Opening Bell

Rob Haworth

So with that I want to get some more insight in early morning trading by joining us and rob Howard senior investment strategist at U. S. Bank wealth management Just noted there a moment ago earnings really kind of being the story of the last couple of weeks and to that extent we've seen what 76% of s. and P 500 companies that have reported earnings, they've reported beats, this is kind of notable and then again something that's been moving market, but actually in context this is the smallest percentage of the first quarter beats that we have seen. This is about 2020, only 6% of the company's. In fact, if we kind of dig into that number reported beat on profit margin estimates, is this just a reflection of a tough comparable in particular with profit margins since cos really enjoyed wider margins over the last year, year and a half? Or does it signal something about really the strength of companies for the rest of the year? Uh You know. Yeah, I think we'd agree that this is tough comps and we're getting back to more normal beats in terms of in terms of earnings expectations, I'd say the last couple of quarters have been abnormally strong, reflecting low expectations headed into the quarters. Um And and as we get into this year, right, were kind of expecting that earnings are going to be a little more challenged given the comparisons and also the fact that we're expectations have really ramped much higher for the rest of year that said, we're still generally constructive on this year, Right, This can still be a solid year, from an earnings perspective, what's the biggest risk then, you see, you know, for companies, is it really the inflationary pressures and and how that affects margins, the supply chain issues that continue labor shortage? I mean, there is, it seems like as I'm talking, there are no no shortage of issues. But what's the biggest one do you think? Uh, there are plenty of really risky year uh with with a lot more questions really than we have answers at this point, I'd say we point to two things. One. What is the trajectory for inflation? Do supply constraints remain an issue whether it's the labor market, oil prices, raw materials, semiconductors, right? Can we resolve those supply chain issues to supply this market or do we have to resolve that through higher prices? And then to the question is does the path of the Federal Reserve match current market expectations which are fairly robust? Right, anywhere. I think we're around, you know, five interest rate hikes or expectations. Some people are expecting seven. Um, and I think that the path of the Federal Reserve is a is a meaningful open question uh for for market prospects as we look at this year. Speaking of that path and a question around it, to you, to your point there, you know what, I think the consensus right now is potentially like five rate hikes and many analysts saying that that's not essentially to get us to that 2% target when it comes to inflation and that truly, by the end of the year we could still be sitting at an inflation number that is 5%. Especially in context with tomorrow we've got that C. P. I. Data coming out that's gonna show potentially 7.27 point 3% inflation, you know, for last month. Do you anticipate the Fed is going to have to be more aggressive, you know, with the rate Number of rate hikes or even potentially with, you know, increasing it to, you know, 50 basis points. Yeah, we'll probably be in the middle that it's three or four rate hikes this year. But a lot of that has to do with we think the supply issues probably get resolved. I think there's a lot of open questions as we think about CP I tomorrow there are some, there are some prices which should start to soften, right. We've had a fairly robust used car prices which have been pushing that inflation number up. That's starting to roll over the challenge in the near term is certainly energy prices as we've had oil prices press above $90 a barrel. So that's going to be a headwind for the next couple of months. And then the final key question on what kind of keeps inflation higher I think is how do shelter prices continue to work through the economy? We've seen very high housing prices that typically takes about a year to work its way through into the owner's equivalent rent Measure that's embedded within consumer prices, the consumer price index. Um and so that's something that could keep inflation above that 52% level. The federal reserve expected to preserve preferred 2% level for the rest of the year. So we we'd say we're we should be moving kind of past that peak inflation rate at 7% and moderating. Um but we're probably not hitting that said target by the end of the year, we're probably going to be above average, you know, focusing on the number tomorrow. In particular. We know it's it's more than likely going to be a market mover, no matter what comes out, whether it's higher or lower, then I guess the expectation right around 7.2 or 7.3% investors are obviously gonna react towards it, but when it boils down to it in a nutshell, consumers really are going to feel the brunt of a lot of these price increases because we have, we were just talking