We are a couple of weeks into earnings season for the second quarter of 2023, with most of the world’s major listed businesses reporting financial statements and management commentary.  With most companies still yet to report it is early in the season but, nonetheless, we have seen and heard enough so far to make some conclusions.   

China’s discretionary consumer has arrived, albeit a little late. We are seeing a solid recovery in the Chinese consumer, led by higher income consumers in traditional luxuries earlier in the year, we are seeing evidence now of a broader improvement in spending across other product and service areas like mid-tier apparel and sportswear, and travel and leisure.

US ‘aspirational consumer’ is weakening in traditional luxury. We have heard now from multiple global luxury goods companies that in the US, consumers in the ‘aspirational’ category, those on incomes who can afford the lower pricing tiers of products, are slowing down their spending on this product category.  Meanwhile, however, the US high income consumer is doing fine.

A major global catering business we follow is not seeing slowing in the US economy.  In Sports and Leisure spending remains strong: “strength is continuing… We’re not seeing any signs of weakness thus far” according to management.  This supports the view that where there is weakness in the US consumer, it remains restricted to physical products like traditional luxury goods and is yet to impact experiential or services spending, which remains strong.

Advertising spending is not dropping off a cliff, as you would expect to happen in a recession.  Google Search growth accelerated, driven by retail advertising spend, while Meta (digital advertising business) reported very strong results.  Despite the slowdown late last year in digital advertising, we have not seen the apocalypse predicted by many in advertising spend driven by weaker macro.  Spending remains solid in the industry, especially in digital advertising with the large online platforms who offer the highest return on investment for advertisers. 

Cloud spend growth is still strong across geographies and sectors.  The two major cloud service providers to have reported results so far this season (Microsoft, Google) have shown continued strong growth in demand for cloud services across the economy and across regions.  There is little evidence of a major slowdown in enterprise spending on cloud computing, far from it. We may see some moderation in growth rates, but nothing like the cliff edge drop expected earlier in this market cycle.

Conclusion:  there is no evidence yet of a recessionary slowing in the economy.  If there were we would expect to start seeing consistent patterns across sectors of the economy of slowing demand.  We are seeing pockets of this, but it is limited and not consistent.  The evidence continues to point to a ‘soft landing’ or ‘no landing’ scenario for the economy. 

This is good for equities!

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