A Week for Tech Earnings and Inflation Data

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning everyone. This is Quincy Krosby. It is Monday morning, and this is the Talking Point. It is Monday and it is April 22nd. This week is a week for earnings, ‌earnings, earnings. One of the busiest weeks for the earnings reports, but it is also a week in which we have extremely important data releases. And this, of course, will be inflation-related, and that is going to be the Fed's preferred measure of inflation. And that is the PCE index, and that is the Personal Consumption Expenditure price index. And why this is so important is, I think we all know, is that the market is hoping upon hope, upon hope, and so is the Fed, that this indicates that inflation, particularly with this report, the core and super-core actually start to come down at a faster clip.

Quincy Krosby:

Remember, we started to hear from the Fed Chairman Powell started the discussion of, well, maybe it's not moving down fast enough. Maybe it's even stalling. Then we started to hear that word from other members of the Fed. Once you hear the "stall" word, that is not what the market wants to hear. A market that is so hopeful that we will get maybe now one or two rate cuts this year. Just to keep this in perspective, there are still some pragmatic strategists who think maybe we could get another rate cut in terms of probability that has been kind of wiped out and washed out now, but in the summer. But there are those who think, well, you know what, maybe we don't get any rate cuts this year. And then there's a camp out there, of course, out there.

Quincy Krosby:

You know what, we may even get a rate hike this year. It's all over the map, but it will be about the data. And therefore this week if we get a report that indicates that inflation is coming down much faster, notice I say much faster, than the market expects. Perhaps we get the market repricing the higher for longer narrative that the Fed is advocating at this point. I would put it this way higher, but for how much longer? And I think for the Fed as well, they just don't know. Now, this leads me to something else, and I'm just going to do this as an asterisk. And that is there is a move to change the communication from the Federal Reserve. We have seen this with a couple of other central banks, the Swedish Central Bank, for example, to do a scenario view; different scenarios, so that the Fed is not locked in when they come out with this one narrative, and then they're wrong or they're right or they have to adjust the narrative.

Quincy Krosby:

When you come out with a couple of scenarios, it gives you breathing room and also for the market. So in any event, you know a Fed that says, well, we are data-dependent. Well, what happens is that the market becomes more data-dependent than the Fed because they're making bets on and with leverage, you know, that you always see, about this scenario or that scenario. But if the Fed comes out and suggests, well, perhaps A, perhaps B or even C, it makes it much more according to those who advocate that sort of communication, makes it much more pragmatic and acceptable to the market. Including consumers, by the way, who are, you know, waiting to buy a house or selling a house or buy a car, all based on interest rates. So in any event, that theme is being played out more and more with prominent, including Ben Bernanke, former Fed Chair, suggesting that this would be the way to go in the future.

Quincy Krosby:

Nonetheless, we have what the Fed is looking at, and Friday is going to be extraordinarily important for this market. Also for the market is a host, absolute important host of earnings, and this is one of the biggest earnings weeks of the season. The guidance is crucial. We have seen companies come out with solid earnings, top line, bottom line, but where the guidance remains questionable, remains weak, and the market just goes in and basically punishes those companies. We saw it in the financials. We saw it last week. Netflix came out. The market just went after Netflix again, because the guidance was a little bit lukewarm. Not to mention the fact that they came out and said, you know what? Going ahead in the future, we're not going to be offering data on certain metrics that we have.

Quincy Krosby:

Market doesn't like to hear that. That's not what they want to hear because they always think, well, you're doing that because you think things are going to be softer in the future. So again, guidance is going to be crucial. And this week, because of the tech focus that this market has had and and enjoyed, right, I mean not just focus, but has enjoyed, it will be about mega tech names that will be coming out with their earnings. Again, it will be about the guidance that these companies have, and it's going to be important for the market because we see NASDAQ down. And there's a question now as to wait a minute, is there a change in theme in the market? By the way, there's an old saying in the market, and that is that when you have a market that's pulling back, a market that is what, what should I say?

Quincy Krosby:

Consolidating a market that is taking a breather, however you want to categorize it. But when you ever, you have that, you do have bounces. There are always bounces. You want to make sure that these are viable bounces, that it is the beginning of a viable uptick. But nonetheless, there's the saying goes like this, that when that happens, it very often allows new leadership to come in. That it's a part of the changing of the guard, changing of the leadership. Folks are talking about this with regard to whether or not tech is going to lead because it has led for so long, and we wait for these numbers. Let's keep in mind that the market is discerning. The market is paying very close attention and not giving a pass to companies. And they're not going to do that with the tech earnings this week.