about Chipotle earnings results, we're seeing companies really enjoy the opportunity to have this pricing power and to pass it along to the consumer. How much longer though though, do you think companies like a chipotle layer are really going to enjoy this pricing power And when do you see potentially, you know consumer spending slowing down as a result of potentially kind of hotter and higher inflation? I think the the constructive news isn't released that wage growth has been fairly solid, right? Not yet. The 7% level, but we've seen 4-5 plus percentage points of wage growth putting up on the ledge. You look at whether it's average hourly earnings coming out of the jobs report or the wage and income indicator coming out of the employment cost index. Um So so it seems like the consumer is able to keep up for now. The data were actually watching is going to be on friday. We're going to get the preliminary University of michigan consumer sentiment survey for the month of february. I think that's one of the indicators were really watching to say our consumer is going to have to tighten their belts a little bit more due to inflation and then that will impact the pricing power for companies or are they still feeling OK? And when we look at things like last night we got consumer credit from the, from the new york Federal Reserve, very solid consumer credit numbers, right. The consumer seems to have the confidence to spend and to take on debt. So, so it seems like we've got some time, you know, multiple quarters ahead of us where, where the consumer should be. Okay, Doesn't that continue to fuel inflation. Right? Because if the consumer is willing to continue to spend the money and there's no, despite what the Fed does, there's no real pullback potentially on um, you know, prices Right now we would definitely, I think in the camp that our base case would be inflation is going to remain above average. So say three plus percentage points into in the year end, right at the current pace of 7% seems a little elevated. It's, it's hard to imagine used car prices for example, continuing to grow at a 27% year over year rate for For a lot longer. So, so that probably comes down. But that still means, uh, you know, if we think about something like shelter costs, they're probably in that 2-3-4% range year over year for the rest of the year and that's and that's up from, they were, you know, certainly below 2% for some time. So there's room for us to think that that prices probably price gains probably stay elevated. I think that, You know, where that inflation comes from, probably changes compared to where it's been over the last couple of months. Yeah, it's such a tricky topic given the strength of the consumer right now, but the struggle to still to try to bring down prices and really get a control on inflation will continue to follow it. I want to get your thoughts though on the NASDAQ that that has rebounded recently right down, it's right around 1.1% over the last five sessions. However, the index, I think still below what? 200 day moving average down 3.6% over the last four weeks. This is obviously kind of in relation to the Fed and really in relation to two evaluations and mid kind of expected higher interest rates, but just focusing on tech and the potential opportunities. What, what opportunities do you see? Um, you know, in the tech sector? Yeah. In the near term, we certainly say technology is challenged. But as we look at the longer term, that's really where the secular growth is. So if we think about kind of the new normal as we move from, from pandemic with coronavirus to endemic, um, we think taste and demand has changed and technology is going to be at the center of that. So demand will be up. We think we're fairly constructive over the longer term on those prospects. Whether it's semiconductors software, right? There's just a lot of innovation happening there that said in the near term. I think it's a little more challenging when we think about higher interest rates and relatively elevated price earnings multiples. Right. I think investors sentiment probably comes down in the short term because of that. But in the longer term we're certainly still constructive before I have to let you go here, I've got about 45 seconds. Just want to get your thoughts. We have earnings after the bell. Big names like Uber, Disney MGM. A few others kind of reporting, what are you gonna be watching? Ah mm hmm. There is the consumer we're going to be watching very closely. What is consumer sentiment? Where are they spending money? Are we getting back to two services spending? Because that's the area that has really taken a pretty big hit and has not yet come back when it comes to the consumer. The consumer has been spending a lot more on goods in the last year or two because that's what's been available. Um, I think the key question is how do how do, how does the consumer do? And is the consumer returning to services, whether it's entertainment, hospitality? Are are they getting back to more normal spending pattern? That such great insight, really appreciate your time rob Howard, senior investment strategist at U. S. Bank wealth management. Thank you.