Focus On Earnings, Not The Fed Or Unemployment

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

The market seems convinced the Fed will increase in May.

We get CPI and PPI numbers this week, and while the inflation trends are falling, they will very likely remain far above the Fed’s 2% target.  The Fed also has stated that they expect unemployment to rise meaningfully, something they see as necessary to break a wage-price inflation spiral from becoming embedded. But while wages growth has slowed noticeably, unemployment remains at 50-year lows.

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The Fed has plenty of room to stay higher for longer within their stated goals and investors trying to time the market for a major rally from rate cuts in 2023 are probably going to be disappointed. A relief rally, however, when the Fed announces a pause in further cuts remains quite likely, though may be short-lived, if unemployment does in fact start to rise from 3.5% to 4.5%.

Focus on Earnings

The real issue is can earnings growth continue if the Fed stays higher for longer? We will find out soon as the 1Q23 earning season kicks off with the banks next week. Currently, estimates for the 1Q23 are down 5.2% y-o-y, and for 3Q23 down 4% y-o-y. The bulls see 1Q as the bottom of earnings contraction with 2H23 a return of actual y-o-y growth.

If results and forecasts confirm that, what the Fed does matters less. If 1Q23 is weaker than expected, and more importantly, if clouds form over earnings growth for the second half of the year, expect a meaningful sell-off and louder calls that the Fed needs to ease. If 2H23 growth forecasts are confirmed or improved, stocks will be poised for a firm rally when the Fed pauses.

Investor focus should be on earnings, not the Fed or unemployment statistics. Companies which retain pricing power and are addressing their cost structure will outperform indexes even if the Fed has to go even higher than expected to move closer to their objectives. Look for these elements in your holdings as earnings roll out.

Coffee Beans

Shaking someone's tree. Virginia man, Josh Anderson, successfully pressured local officials to fill in a large pothole after more than a year by planting a tree in the hole -- twice.

City workers swiftly removed the first tree, but the hole remained. Anderson planted another tree and put some lights on it, prompting a crew to come to the intersection the next day to fill the pothole in properly. Source: UPI. See the full story here.