Mega Tech Earnings, Fed Meetings and Payroll Report

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning everyone. It's Quincy Krosby. It is Monday morning, January 29, and this is the Talking Point. Thank you for joining me. It is a very busy week for the market from almost every single perspective. Let's go over this. First of all, this week is the week that we will hear from about a hundred companies, but what the market is focused on is, well, you guessed it. It is focused on yes, the big mega tech names. And this is important because what you have is a market which has become increasingly focused on those names. In other words, the broader market that we saw just some weeks ago as we saw the Russell 2000 participating, as we saw some other names participating, large cap names. It is more and more, again, focused on yes, mega tech.

Quincy Krosby:

Now, the point I want to make is that this week and next week, we are going to have virtually all of them. The only one that is going to be missing in the Magnificent Seven is Nvidia, which comes out at toward the end of February. I think it's just probably, I think it's February 21, in fact. We'll have to wait for that company, major company, to report. But what the market is looking for above all else, given that the valuations in those names has become extremely rich as funds and allocations are moving into those names, is show us what you're doing with all of the innovation, with all of the money that you're spending for AI. Where is it showing up? What are the products? And obviously there are software products that are AI generated, but again, what the market wants to see are definitive signs of the companies moving closer and closer to their goals in developing AI delivered software that ultimately is going to be used by companies.

Quincy Krosby:

So this is going to be important. And again, one of the main reasons is that the valuations are quite high. In fact, the overall valuation at this point for the S&P 500, looking ahead on a 12-month basis, is trading at 20 times forward earnings. And this is in contrast to a five-year average of 18.9 times forward earnings and 10 years at 17.6 times forward earnings. And the rich valuation is attributed to yes, the big mega tech names. So this is going to be an extremely important week for the market as those earnings come out. And again, I want to make it very clear. The market is punishing those companies that are not delivering and it has no hesitancy if the companies are not delivering. So again, this week is extremely important. And then next week, we will get another group of the big mega tech names.

Quincy Krosby:

And then, as I said, toward the end of February, it will be Nvidia, which is the semiconductor name that actually provides the generative AI processors. And by the way, I've gotten a lot of questions. Quincy, what does generative AI mean? It just means that it is more and more data that needs to be processed. Sort of think of a deluge of data that needs quick, reliable processing. That's what it means. And then we add in addition to that, just in terms of the heavy load of data, but we add that what the market is also looking for is a more realistic AI. In other words, in terms of the quote unquote individuals that you'll see online talking to you or you call up a consumer care number and they sound much more realistic. That's another element, another perspective of it. But overall, it is this deluge of data that is going to need to be processed and processed ever more quickly.

Quincy Krosby:

So that's what it means, and you'll hear the term over and over again as we go into this earning season. The other thing I want to mention as we get into today, and this is geopolitical. I think everyone has been following this over the weekend. Three service members killed on the drone attack on the Jordanian-Syrian border. We have troops over in Jordan. The question is, what is the retaliation going to mean from the United States? There will be retaliation. The question is when, not if and how. And so the all market heated up, but I do want to point out, it never moved on West Texas Intermediate crude. That is our benchmark. It never moved above $80 a barrel, but it certainly did climb higher, moved up to $78 a barrel. It has eased somewhat, as you know, the retaliation has not begun. And again, the market is waiting to see how the Biden administration handles it.

Quincy Krosby:

Certainly there is enough pressure from even within the Democratic party and also in Republicans to actually have a retaliatory attack, and make certain message to Iran because the view is that this was escalated by Iran and have a clear message. We're not, the U.S. is not going to tolerate this. In addition, by the way, to the three service members who were killed, many have been severely wounded. Not just in this attack in the Jordanian-Syrian border, but elsewhere in the region. So we're paying attention to oil in addition to the earnings, which are again, much broader than just the tech names this week. But we also have extremely important data coming out this week. Everything from consumer confidence, and then we get into the ADP Employment Report. Remember, this is on Wednesday. It is the private sector employment. Let's keep that in mind.

