Capital Markets Update #20

Hard data, meet earnings reports.  Earnings commentary, meet government survey data.  Reconciling economic data with actual reported earnings is perhaps one of the most powerful tools we have at our disposal as we evaluate domestic economic health.  It’s our responsibility to acknowledge that eliminating selection bias in its entirety is impossible as we comp out data with earnings commentary.  Undoubtedly any discerning individual can find a counter narrative across the hundreds of large-cap earnings reports released in any given quarter.  AirBnB beats, Shake Shack disappoints – both consumer discretionary proxys.  McDonalds says more consumers are buying value meals, yet Delta and United see demand strengthening into year end despite fare hikes. Somehow, we must try and divulge the underlying trend without falling victim to anchoring bias.  In that case, does a slight pivot towards value meals across the McDonalds menu provide any real read-through on consumer health?  Or is the Kraft-Heinz punchy takeaway that “the consumer is running out of money at the end of the month” substantiated in savings account balances or transaction activity for consumers earnings less than $100k/year, or $50k/year for that matter?

First and most importantly, the consumer. We can exercise our access to overlapping data to come up with a well-rounded thesis here.  Chime, a payments and credit company targeting consumers earning under $100k/year, noted in its Q1 2026 earnings commentary that its customer base has exhibited incredible resiliency in face of ongoing geopolitical and macroeconomic uncertainty.  For instance, purchase volumes and savings rates remain “strong and consistent”, average account balances continue to grow, the company has perceived no meaningful change in unemployment benefit income, and credit loss rates continue to improve (i.e. go down). Unfortunately, Chime doesn’t give actual statistics regarding their customers financial wellbeing, but the commentary is helpful at a minimum. Bank of America has validated Chime’s assertions through its proprietary data, noting payrolls (a BofA proxy for employment growth) have inflected positive as of EOY 2025, rising from about 0.4% YoY growth in December to 2.0% YoY growth in April 2026.  Consumers earning under both $100k/year and $50k/year went into April with a savings account balance about 20% higher than 2019 levels (inflation adjusted – 50% higher nominally) before tax refunds really hit.  Unemployment assistance, or the number of accounts receiving unemployment insurance across the BofA system, is historically stable and currently in decline MoM four months in a row.  ADP further validates the dataset by recognizing strong labor market hiring in April of about 100k net new hires, approximately 60% of which were hired into small businesses.  Additionally, the April hiring rate is up from consecutive months of about 50k new hires in February and March 2026, further establishing a measure of vigor in the jobs market.  Today’s labor report out of the BLS actually doubled estimates at 115k new hires, allowing the economy to settle at a stable 4.3% unemployment rate.  There is literally nothing weak about any of that data.

We’ve separated the consumer’s wage and transaction data from the above “economic security” data as its worth highlighting the apparent dichotomy building within the world of wages visa vis employment.  For instance, after-tax wage growth across all BofA income cohorts remains in expansionary territory, albeit at a concerningly low rate.  Low-income household wage growth appears to have found a durable bottom as of January 2026 and has rebounded from 0.5% YoY growth in January 2026 to 1.5% YoY growth in April.  While high-income wages are presently up 6% YoY, its noteworthy that low-income wage growth has outperformed high-income wage growth by 5% since 2019.   In effect, low-income wage growth jumped in 2021 – 2023 then moderated, while high-income wage growth has yet to catch up to low-income wage growth when compared to the Q4 2019 base.  Overall ADP wage growth trends remain sticky at about 4.2% YoY wage growth for job stayers and 6.5% YoY wage growth for job switchers.  Today’s BLS report showed 3.5% YoY growth in average hourly earnings.  Mix all that up and you’re probably looking at 3.5% - 4.0% wage growth ish.  Assuming actual inflation of about 3.5% - 4.0% following the March / April jump in gasoline prices and core inflation perhaps around 2.9% (avg. of Core CPI and PCE for March), real wage growth is a concern in the short-term.  Longer term, it’s still a concern but less so.  However, you again need to be intellectually honest here and gut-check your flat real wage assumption against actual consumer activity.  Visa, Mastercard and Amex all posted Q1 2026 profit and revenue beats with total payment volumes increasing between 9% - 11% YoY.  Visa and Mastercard both reported in excess of a 9% increase in processed transactions, i.e. card usage, which we find to be a more helpful indicator of actual consumer sentiment than any UMichigan survey ever published.  Approximately 80% of Americans use credit cards (Federal Reserve data), and these three majors account for 97% of total credit card utilization in the US (Nilson Report, 2025).  Thus, this represents quite the holistic data capture.   According to the Fed, credit card default rates have declined six quarters in a row (latest data as of Q4 2025), so the data generally supports the view that the US consumer remains financially secure with a critical and suspicious eye towards real wage growth in the quarters to come.

Hard economic data came in quite strong for March.  US Factory orders beat estimates by about a full percentage point, rising approximately 1.5% MoM, with factory orders (ex transportation) up 1.6% MoM.  US Core Capital Goods (Nondefense, ex Aircraft) – the business proxy for capital spending across the US – surged in March up 3.4% MoM after being up 1.5% MoM in February.  Though not a hard data input, April 2026 ISM Manufacturing PMI continues to show expansion in the US manufacturing space, registering a reading of 52.7 for the second consecutive month, with the index breaking the critical 47.5 barrier delineating expansion / contraction for the 18th consecutive month.  New Orders registered a reading of 54.1, while supplier deliveries, production and new-order backlog are all in expansion.  John Deere saw net sales and revenues up 11% YoY, led by growth in its construction and forestry segment.  Caterpillar generated a 22% YoY increase in global revenues, with exceptional performance in its power equipment and core construction segments.  CAT revised its expectation for full-year 2026 revenue growth higher to “double digit growth” from the prior 7%  expectation.  Between CAT and Deere, you’ve got two massively diversified and fundamental inputs to our manufacturing economy, from agriculture to forestry to building buildings to datacenters and energy.   Nucor steel mills hit a new quarterly delivery record, CMC (Consolidated Metals Corporation) saw backlogs for new business increase, CRH (largest US building materials company) saw solid 9% growth in revenues and “continue to expect favorable underlying demand across our key end-markets, underpinned by significant public investment in infrastructure and continued reindustrialization activity.” 

We’ve got some thoughts on the housing market, but that’s for next week. Overall, a pretty strong picture is forming for the US economy following strong employment trends, relatively week but not scary wage growth trends, excellent spending trends, solid savings and default rates, a resurgence in CapEx across the American economy and a boatload of wealth being created for the 65% of Americans that own stocks.