Earnings Season Is More Important Than Inflation Data

Published on

In his Daily Market Notes report to investors, Louis Navellier wrote:

Earnings Season > Inflation

Inflation data this week won’t be as important as earnings season.

As the likelihood of another 25bps rate hike by the Fed in May seems to be widely accepted, what inflation numbers come in this week only has major importance if Jay Powell clearly states that they plan to pause after May. This appears to be wishful thinking given Powell’s consistent data-driven responses in the past.

Get Our Activist Investing Case Study!

Get The Full Activist Investing Study In PDF

Q1 2023 hedge fund letters, conferences and more

Market pundits see an additional increase after May just as likely if inflation statistics remain stubbornly high. Either way, rates are likely to remain roughly where they are currently expected for the rest of the year. 

Profit Margins Key

More important will be the results and forecasts coming out of earnings. Just look at what occurred today with CarMax (NYSE:KMX) which had a top miss but a strong bottom line beat; the stock is up over 9% on the results (+18% YTD).

Compare that to Albertsons (NYSE:ACI) which hit their top line forecast and had a minor bottom line beat.  Their shares are down 1% (+1% YTD). Profit margins are a key focus due to uncertainty about pricing power and cost control. S

&P index margins peaked in 2Q22, fell 50bps in 3Q22, contracted another 100bps in 4Q22, and may fall another 150 in 1Q23. This explains all the layoffs that have been announced since late last year, an effort to protect margins.

Soft Landing Outlook

We'll also get some insight into the banking situation, which the Fed has characterized as a proxy for further increases due to expected credit tightening. Current earning estimates are for a very strong 3Q23 and an only slightly softer 4Q23, the soft landing outlook. Whether this is confirmed or pulled down will be decided in the short weeks ahead.

Next quarter, we'll also be dancing with the contentious increase in the Federal debt ceiling in late July. The greatest likelihood is that volatility will remain high, with the bias to the downside as many more strategists are predicting a meaningful contraction in stock prices than those looking for a spike from here.

The real earnings kickoff starts Friday with the big banks; JP Morgan, Citigroup, and Wells Fargo. Buckle up. 

Coffee Beans

Lucky Seven. 'P7' license plate sold for a record-breaking $15 million in UAE. The winning bid at Saturday's auction was placed by Pavel Valeryevich Durov, the French-Emirati businessman who founded the Telegram app. Other plates sold at the auction included "AA 19," "O71" and "Q 22222." Source: UPI. See the full story here.