Quincy Krosby:

It does not necessarily have a very, very tight correlation with the report we're going to get on Friday but nonetheless, the market pays close attention to it because the private sector employment is considered to be obviously very important. Expectations are right now that we may have about 140,000 new jobs within the private sector. This would be coming down from the surprise that we had last month which was 164,000 new jobs. We're also on Wednesday going to have something I think we have to pay very close attention to. It is the Employment Cost Index for the fourth quarter. What the market is looking for, and remember, we're always thinking about what is the Fed looking for. How are they viewing all of these data releases? Well, what the market is looking for is an indication that employment cost is coming down, not up, but coming down, easing from a higher level.

Quincy Krosby:

And the expectations are actually that we will see a lower Employment Cost Index, the ECI, on Wednesday morning at 8:30. This is important because again, the Fed meets this week. And on Wednesday afternoon, we will have the Fed's decision. We'll get to that in a minute. And then as we go through the week, I do want to mention that the Institute for Supply Management, the ISM, produced a price index for manufacturing is going to come out. And remember what we're looking for. We're looking to see if we're bottoming in manufacturing. Remember, 50 is the line in the sand between contraction and expansion. And we are still expecting that manufacturing all told will be in contraction territory. However, we're looking for it to be less bad. All right, so the last number we had was 47.4%, and we are expecting that it will come down to 47.2%, which is again, less bad.

Quincy Krosby:

But we're looking for also the employment expectations. We're looking for new orders. We always look for that, but also we're looking to see prices paid. What are the manufacturers paying? We want to see if those prices are inching higher, not lower at this point, but are they inching higher? Because that also would reflect obviously a bit more inflation. So that is all on Thursday. Initial unemployment claims as well come out, and this is, I can't stress this enough. If there is one area within the labor market that will point to a slowdown in the labor landscape, and that is initial jobless claims. We had 214,000 last week. The expectations are it could drop to 210,000 this week, but even let's go back to 214,000 from last week. That's still actually healthy. If we see those numbers climbing higher, obviously it's an indication of weakness in the labor market.

Quincy Krosby:

And why is that so important in our reading of the economy? Because if the labor market weakens at a faster clip, we are going to see consumer spending slowing down. Remember, we represent 70% of the U.S. economy, and consumers will slow down once they begin to feel that the labor market that people are losing their jobs, people they know, relatives, friends, colleagues that they're in touch with, it usually picks up momentum. So far, we are not seeing that, but I'm just offering a guideline of why we pay such close attention to initial jobless claims. And then on Friday, a very important day, is the payroll report. The expectations are that we will come down from the 216,000 new jobs that were created last month to about 180,000 new jobs, which would represent a normalization within the labor market. However, expectations are that the unemployment rate trends higher going from 3.7% to 3.8%, still healthy.

Quincy Krosby:

But we always keep our eyes on that because if it starts to escalate month after month into the 4% range, it is an indication obviously of the labor market losing momentum. Last month, we stayed at 3.7%. But let me get into the weeds here. So forgive me for getting deep into it. We have something called the participation rate. It's how many Americans are looking for jobs. When they leave the area of looking for jobs where they just say, I can't find a job, the more they pull away from looking for jobs, the more the unemployment rate can come down. I know it sounds odd. I've said it over and over again in these calls, but we're going to pay attention to that participation rate. How many people are coming in and looking for jobs? Because that's going to be important. It's going to be significant. But if they start pulling away, then the unemployment rate comes down.

Quincy Krosby:

So this is important and we want to pay attention to that. The other part of the looking under the hood on the Friday labor market Friday is the wages. Expectations are that those wages come down inch lower. Again, this is what the Fed wants to see. And let's go over the pragmatic reasons for this. Why would you want to see wages come down? Because if wages keep going up, companies are going to try to pass along the higher cost to us, to us, the U.S. consumer or business buyers, you know, and we share spending with businesses that buy services and products. They're going to try to pass that along. And so if the wages come down a bit, there's less of a kind of an anxiety that these companies are going to try to pass along these higher prices. So that's the wages. Another thing that we're going to look for by the way, is the work week.

