Earnings season pessimism proving to be 'overdone': Strategist

Bank of America Morgan Stanley Charles Schwab or the standouts today half of the companies in the S P 500 that have reported earnings in the past week are in the financial sector giving us a good Glimpse at the consumer this is according to fact sets let's talk a little bit more about the results we've seen so far what is signals going forward for that we want to bring in Tom Hayes great Hill Capital chairman and managing director Tom it's good to see you here so the Q2 setup was similar to what we saw headed into the into the first quarter now that we've gotten even more results this morning from Bank of America from Morgan Stanley I guess what are your big takeaways just in terms of the health of the consumer and what it signals better than expected the borrow is very low and as we know the secret to happiness and life is low expectations so we came into q1 negative 6.2 percent expectations we got negative two analysts had to take their numbers up the strategists were looking for a drop of 20 in earnings instead we got a rise the same exact thing we expected negative 7.1 percent coming into this earnings season we're shooting the lights out the average gain over the last 10 years during earning season is plus 5.3 percent which means we could finish up negative 1.7 percent and that's going to force analysts to take their guidance up and if we look at the next two quarters even now the guidance is uh plus uh one tenth of one percent for next quarter so positive earnings next quarter and then plus 7 7.6 percent for Q4 so a lot of good things coming but I think they're coming right now uh Tom you know give me a sense of what your read is on where we are in this economy right now based on the numbers that we've gotten so far I mean you heard Brian Moynahan earlier saying look the consumer has been a lot more resilient than we expected of the economy it is still fairly strong even though things are starting to slow down what's your read-based on the earnings we've gotten so far in terms of where we're headed well you have an 80 beat rate at Kiko and you have to keep in mind people talk about negative money uh M2 money supply growth you had basically 10 years of money supply growth pumped into the economy in 24 months so that's going to take a long time to work work off and I think that the the pessimism uh is is overdone it's been overdone granted we're up over 25 percent off the October lows so we might have some consolidation but that consolidation could actually look more like rotation so while the indices may not quite do as well as they did in the first half of the year uh being up mid teens maybe we'll get mid-single digits to high single digits underneath the surface and underneath some of the sectors that haven't participated and we've talked about X The Magnificent Seven they've started to participate in the last six weeks since I've been on which we talked about last time that's where the opportunities are going to be so if you're just jumping into the indices now you you may not be that excited to get five or seven or eight percent but if you're jumping into the 90 percent that didn't participate the first five months of this year there's huge opportunities they're going to be stocks up 30 50 plus percent Tom the beat rates that we've seen so far is that enough though for the Market's momentum this rally to stay intact are we going to have to see maybe some stronger results elsewhere economic data that's cooperating with the cooling economy maybe for the FED to back off in order to keep that trajectory to the upside well people were pretty pessimistic coming into the bank earnings other than the revenue was supposed to grow 7.8 which was going to be the highest people worried about net interest income that's proven to be better I love what brianis Moynihan said about commercial real estate people have been so pessimistic that this was going to blow up the economy and instead he's like it's a building by building thing it's going to work itself out and these are going to be extended they're going to be renegotiated and it's going to depend on the different buildings the A-Class are going to do exceptionally well the BNC class properties they'll work out and they'll restructure so a lot of positive things happening so I think the key is is not being tempted with fomo to chase the things that are up enormous already year to date and look at those things that haven't yet fully participated because that's where all the money is going to come next and actually if we looked at the Bank of America Global fund manager survey this morning it was so interesting in the coveted lows in 2020 the institutions were so skeptical after the route after the market rallied from March till June and it just took off they still wouldn't get in the market they were still pessimistic they were still at high cash levels guess who bought those first four months retail investors got it right off the coveted lows and it's the exact same thing is happening right now the the retail investors have been buying the sentiment has gone up institutions actually picked up their cash levels this month they're still overweight cash and bonds they have the least risk on since the covid lows and since the great financial crisis lows their growth expectations are still pessimistic so that is further fuel for this Market to to churn higher on the indices level but actually for the laggard groups that's where they're going to have to chase they're not going to chase what's up if there are missing their Benchmark they're going to chase those things where there's opportunity Tom we're