Disney Earnings and US Inflation in Focus

November 07, 2022 09:11

Last week, the Federal Reserve and the Bank of England (BoE) both hiked rates by 75 basis points. However, whilst Fed chair Jerome Powell’s post-announcement comments were decidedly hawkish, BoE governor Andrew Bailey struck a more dovish tone, suggesting that interest rates may not rise as high as initially predicted.

Considering the UK’s inflation rate was last reported at 10.1% compared to 8.2% in the US, you might have expected the comments to be the other way round.

However, the two economies find themselves in very different positions. The US’ comparably robust economy provides the Fed more scope to raise rates without being too concerned about crashing the economy.

The BoE, on the other hand, has no such luxury. The UK appears on the precipice of what the BoE have forecast could be its longest recession since records began. Although the silver lining is that it won’t be as profound as had previously been anticipated. Understandably, therefore, the BoE is slightly more wary about aggressive rate hikes in the near future.

But that’s last week, so what about this one?

Walt Disney Earnings

The current earnings season is well under way, with over half of the S&P 500 already having made their announcements. One of the big names to watch out for this week is the Walt Disney Company, who report their fiscal full-year earnings after the market close on Tuesday.

For Disney shareholders, 2022 has been a year to forget. As the closing bell rang on Friday, share price was down 36% year to date.

Of course, much of this downturn is attributable to wider issues affecting the stock market; however, Disney’s drop has been far more profound than the wider S&P 500’s fall of 21% and, furthermore, the truth is that Disney’s downward spiral started long before 1 January.

Covid-19 hit Disney hard. With theme parks and other in person experiences forced to close, Disney lost a large stream of revenue and, unsurprisingly, share price fell. However, thanks to rapid subscriber growth in the nascent Disney+ streaming service, the stock became a favourite of investors during lockdown. Consequently, share price surged, hitting an all-time high on 8 March 2021.

Nevertheless, as with many so-called “stay-at-home” stocks, Disney’s pandemic-era stock market success was seemingly driven more by generous speculation over future results rather than grounded in any real-time data. Perhaps inevitably, sentiment changed and these stocks began to sell-off as investors realised current earnings were not necessarily justifying the high valuations.

Since its all-time high on 8 March 2021, share price has slumped more than 50%, and now sits not far from where it was at the outset of the pandemic. Does this create a buying opportunity for investors? Perhaps, but not one without risk; the future is far from certain in the Magic Kingdom.

Whilst Disney’s earnings have been recovering, they are yet to return to their pre-pandemic levels. Nor, apparently, have they reached a level where the entertainment giant feels comfortable reinstating their dividend, which they eliminated in response to the pandemic.

Revenue and earnings are both forecast to jump in Tuesday’s announcement. However, investors are likely to pay particular attention to the company’s forward outlook.

As with most companies, Disney faces some pretty serious headwinds at the moment. High inflation and rising interest rates are eroding discretionary incomes, which is highly likely to damage demand for Disney’s range of enjoyable, yet thoroughly non-essential, goods and services. Furthermore, an economic downturn will cause advertising revenue for Disney’s media divisions to shrink.

US Inflation

On Thursday, the Bureau of Labor Statistics will release the latest inflation data for the US. After the Fed’s interest rate decision and the Employment Situation report last week, many eyes will now turn to this important announcement.

The annual inflation rate is expected to be reported at 8%, which is marginally lower than the 8.2% reported last month.

If inflation comes in lower than expected, it will lend credence to the Fed’s aggressive approach to tackling inflation, but may prompt more restraint at their next policy meeting in December. In this scenario, we might expect to see a positive reaction in the US stock market at the expense of a negative reaction to the US dollar.

However, if inflation is reported worse than expected, coupled with Powell’s hawkish speech last week, speculation of further aggressive hikes will be rife. In this scenario we can expect to see equities suffer and the USD strengthen.

Regardless of the outcome, traders and investors should be braced for an increase in volatility in currency pairs including the USD and US stocks around the time of the announcement.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Roberto Rivero
Roberto Rivero Financial Writer, Admirals, London

Roberto spent 11 years designing trading and decision-making systems for traders and fund managers and a further 13 years at S&P, working with professional investors. He has a BSc in Economics and an MBA and has been an active investor since the mid-1990s