Quincy Krosby:

How many hours in the work week? We started to see it shorten a bit. Now we want to see if it normalizes because obviously what it represents is economic activity. So that is on Friday. Now this week is the Federal Reserve. So what are we expecting? Obviously the statement is going to have to mention the economic growth that we have seen. Remember that was just the first read of GDP for the fourth quarter. That was 3.3%. The market was expecting something in the 2% range, perhaps 2.3%, 2.4%. Obviously we're going to have a revision, so we'll keep our eye on that. But nonetheless, they're going to have to mention this and suggest whether or not they expect to see even more slowing over the course of this quarter, the first quarter or the second quarter. They are also going to have to mention something about the talk about rate cuts.

Quincy Krosby:

Remember, the market is looking at March 20, right? For the market, they want to see a rate cut March 20, but right now the probability of that is 50-50. However, it moves up for the May meeting, and that's where the market believes the Fed, if they're going to cut rates, they start in May. However, there are those who believe the Fed could, could under certain circumstances, cut rates March 20, at that meeting. No one's expecting it at this meeting, but rather a 50-50 chance at this point at the March reading. What would those scenarios look like? One would be that the economy is slowing much more quickly than anyone expected. That's one scenario. The second scenario is something breaks in the market; liquidity dries up, the Fed has to do something and cuts rates or buys bonds, something along those lines. And then also the prevailing view is that if inflation continues to come down in a more meaningful way and that the Fed is not worried about all prices climbing higher, if that's the case, then perhaps the Fed does cut rates and does it because they think we just need to normalize where the rates are now and then bring them down to where we believe the economy is and where we believe inflation is headed.

Quincy Krosby:

But as I said, right now it is 50-50 for the March 20 meeting, and then it jumps to the May meeting, and that's where it jumps over 90% of a probability of a rate cut cycle beginning. So we want to see if we can glean any more information during this Fed meeting. And you know that at the press conference, the reporters go after chairman Powell, asking very specific questions. And sometimes he winds up giving a little bit more than you think he actually wanted, though although there were those who say, no, no, no. He is feeding the market what he wants the market to absorb and assimilate. Now I do want to point out that the Fedspeak that we have been listening to before they went into this blackout period, the doves and the hawks were messaging in the same way. And that is, please market, don't expect rate cuts right away.

Quincy Krosby:

We will probably not start until the second or third quarter, but nonetheless, the market is saying, no, no, no. We think that we'll have rate cuts earlier. So this is why this Fed meeting is extremely important. So between earnings, which are extraordinarily important, and especially from the big tech names today, tomorrow, and next week, it's going to be a very important period for the market. Remember, the market wants to figure out, when are those rate cuts coming? Because the rate cuts were part of the surge in the market as November 1 began and moved the market from really contracting to surging higher. And right now the market wants to see, let us figure it out when those rate cuts begin. So it's going to be an important week for the market to make that determination, A, and B, the market to see how well the labor market is holding up.

Quincy Krosby:

Because remember, the labor market helps the consumer. The consumer is 70% of the economy. And if the consumer feels that the job market is deteriorating, suddenly most consumers start to pull back spending. And then also, we are paying very close attention to the statement from the Fed, but particularly the press conference following it. So an awful lot for this market to absorb. But also let's keep our eye on crude oil. I'm mentioning this because if there's additional flare up in the Middle East conflict zone, and remember what the market wants to see is that contained, contained around the Gaza, where it started, not move towards Iran. Oil prices are going to not inch higher, not edge higher, but they will ultimately surge higher. So we're keeping our eye on that. If we have not moved above $80 a barrel in West Texas Intermediate crude. It has pulled back to about $77 a barrel. But we'll keep our eye on it. All prices are vulnerable to any indication that this conflict is going to take another path and a path deeper into the oil producing region I.E. towards Iran. So thank you very much. We'll be back next week. Thank you.

Quincy Krosby:

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Quincy Krosby:

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