Will earnings disappointments halt the stock market rally?

Investors are happy with the way January has gone so far. Even amid fears of an economic slowdown, major market indicators have rebounded sharply and regained at least some of what they lost in 2022.

On Wednesday morning, however, market participants weren’t entirely happy with the way the earnings season has gone so far. Significant earnings releases from tech titans pointed to the potential for further weakness ahead. Moreover, the disappointments transcended the technology sector, as both Boeing (B.A -2.49%) and Capital One Financial (COF 5.91%) provided some perspective on the business environment at the end of 2022 and what the year ahead may bring.

Boeing is still losing money

Boeing shares were down 2% at the market open on Wednesday morning. The aerospace giant released its fourth-quarter financial results, and investors weren’t happy to see more red ink from the company after several years of heavy losses.

By some standards, Boeing had a great quarter. Revenue of $19.98 billion rose a staggering 35% from year-ago levels, capping a year in which Boeing managed to see sales rebound by 7%. The aircraft maker also posted positive adjusted free cash flow of $3.1 billion, demonstrating its return to financial strength after a long period of uncertainty amid a liquidity crisis. Boeing delivered 152 commercial jets for the quarter and 480 for the full year, both figures up significantly from prior periods.

However, shareholders were surprised to see Boeing’s continued losses. The company reported a net loss of $663 million, or $1.06 per share, and the company’s adjusted basic loss per share was even worse at $1.75.

Unfortunately, Boeing expects to have to wait some time before fully recovering. Low production levels for its 737 and 787 programs are likely to continue until sometime around 2025 or 2026, and despite growing orders, production challenges could hold Boeing back for the foreseeable future.

Capital One deals in higher fees

Shares of Capital One Financial also fell about 3% early Wednesday. The banking institution’s fourth-quarter financial report late Tuesday showed weaker business results and pointed to worrisome trends among consumers that could signal a possible recession.

Capital One reported net income of $9.04 billion for the quarter, up 11% year-over-year and closing out 2022 with 13% annual revenue growth. However, net income almost halved to $1.16 billion, coming in at $3.03 per share.

The main culprit for Capital One was a strong increase in loan loss provisions. The credit card company added $747 million to its loss provisions, bringing the total to $2.42 billion. This continued a steady trend over the past year, as the provision for credit losses 12 months ago was just $381 million. Net charges rose to $1.4 billion.

Capital One cited multiple factors to justify the jump in loss provisions, including a moderately worse economic outlook and the continued return of creditworthiness in the overall loan book to more normal levels after a period of unusual strength. This affected both the credit card business and other areas such as auto lending.

Capital One is certainly not the only financial institution building up reserves to cover larger losses in anticipation of a potential recession ahead. Yet shareholders still seem surprised by the extent to which lenders like Capital One have increased their loan loss provisions, especially given the impact those provisions are having on their bottom lines right now.

Generally, it will take more than two companies to end the rally. However, if the economy weakens more than expected, then markets may struggle longer than many investors currently expect.

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