How Will Stocks Respond to Lower Earnings?

TL;DR

Inflation data came in higher than expected, causing concerns about the Fed's future policies. The market reaction was relatively muted, but the implications for the economy and equity market are significant.

Transcript

hello and welcome to the real vision daily briefing it's wednesday july 13 2022 i'm maggie lake and here with me today is eric johnston senior managing director and head of equity derivatives and cross asset at cantor fitzgerald hi eric great to have you back maggie how are you great to be here i'm doing well and uh you know we have a pretty action... Read More

Key Insights

• ✳️ The market may be underpricing the risks of future inflation and a potential economic slowdown.
• 💳 The credit market is more accurately pricing in risks compared to the equity market.
• 🤕 Commodity prices are expected to head lower in the next six to nine months due to a drop in demand and potential supply improvements.

Questions & Answers

Q: Why was the market reaction relatively muted despite the high inflation data?

The market may have already priced in the expectation of high inflation, leading to short covering and the belief that the Fed will bring forward rate hikes to tackle inflation.

Q: Is the market underestimating the potential pain the Fed is willing to tolerate to control inflation?

Yes, the market may be underestimating the Fed's determination to squash inflation, even at the cost of short-term pain in the economy and equity market.

Q: Are companies not warning about future earnings because the bulk of the cuts will come in guidance?

Yes, companies may not be issuing warnings about earnings because they have just completed their quarter and are more likely to lower guidance instead.

Q: How should investors position themselves in light of the potential risks in equities?

Cash can be a valuable asset in this scenario, and owning long-dated bonds may provide both yield and price appreciation as the Fed tightens and the economy slows.

Summary & Key Takeaways

• Expectations were that the Consumer Price Inflation (CPI) data would be high, and it indeed came in higher than expected, indicating a hot print.

• Despite the high inflation, the market reaction was relatively muted, possibly due to short covering and the anticipation of the Fed bringing forward rate hikes.

• The two's tens curve inverted significantly, indicating concerns about future economic growth and potentially signaling a recession.

• The potential for a Fed pivot and rate cuts is being overly optimistic, as rate cuts typically coincide with sharp sell-offs in equities.