Quincy Krosby:

They're going to look and see top line, bottom line, margins, but also they're going to pay very close attention to that guidance that these companies have to offer. And it is going to be important for the market. Also, keep in mind that small and mid cap, these are the most interest rate sensitive of the companies that we have. They're small, medium sized. They have banks, they have tech names, they have industrials, biotech. But the thing is that they really pay attention to the economic conditions. They're local, they're regional. I always say they are the most granular of all of the indexes because they are so very much associated with the real economy, but they are also interest rate sensitive. So I watch them in particular. If they start performing and, you know, absent the performance of S&P 500 or NASDAQ, are they seeing something and hearing something about the potential for rate cuts sooner than the market thinks?

Quincy Krosby:

Because right now, in terms of probability, the market now is all the way out to September perhaps for the first rate cut. So we'll be paying attention to what the signals coming from the small and mid cap sector. Overall this week we're going to have, again, major earnings, airlines, but the focus for the market will be on those big tech names. Nvidia, I just want to repeat, not now. It comes at the very end of this the earnings calendar. The new home sales are coming in. Keep in mind that we saw interest rates, mortgage rates higher, but the consensus right now is that new home sales for March, remember March, actually ticked up a bit. But Wednesday we're going to have durable goods. And I'm paying very close attention to this because durable goods, a component is about CapEx, capital expenditures by companies.

Quincy Krosby:

And the market looks at that for the simple reason that, you know, you want to see your company spending money on equipment, on structures, because it is an indication that companies feel comfortable enough for CapEx outlays. So we'll be paying attention to that. And then Thursday, there's an awful lot being talked about with GDP for the first quarter. Remember, these always get revised. The revision for this and the median consensus estimates is that it's coming down to about 2.3%. Although, there are other indications that it could be around 2.8 to 2.9%, but lower than what we had previously, which was 3.4%. So slowing not stellar, but still extremely solid. Even if we go to the lower end of that consensus range, jobless claims expected to inch higher. There have been a lot of reports on how is it possible that for four to five weeks in a row we get the same exact number for initial jobless claims.

Quincy Krosby:

And why are they important? Because they are a first read on potentially deeper unemployment. And so how do you get, given how wide and broad this country is that, and remember these come from the different regions in the country, that you get the same exact number? The defense that comes out of the government as well and certain economists who are private sector economists, is, look, there's a lot of seasonality involved in these numbers. That's one of the reasons those numbers can remain consistent. Well, there's a big question mark there right now for Thursday morning, 8:30, initial jobless claims. The expectations is that it breaks that cycle of 212,000 and moves up to about 215,000 new jobs. Still healthy, but still a little bit higher. We will also get pending home sales on Thursday. But again, the big number comes on Friday.

Quincy Krosby:

We're also looking on Friday for personal income and personal spending. This is important because when you see personal spending much higher than personal income, it raises, you know, questions. Are consumers, you know, just spending on credit cards or they just spending money that they really don't have, and they're going to be sorry later? We know that lower wage earners are having a harder time. We know that these higher interest rates are hurting them. We see late payments, we see delinquencies picking up, but the average wage earner in the scale that we have in this country of folks working is still actually healthy and they are spending. As long as the labor market remains intact, we see the positive correlation with consumer spending. But what we don't want to see is that we start to see income coming down and spending continuing to move higher.

Quincy Krosby:

That's been popping up every so often in this series, and we want to see where that falls over on Friday. Right now, the consensus is, by the way, that personal income will be a tad lower than personal spending. Not by much, but just a little bit. Also, again, consumer sentiment. This is the final picture on Friday. Reason this is becoming important is that we're starting to see something that the Fed doesn't want to see, the market doesn't want to see, is that consumers are starting to see inflation tick up over a longer-term period. Very often this has to do with oil prices, it has to do with gasoline prices moving higher. The expectations right now are the consumer sentiment, which would be the final, not from last week, which is the provisional, it's temporary. And then we go to the final is that it still is a little bit lower than we have seen, but it's not collapsing.

Quincy Krosby:

But the question in terms of those who have really focused on inflation will be, what do consumers say about future inflation? When it rises to over 3%, the folks at the Fed pay attention. But so does the White House because the one thing they don't want to see are folks basically looking at those gasoline prices across the country where they're rising and say, well, we see inflation continuing to climb. That's not what, it's not what the market wants to see. We've seen it before. And then we saw gasoline prices come down as the administration took oil out of the strategic petroleum reserve, and then it started to bring down gasoline prices thereafter. That was following, of course, the beginning of the Ukraine-Russian conflict. So, in any event, the market is going to be braced to repeat for those earnings across the board, but also keep in mind, the earnings from the big tech. It's going to be a busy week and a busy week with data too. Have a good week. We'll be back next week. Thank you so much.

Quincy Krosby:

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Quincy Krosby:

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