Will 'Brexit' Dampen Guidance?

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Includes: AA, C, FXB, GLD, JPM, USB, WFC
by: Edward Frost

Summary

I provide a look at this weeks earnings highlights.

What should we look out for?

Can they just 'blame it on Brexit'?

This week we hear from a whole host of companies, with Alcoa (NYSE:AA), as always, being the first noticeable name to report. This earnings season will be the first real chance for CEOs to talk about Brexit, discuss the impact on earnings, and answer the many questions that I'm sure top analysts have in store for them.

The financials will be of particular interest. With a lack of Fed interest rate hikes, economic uncertainty in the EU, and now the Brexit debacle to throw into the mix, the future is now harder to predict than it was 6 or 12 months ago. US-focused banks Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) both suffered falling stock prices in the days after the referendum vote, but will Brexit really effect their earnings? On Friday we will find out. Citigroup (NYSE:C) and JP Morgan (NYSE:JPM) also report this week, and with greater dependence on the international stage than the prior two banks, will their calls tell a different story?

Wells Fargo, Citigroup and JP Morgan are all expected to beat their respective estimates, but we all know that guidance moves a stock more than the headline numbers. I suspect that many companies will highlight Brexit concerns in their conference calls, and the continued unanswered questions will likely lead to lower stock prices after-hours.

We could find ourselves in a situation where many of our much-loved household names are unfairly discounted should Brexit concerns dominate conference calls. Companies like WFC will likely point to how insignificant Brexit is to their business model, explaining how domestic the business is and how changes in the value of the pound (NYSEARCA:FXB) will make little, if any difference to the firm's bottom line. However, global corporations like JPM and C have concerns, and will highlight them in the coming weeks. Will they have issues with EU headquarters in a soon to be non-EU London? Will they have problems recruiting from the EU to these offices when the UK triggers Article-50? The list of unanswered questions is seemingly endless, but it is guaranteed that some will get asked this earnings season.

With markets near all-time-highs, I struggle to justify rising stock prices in the immediate future. Despite Friday's excellent jobs number, questions still remain about the strength of the economy. Nobody really knows what a post-EU Britain will look like, and how trade with the rest of the world, as well as with the EU will work. We've had one rate hike this year, despite the promise of four in 2016, and with many suggesting that the next interest rate move is likely to be a move lower rather than higher, can we really expect strong guidance in these conditions? Money is flowing to safe haven securities, US bond yields are incredibly low, the dollar is very strong and gold (NYSEARCA:GLD) is near a 52-week high. The British pound is at its lowest level in over 30 years, and until very recently, stocks were unloved worldwide.

It is likely that some will 'blame it on Brexit', highlighting consumer uncertainty before and after the referendum as the villain of the quarter, but that doesn't have to be the case. I want to hear from a firm that posts strong year-over-year growth, without the excuse of Brexit or the strong dollar. I want reassurance from CEOs that the post-Brexit environment will be one of prosperity and growth, and silence some naysayers in the process. Is that too much to ask?

Conclusion

We go into earnings season in a strange situation; markets are high, but so is fear - fear of uncertainty. All eyes (well, ears I suppose) will be on the CEOs, as they discuss Brexit and the aftermath. Better buying opportunities are almost guaranteed after Friday's run, so be patient, but vigilant, because there could be some bargains in the coming weeks.

Disclosure: I am/we are long WFC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.