Corbin Advisors

The Big So What™ This week, we’re covering Industrials in our Sector Beat. While performances have varied from company to company, EPS beats for the roughly 45% of S&P 500 Industrials that have reported Q3 figures have so far come in at a healthy clip — 65% have topped consensus. That said, this trails the overall EPS beat rate for the S&P 500, which stands at 79%, with only Consumer Discretionary beating EPS estimates at a lower pace. Further, top-line results have tilted more towards misses, with 54% reporting Q3 revenue below consensus versus the broader index average of 43%. While fewer Industrials are lowering annual revenue and EPS guidance than expected, executive tone is decidedly mixed depending on the industry and business trends. Government spending (infrastructure/defense) and other secular tailwinds (such as AI-driven demand, energy transition) continue to contribute to optimism on one hand, while subdued commentary elsewhere as a result of macro uncertainty, sluggish end markets, and a cautious consumer continue to weigh on sentiment on the other. What is certain, however, is that despite these challenges, many were able to deliver positive results through strategic initiatives, cost management, and operational efficiencies. “Outgrowth” and “outpacing soft industry growth” were commonly referenced, as executives tout above market strength in execution despite a soft top-line environment.   Companies across Aerospace & Defense, which contributed heavily toward the group of companies raising guidance, point to robust demand and record backlogs, but burgeoning concerns about future results due to the potential impact of the Boeing factory workers strike on the supply chain is starting to give some pause. While most in the group delivered another beat-and-raise outcome, the heightened uncertainty led at least one company (Hexcel) withdrawing previously issued mid-term guidance, and others implementing furloughs (Spirit AeroSystems).   Meanwhile, the transportation group remains mired in a longer-than-expected freight recession, but with some signs of bottoming and cautious optimism for an eventual rebound in demand. At the same time, recent hurricanes in the Southeastern U.S. have disrupted those operating in the region, with cleanup and rebuild costs to remain a headwind into next year. Given continuous mounting headwinds, commentary around 2025 is unsurprisingly noncommittal, with many executives seeking greater clarity on how the upcoming U.S. election will shake out and impact of heightened geopolitical turmoil. Globally, trends are mixed. China remains under pressure amid downbeat consumer sentiment and a weak funding environment. While recently announced stimulus efforts offer hope for a demand recovery in 2025, early takes reflect an expectation for softness to persist through the rest of this year. European demand remains muted, while commentary around Latin America is mixed. India remains a relative bright spot.

The Big So What™ This week, we’re covering U.S. Banks in our Sector Beat. Continuing last quarter’s earnings season trend, U.S. Banks are largely reporting strong results relative to Street expectations with most posting solid Q3 beats on the top- and bottom-line. Broadly speaking, results have been bolstered by strength in capital markets, investment banking, and wealth management. Executives remain largely optimistic for a more robust M&A and IPO environment on the horizon amid signs that sponsors may be readying to tap their more than $1T of dry powder. As the Fed has kicked off its easing cycle with a 50 bps rate cut last month, questions around the expected path of interest rates and the impact on net interest income (NII) garnered outsized attention on earnings calls. While some noted near-term NII headwinds are likely to persist into next year, executives touted swift measures to reduce deposit pricing. With two additional 25 bps rate cuts expected this year (one in November and one in December), and more seen on the table for 2025, commentary also reflected the view that a more upwardly sloping yield curve should be more supportive in the year ahead, albeit with timing uncertain. Continuing, overall loan growth remains muted, albeit with some positive comments around emerging demand trends and hopes for lower rates and post-election certainty to loosen pent-up demand. Views regarding the U.S. consumer reflect a continuation of trends seen in recent quarters, with spending more selective and lower-income groups under particular pressure. That said, executives point to normalization rather than a sharp drop-off, with consumers broadly on solid footing and supported by relatively low unemployment and steady wage growth. Taken together, bank executives struck a mostly upbeat tone on the state of the U.S. economy and prospects for a soft landing supported by cooling inflation and the start of Fed rate cuts. At the same time, most remain guarded in their macroeconomic commentary, wary of heightened geopolitical turmoil and a contentious U.S. political landscape – what they describe as “tail risks” and a “variety of economic environments”.

The Big So What™ Earnings season is quickly approaching! As we do every quarter, we analyzed the earnings communication trends of 30 off-cycle companies reporting between September 3 and October 3, 2024, to identify important themes and precedence. These companies span market cap sizes and sectors. In line with preliminary findings from our Inside The Buy-Side® Earnings Primer® — to be released next week — commentary from recent earnings calls reveals a cautious near-term outlook among executives, along with a dose of tempered optimism toward prospects for a better environment in 2025, but with some potential green shoots. Amid ongoing macroeconomic uncertainty and a heightened focus on the upcoming U.S. election, many remain in “wait-and-see” mode, but are hopeful that post-election clarity and lower rates may catalyze paused orders and bring hesitant consumers off the sidelines. With the Fed kicking off its long-awaited easing cycle on Sep. 18 with an outsized 50 bps rate cut, some recent calls are expressing optimism for rate relief to bolster consumer confidence into next year, but commentary remains more “hopeful” than “expecting”. Demand commentary varies by sector, though outside of AI/data-driven demand for chips, most characterize the backdrop as moderate and consistent with recent trends. The consumer remains price-sensitive and budget-constrained, with more comments about pressures broadening beyond low-income cohorts, in line with earnings call commentary from recent months. Protecting (and growing) margins remains a common theme, while some point to prior cost-cutting and expense management measures providing greater flexibility to self-fund and invest for future growth. Adding to the near-term uncertainty, warnings of looming U.S. port strikes in the East and Gulf Coast came to fruition this week, before the two sides reached an agreement late Thursday to bring the three-day strike to an end. Companies asked about the potential impact highlighted proactive steps taken, including diverting activity to the West Coast and switching to air freight. Ultimately, it remains too early to determine the extent of the three-day impact and another potential albatross in companies’ ability to meet guidance for the year. Regionally, the picture remains mixed. Commentary points to signs of recovery in Europe and the UK, as well as a solid environment in parts of Asia. Meanwhile, headwinds in China persist amid weak consumer demand. Lastly, while this group of off-cycle companies falls on different fiscal years and exhibits different guidance patterns from the norm, for those that updated guidance this quarter, more are lowering than raising or maintaining. We have seen an increase in preannouncements in recent weeks leading up to Q3 earnings season, something we will be monitoring closely in the weeks ahead. Key themes from our analysis below: