D-Fence

From Amazon to Coke, earnings season underscores a shift to defense as econ gloom grows

Monday, May 2, 2022 by Robinhood Snacks |
The pantry-staple defensive wall (George Frey/Getty Images)

The pantry-staple defensive wall (George Frey/Getty Images)

New season dropped... We're not talking “Ozark.” Investors have had eagle eyes this earnings season on how corporates are managing a unique economic hot mess (inflation, war, China's Covid crackdown). What we've learned so far:

  • High-growth sectors like tech, which thrived mid-rebound, have hit a wall as sales slow, and they’re tightening their belts to prep for more pain. Ditto other "cyclicals" (think: banks, construction), which typically do well when the economy thrives.
  • "Non-cyclicals" — which tend to hold steady regardless of how the economy is doing (think: consumer staples, utilities) — outperformed.
  • In context: The World Bank slashed its forecast for global economic growth, US GDP shrank last quarter, and some analysts warn a recession’s coming.

Change is the only constant... A year ago, the "Big Tech 5" demolished earnings with jaw-dropping records. The economy was in full rebound mode and cyclicals were raking it in. Now:

  • Tech: Amazon had its slowest sales growth since the dot-com bust (the late ’90s), while Meta posted its slowest growth since going public in 2012. Google’s biz is also slowing, while Netflix expects to lose millions more subscribers. Apple was strong but said chip shortages would keep slowing its growth. The outlier: Microsoft beat across the board.
  • Banks: From Citi to Chase to Goldman, America’s largest banks reported double-digit earnings declines as trading and dealmaking slowed.

Versus…

THE TAKEAWAY

The market’s getting defensive… It used to be “growth at all costs” — now it’s “steady earnings and cut costs.” Amazon, Meta, and Netflix plan to slow investments and be more financially disciplined. Companies and investors are getting used to the “new not normal” environment: persistently high inflation and supply shocks. While the techy Nasdaq just had its worst month since 2008, the pile-on into defensive stocks could continue.