a week out from the next fomc meeting when you think about expectations right now nearly unanimous when you in terms of expecting a rate hike in July just under the three percent think the FED will hold to a pause um you know based on the data that we have gotten since the last meeting yeah are you in that camp that this is the meeting where we have a hike but maybe see a longer pause on the other end of that well Akiko are you asking me what they should do or what they will do those are two different questions like both are great they should do what they should do is they should absolutely skip once again and say we're going to look at the data because they have more than enough cover at this point to justify a skip when you look at PPI that was near deflationary levels up one tenth of one percent that leads CPI CPI was a tick off of a two handle and we're still thinking about hiking rates these things worked on a lagged basis between PPI and CPI they have more than enough cover you had the lowest job growth with the non-farm payrolls at 209 000 jobs created you have the U6 unemployment rate at uh 6.8 percent so the lagged effects of the tightening that have been going on for over a year are being felt now they just need to sit back and make sure that Trend persists and make sure the data keeps going down so if I was in Jay pal shoes I would say skip let's see more data and ultimately turn into a pause they probably won't do that because it's priced in the market can handle another hike but they shouldn't go too far beyond that because when that lag kicks in it tends to get aggressive and and right now they've landed this soft Landing opportunity and they could ruin it if they get too too aggressive and too feisty so if they do do two more hikes the odds of a soft Landing go down go down materially yeah it's uh I think you'd go down from a 95 possibility of a soft Landing to maybe a coin flip the FED should be abusion CPI core CPI is what they're most closely watching we've gotten to on that headline number not core CPI obviously but that headline number to three percent yep if we want to see further Cooling and inflation how do we get that how do we make more progress If the Fed is not going to continue to hike or they shouldn't we can't afford to see more disinflation because we have a hundred and twenty percent debt to GDP so the last time we had this much debt and Debt Service as you saw the headlines of service is now approaching a trillion dollars a year that's huge last time we had debt to GDP at 120 was following World War II and the way that they got out of it was through nominal growth they let inflation run between three to five percent for five years and debt to GDP collapsed from 120 down to 63 percent in just a handful of years that's the Playbook they should be following right now acknowledge that continue to to talk caucus we're going to take it down to two percent but let it run a little hot so we can bring the debt to GDP you down and have it at sustainable levels have nominal growth run hot and and all will be well so hopefully they're following that Playbook and they're reading enough history books to continue they've got a win here that you know don't statch defeat from the jaws of Victory they got a clear win here skip it uh if they won't skip this month and then just go into a pause after this month would be great uh Tom you know we started by talking about the bank's financials one area that has really benefited from the fed's rate hike cycle obviously because of the income earned on those rates there's another area though that's been hit hard by the feds hiking and that's a REITs I mean what are you what's your investment thesis around that right now okay so the great question uh Kiko there are two themes that we're looking at now that the FED is wrapping up whether they should have wrapped up at the last meeting so they'll wrap up at this meeting uh number one the dollar downtrend that began in October is going to continue okay so that's already happening we had a short bid to Safety in advance of the debt ceiling uh just a few weeks back that's now rolled back over so with the dollar weakening we like multinationals that get up to 50 or more of their income from abroad those increased earnings are really not baked into future estimates we're going to start to see those come come through in the second half of the year we like Emerging Markets is going to work with a weak dollar our Emerging Markets China and risk on with biotech now as it relates to REITs the second theme besides weak dollar is that we're going to see the middle end of the curve to the long end of the curve the 10-year start to get bid which will compress rates that helps a number of things that helps Regional banks with their Mark to markets that helps Reit start to get bid because their interest rate sensitive and I know we were on a a couple of months ago talking vernado and people looked at me like I had three heads but they were kind and polite and uh and bernardo's up now 30 40 since then because the high quality businesses will do well the BNC properties we're not so sure but the a properties are going to do well this is very similar to the mall crisis of three four five years ago where everyone said all these malls are going out of business the BNC properties did go out of business the a properties like Simon Property Group that have apple that have Lululemon did exceptionally well we think it'll be the same case for commercial real estate REITs with A-Class properties like vernado which we own

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Length: 10min 16sec (616 seconds)

Published: Tue Jul 18 2023