The mystery of the state of the U.S. consumer’s financial health got stranger this week when American Express reported earnings Friday morning. The results sent the stock price swooning, for what at the time of the release, seemed like no good reason. Amex posted very healthy beats on sales and profitability. Of particular interest were management’s comments on the strength of the U.S. consumer, that despite current macroeconomic challenges, they are seeing “no changes in consumer spending”. Management went even further by reiterating their full-year sales forecast of 23%-25% growth, with amended earnings guidance above its previous estimate of $9.25 – $9.65.
So why the negative market reaction?
Loss provisions.
Amex’s total allocation for loss provisions came in above what street analysts expected. According to FactSet, expectations for loss provisions were projected to be $717M, but came in at $778M. The unexpected, extra allocation clearly spooked investors, if for no other reason than its incongruity with the rest of the quarterly results, which all trended positive.
Interestingly, the dichotomy between the strength in consumer spending and the increase in loss provisions echoed what Citigroup’s and JP Morgan’s reporting showed last week. They too increased loss provisions in the face of strong consumer spending and historically low delinquency rates. Bank management – across the board – is simply having a difficult time reconciling the rather hale consumer financial health against the backdrop of rising interest rates and inflation.
Though it remains to be seen how this all shakes out, it’s hard to imagine, all else being equal, the mysteriously strong financial health of the U.S. consumer sustaining itself much longer.
