Brian Shepardson, VP & Senior Portfolio Manager at James Investments, discusses the takeaways from this week's earnings and forecasts market reaction as Fed Chair Powell signals a 50-basis point hike in May.

Opening Bell

American Express Reports Q1 Net Income of $2.1 Billion as Travel Spending Ramps Up  

With that if things stay as status quo while the NASDAQ is set to fall more than 1% on the week. And this is despite earnings from big names like Tesla and United mostly posting posting positive results. But then next week we're gonna have a slew of earnings. If you thought it was busy this week, just get ready. We got 550 companies set to report big names like Microsoft alphabet even that is certainly going to be something that's moving the markets. But for right now more inside an early morning activity, some more insight on the week of earnings that we have seen. I am joined by brian Shepherdson, vice president and senior portfolio manager at James investment brian, the S and P. On pace to finish the week flat maybe to the downside depending on how much of a pullback we see today, the NASDAQ that's dropped over 2% trading at levels close to kind of mid March. What is your take on this week of market activity given that we've had earnings come in and for the most part they've been pretty decent. Although everyone talking about the usual suspects inflationary pressure and supply chain issues. Right? When you look at just the different indices themselves. Um as you mentioned, like the NASDAQ seems to not just this week, but for the most part year to date has struggled a little bit more than say the S and P. Or the dow. So from our standpoint that you know, really gives us some indication that maybe the growth names are really starting to be questioned from the standpoint that higher interest rates really start to affect their future earnings when you bring back those cash flows. So from that standpoint, you know, I think what you also just mentioned that next week's earnings are going to be very important, especially when you do see those large tech names really come to the forefront, You know, continuing with earnings right? We had American express reporting the first quarter net income of $2.1 billion dollars a nice beat, really driven by strong spending on the consumer side, showing the consumer appetite for travel, for entertainment, that has reached pre pandemic levels. That would signal to me kind of optimism moving forward, especially as there are concerns about the consumer pulling back, this is a clear signal that's not happening. They're just moving money around. That talk has been happening for a couple of weeks now for months now, and we're starting to see it. What were some of your biggest takeaways that you you noticed from, you know, american Express is reporting and how the market is reacting to it. Yeah, I think just as you said, there's two main takeaways that we had number one, it's just like you said, consumer spending has been strong. So obviously that's good for the economy. There was a concern that if the consumer starts to slow down, that could move us into a recession, you know, from our standpoint, we're way way away from that, you know, if you're talking to three years down the road. Yeah we'll start to listen but we still think it's pretty early in the game to talk about recessions, especially when the consumer is strong and there's plentiful jobs. The second thing that was also very impressive was when they talked in their question and answer session, they mentioned strong travel. So again this really signifies to us that there's this opening up that continues to take place in the U. S. Economy. So again some of those travel and leisure things people haven't been able to do for years. And when you match that on top of what was recently spring break for many kids all throughout the country through March and april it really just amplified it. And uh you know, american express kind of leads the way and for letting us know the consumer is still strong. Maybe it does support a consumer that is still spending a bit of optimism. And I would have thought more of that optimism would translate into the markets before we talk about Fed because the Fed because obviously I think that's what's weighing down the markets right now, why don't you get your take on earnings coming out net week next week? Obviously we've got meta platforms, Apple Microsoft, Even Twitter said to report Q1 earnings next week. What are you going to be watching closely there? Well I don't think we're gonna be necessary watching anyone given name, we want to look at those basket almost to say what sector is doing well, really trying to see is that the value type names or the growth type names are small caps doing well or are large caps really giving us an idea of what type of sector rotation is happening within the markets, you know, when we had the shutdowns and then the reopenings and then the shutdowns again. So where is really going to play out? Um, I think that apple and Microsoft obviously being those behemoths within the market could really sway the market direction on all fronts, meaning the S. And P. As well as the NASDAQ. But I think again, we're really looking for what sectors are continuing to lead the way. Um you know, one concern I guess would be with the recent missed by netflix or other tech companies are starting to worry, you know, they haven't given any type of indication at this stand point in time. I just