American Express (NYSE:AXP) just reported second quarter results, and for the most part they were everywhere investors don't want to be. Specifically, for the quarter ended June 30, the company reported earnings of $653 million, or 56 cents per share, versus $1.06 billion, or 88 cents per share in the same quarter last year. Making matters worse, the credit mega-company's results came in far below Wall Street's expected number of 83 cents per share. Oops.

The Rich get... Poorer?
Looking into the quarter, it's clear the company is padding itself for continued difficult times ahead, as noted in the $374 million addition to credit reserves. This is typically a safety net for write-offs (read: deadbeats) in coming quarters.

What's amazing about the second quarter earnings is that the results actually showed a slight shift in the definition of the "bad borrower". Typically, wealthy consumers have been thought of as lower risk borrowers, and those with higher incomes were often are given higher credit lines, which is exactly where American Express is now feeling some additional pain. With the company's wealthier clients now taking longer to pay bills (with some actually defaulting altogether), while also spending less at the same time, American Express will undoubtedly miss previous annual earnings growth targets of 4-6% for the year. (If credit card bills are cutting into your finances, read Take Control Of Your Credit Cards.)

Honesty - What a Novel Concept
On Monday's earnings conference call, executives were substantially frank, painting a clear picture of what to expect in the quarters to come. To paraphrase Dan Henry, the company's CFO, This economy stinks, and frankly the remainder of the year, and the credit business, could get even worse.

Here's where the story could change slightly, however. On Wall Street, when times are rough, sometimes it's better to just take a hit right on the chin, than to hope for a bailout in future quarters. That's exactly the stance that American Express has taken, as seen in the company's no-nonsense approach to investors on the conference call. American Express further reiterated this stance by bracing investors for lower annual guidance, while also adding to credit reserves all at the same time.

At the end of the day, what the company has done is under promise, with the goal of outperforming in the third and fourth quarter. With the picture the company has now painted, any signs of improvement will likely have Wall Street jumping for joy toward the end of the year. (For related reading, see Can Earnings Guidance Accurately Predict The Future?)

Business Risk Remains
When we consider the overall credit/banking conditions across the board, it's important to understand that there's still a ton of downside risk remaining. Even Bank of America (NYSE:BAC), which just beat second quarter expectations of 53 cents a share, by reporting 72 cents per share is having trouble convincing everyone that skies have cleared. Morgan Stanley (NYSE:MS) analyst Betsy Graseck questioned the fortitude of Bank of America's ability to stave off the credit crunch, given that the company's fixed-income trading saved the day. Her point was that if the company's trading efforts fail, earnings may also fail in the coming quarters. Pretty much any company even remotely related to the word "credit" is shaky right now.

Parting Thoughts
There is one last point to consider. We learned from American Express' results that wealthy Americans are having a tough time paying their bills right now, which leads one to wonder if high-end retailers like Tiffany & Co. (NYSE:TIF) are also feeling some of the same effects. It seems like common sense that if more wealthy credit customers are having trouble paying their cards down, perhaps they aren't loading up on jewelry either. Regardless, time will tell when Tiffanys' reports earnings on August 28. Hopefully I'm wrong.

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Credit & Loans

    10 Reasons To Use Your Credit Card

    There are several benefits to paying with credit instead of debit, if you use a credit card responsibly.
  3. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  1. How can you pay your Walmart credit card?

    Holders of Walmart credit cards can make payments on their balances due by mail, online or at Walmart and Sam's Club stores. ... Read Full Answer >>
  2. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reduce the number of times shoppers and buyers have to pay for goods ... Read Full Answer >>
  3. Can you use your Walmart credit card at Sam's Club?

    Consumers can use their Walmart credit cards to shop at Sam's Club. However, they cannot use their Walmart credit cards when ... Read Full Answer >>
  4. How can you cancel your Walmart credit card?

    Walmart offers two types of credit cards: the Walmart MasterCard and the Walmart credit card. How to Close Your Walmart Credit ... Read Full Answer >>
  5. Does the Walmart credit card have an annual fee?

    The Walmart credit card does not charge annual fees to its cardholders. It does, however, have other fees associated with ... Read Full Answer >>
  6. How do NetSpend cards work?

    NetSpend prepaid MasterCard and Visa cards are popular prepaid debit cards requiring no minimum balance and no credit check. ... Read Full Answer >>
Trading Center