The 2023 Q1 earnings season is complete, and the outcome is a mixed bag, increasing the uncertainty among investors. Most US corporates did better than expected but almost all were very gloomy in their future guidance, attributing this to a slowing economy. While the current turmoil in the banking sector provides an obvious excuse for the gloom, all is not always as it seems in corporate guidance, which is often framed with its fair share of bias, strategically portraying things as gloomier or rosier than they are. Historically, a clearer view of the corporate outlook has been provided by the interplay of the tightening credit cycle and manufacturing output. The Purchasing Managers’ Index (PMI) has been indicating a contraction since November 2022, with readings dipping below the 50 level. The Fed’s Senior Loan Officer Opinion Survey on bank lending (SLOOS), which tracks the number of commercial and industrial loans issued, indicates a continuing tightening of the credit cycle since 2022 Q3. The simultaneous lows of the two series underscore the strong interplay between contractions and credit tightening, and the latest trough seems to be happening now. More importantly, the interplay between the two series, and more specifically the joint lows, are able to indicate a bottoming out in corporate profitability around six months before it occurs. That low in corporate profitability also seems be happening now. If the worst in the latest iteration is already booked, then corporate margins are likely either to stay where they are for some time or to start to recover. If anything, therefore, take the gloomy guidance of corporate managers with a pinch of salt.
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