all-cash transaction valued at approximately $4.6 billion on an equity value basis.

- Under the terms of the merger agreement, KnowBe4 stockholders will receive $24.90 per share in cash upon completion of the proposed transaction. The per share purchase price represents a 44 percent premium to the Company’s unaffected closing price on September 16, 2022, the last full trading day before Vista publicly disclosed its initial non-binding acquisition proposal on its Schedule 13-D.


Over in real estate, saavy investors are on the hunt...

Starwood’s Barry Sternlicht says he sees “incredible opportunities” to find distressed investments in the real estate market.

He’s looking to “kick through the debris” to find investments and companies “that they’re broken balance sheets but not broken assets,” the chief executive officer of Starwood Capital Group said Tuesday in a Bloomberg TV interview on the sidelines of the Robin Hood Investors Conference in New York.

Rising rates may cost millions of people their jobs and are creating unprecedented stress around the world, he said, adding that the Federal Reserve was “unbelievably late” in acting.

“In the real estate world, there’ll be people having loans coming due that might be hard to refinance. And so they’re going to need a capital infusion,” he said. Banks will likely be tougher and so “you’ll see a lot of loans being sold” across every asset class.


Interesting thought...

Thoma Bravo founder and managing partner Orlando Bravo is a champion of the idea that private equity is best suited to running and building software companies. Indeed, at times he is almost evangelical about the asset class’s ability to transform those businesses.

Private equity has an unmatched opportunity to develop and improve software firms with a “rolling up their sleeves” attitude, Bravo tells Private Equity International – a view that is shared at a time when public market equivalents have seen declining share prices amid market turmoil.

On the topic of liquidity, Bravo puts “so much of a discount on buying a piece of paper than buying a company, if the benefit of owning a piece of paper is that you can transfer it immediately when you want”. He argues that “if you get into something [and] you’re so worried about your ability to sell it instantaneously, then you shouldn’t get into it in the first place”.

Private Equity International

Scary good those New York football teams...

@TheAthletic: New York is a football city

Jets: 4-2 overall, now 3-0 on road for first time since 2010

Giants: 5-1 overall for first time since 2009

Learn more about the Hamilton Lane Strategies

Learn more


The author has current equity ownership in: PepsiCo Inc. and J.P. Morgan Chase.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

Recent Content


Weekly Research Briefing: Time for a Santa Rally?

It is make or break time for a year end Santa Claus rally. As the S&P 500 hits its 200-day moving average, now would be the perfect time for the bulls.

Read the Research Article

Weekly Research Briefing: More Than a Game

I could watch Richarlison's bicycle kick goal on an endless loop. But 4,000 miles away, while watching the great games, the citizens of China are also seeing a world free of COVID. The financial markets and those sourcing goods from China could also use a win from an easing of the lockdowns.

Read the Research Article

Weekly Research Briefing: Significant Reversals

We knew that there would be a few meaningful events last week, but the magnitude of directional change was much more than we would have ever guessed.

Read the Research Article

FPO We use cookies to improve user experience, and analyze web traffic. For those reasons, we may share your site usage with our analytics partners.

Learn More