Here’s what we already know about the next profit season

The spread of the delta variant and rising consumer prices made it difficult to assess consumer and business sentiment in the third quarter. You can see this in the retail sales data, which fell 1.1% in July from an expected drop of 0.3%, before rising 0.7% in August from an expected drop of 0.8. %.

The sentiment has been difficult to gauge as different parts of the country and the world are going through different stages of the pandemic and have different policies in place, all of which impact business activity and consumer spending. Global supply chain issues also continue to be a problem.

But with the third quarter coming to an end, it’s important to try and understand how consumers and businesses have performed over the past three months, as this can help you understand how different industries and businesses are performing – which can to be a great catalyst for actions.

Consumer sentiment

There is obviously all kinds of data that you can use to gauge consumer sentiment. But a pretty simple thing that I like to do is see what some of the biggest banks in the US and the world are saying because their performance is very closely tied to the economy and they have a good idea based on that. what their consumer and business customers are doing. To. Recently, most of the major banks have spoken at the Barclays Annual Conference on Global Financial Services.

The consumer still seems to have a positive trend, despite a peak in the delta variant across the world in the past three months. Marianne Lake, co-CEO of JPMorgan Chase‘s (NYSE: JPM) consumer and community banking division, said after an acceleration in spending from late 2020 to the second quarter of this year, spending has softened a bit, especially in sectors hard hit by COVID-19 , such as travel, airlines and accommodation. But Lake said consumer spending at the bank was still up 18% or 19% from 2019.

While the sweetening might not sound like great, I actually think it’s pretty good to see spending levels staying high considering what happened with the Delta variant in Q3. This shows that despite the disruptions, the economy is functioning better with the virus continuing to spread.

Stimulus checks also started to decline in the quarter, as did unemployment benefits. Earlier this month, millions of unemployed Americans stopped receiving an additional $ 300 per week. Lake said the impact could soon add a shock to consumer spending, as consumer balance sheets begin to drain and more people start borrowing again, but normalization could take some time as a Extraordinary amount of stimulus has been injected into the economy over the past year.

Lake added: “I never like to call it an inflection point, but we would expect that as the stimulus wears off, if the health situation stays under control, which we think it does. will be, the economy remains in solid growth mode, which we think will. ”

Lake’s comments were seconded by Citigroup‘s (NYSE: C) CFO Mark Mason, who said sales of credit card purchases had increased “quite significantly” across the card industry, but reimbursement rates also continue to remain high, showing that the consumer as a whole is still financially healthy, probably thanks to the savings and stimulus created. in 2020 and early 2021.

Business sentiment

As has been the case for most of the past year, business confidence has remained more negative than consumer confidence. Most banks have reported in the first two quarters of this year that many companies are still not taking loans for capital spending or reinvestment as they deal with supply chain issues and wait for uncertainty.

However, in the second quarter, some banks reported slight loan growth. This trend continued for one of the country’s largest lenders in Bank of America (NYSE: BAC), who at the Barclays conference gave an overview of the bank’s commercial lending growth in July and August.

Image source: Bank of America.

I see the steady but continuing growth in July and August as a good sign that the Delta variant hasn’t derailed too much of the modest momentum returning to the trading community. It may not explode, but it is growing. Revolving commercial lines of credit remain unchanged, according to Alastair Borthwick, president of global commercial banking at Bank of America. Revolving lines have remained stable at most banks for a while, resulting in weak lending growth on the business front, again suggesting that corporate sentiment is still not where many would like. to see him. Borthwick said he thinks it is currently very difficult to predict when gun use will resume.

Overview of America’s Fifth Bank, US Bancorp (NYSE: USB), seemed to echo that of Bank of America. CFO Terry Dolan said line usage levels at the bank were stable and growth in commercial and industrial (C&I) lending, which affects many small businesses, is still subdued, although lending pipelines are solid and that he sees optimism in the banking markets.

“When we think about the different components on the C&I side, the biggest challenge is that we continue to experience high repayments, which I think is happening in the industry, given the attractive interest rate environment and the ability for people to be able to access the capital market space, ”Dolan said. “There is also a fair amount of excess liquidity in the market.”

What it means for you

You can use this consumer and business sentiment data to reflect on stocks and their third quarter results, most of which will be released in October and early November. Businesses that rely on consumer spending should overall be in good shape to meet their projections, although you may want to bring a fair amount of skepticism to the travel, accommodation, and airline industries, in which Lake said he saw a slowdown. more difficult to predict commercially, companies always seem to spend and borrow at a lower rate than consumers, so keep that in mind, especially when it comes to companies trying to acquire new business customers.

It is important to look at the stocks you are evaluating and try to understand as much as possible how their clients were affected by the delta variant and other macro factors during a quarter. Learning what we can from the big banks is a good first step.