think that if you see some weakness in some of these numbers, it might kind of build off what we saw this week. Let's pivot to the set. Obviously, again, I mentioned a moment ago, I think that that's what's weighing down the market. You know, even amid kind of a picture that shows the consumer is managing through these inflationary pressures and moving their monies are their money to a different place. But Fed chair obviously jerome Powell at the I m F. Conference signaled, you know, being kind of even more aggressive. I feel like we've heard this tone from him over and over yet it somehow surprising the market. He essentially seemed to endorse obviously a 50 basis point rate hike at least in May and then front loading kind of rate hikes from there. I know we've heard from Bullard in the last couple of days who's kind of wanted to signal three quarters of a percent rate hike most people I've talked to so that's that's highly unlikely nonetheless. 50 basis point likely this upcoming May and then a few 50 basis point hikes, you know, beyond that. Do you think that that that's enough to kind of avoid an economic downturn and really to get inflation under control or they're going to be some challenges there? Well, I think it's kind of a fact that at the last meeting the question was posed, are you behind the eight ball, have you acted too late? And the chairman kind of him haunted his answer. Um you know, kind of almost indicating he agreed with it but didn't want to say that. So from the standpoint that what they've been talking about, you know, when you did hear Bullard say we need to do 75 that might be a little bit unlikely. But when you hear more of the dovish members such as mary daly talked about 50. Yeah, I think that's what we're really starting to look at more and more as we look. I think the futures market is really starting to point to a series of 50 basis point increases which would be, you know, coming up in May june july, You know, so if you did that in succession, that's 150 basis points in a pretty quick time and were coming off rates where they are just basically at zero. So from that standpoint I think it's something that needs to be done. Um And I think when you again mentioned that word front loading that the chairman talked about yesterday, that's kind of important because that allows them to do two things. Number one get those rate hikes rolling and see what impact that has in the remainder of the year. But also talking about quantitative tightening, I think the concern is that what happens if they are continually raising rates at a high level at the same time, they're letting those assets roll off their balance sheet, which is expected to be, you know, maybe another 25 basis points as it feels within the market. You know, while the Fed obviously tries to deal with inflation from a demand side and trying to cool down some of the demand with obviously interest rates going up higher. We know that the other side of this inflation picture at least one other side to this inflation picture is supply chains and really the issues we've seen with supply chains over the last two years and that weighing on the ability to kind of increase the supply side of things to that extent, which sectors are you looking at as indicators of easing supply chains? Um you know, in the overall kind of market? Yeah, I think the first thing that pops out when you talk about supply changes transportation, when you look at trucking, shipping uh specifically that will be the first sign to us when we start to hear from them that things are starting to ease that obviously we're getting products to the end share or the end users in a lot quicker basis. So from that standpoint, I think that just really stands out to us number one on the logistics of what's happening in the United States, but also in their profitability as long as they can stay, you know, ahead of the game. I know their costs have been rising. You know, the price to hire truck expenses for higher wages for truck drivers have been moving up. I think when you piece all these together, that's something that could really be a leading indicator as you look at sectors throughout the markets before I have to let you go here? I'm just curious given that the overall market obviously has come down, especially relative to last year. Do you see any areas right now that you're looking at that are inexpensive or undervalued at this time, when we look at what we're trying to figure out, we do like to use valuation As a metric, but I think we're still gonna really come back to the economy. Are we opening up or are we closing down? Are we gonna want consumer cyclicals are gonna want tech or if the Fed acts to rapidly say we went into a 50 basis point hike and then they did 75 and 75 and they really slammed on the brakes. That would be a concern to us. And potentially at that point we would say maybe we need to look at those types of things that hold up well and really difficult markets, you know, utilities, consumer staples, things along those lines. It's not time to move in that direction in a big way. But you know, as we kind of watched through what's going to happen over the next three months, you can start to make the case. People are starting to drift to some of those names. May be pulling back on their tech for things that tend to hold up well in difficult markets, brian really appreciate your inside brian Shepherdson, vice president and Senior portfolio manager at James investments