Earnings Are Good, but Bears Don’t Care

Stocks opened higher this morning before falling flat several hours later. Through noon, the S&P was down slightly alongside the Dow. The Nasdaq Composite endured the worst losses as rates continued to climb. The 10-year Treasury yield temporarily made a new pandemic high at 1.87%.

Many bulls were hoping for a major bounce-back trading session today. Instead, stocks fell again despite stronger than expected corporate earnings. Procter & Gamble (NYSE: PG) saw its shares rise over 4% after reporting “beats” for both quarterly earnings and revenues.

“Higher inflation has raised concerns about input costs for many companies. Since [PG’s] margins were fine, this has relieved some of those concerns,” said Miller Tabak head strategist Matt Maley.

That doesn’t necessarily mean, however, that margins will look “fine” for other manufacturers. Case in point, Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) both topped estimates this morning and their share prices rose in tandem. But on Friday, JPMorgan (NYSE: JPM) would’ve missed its earnings estimate if not for a “surprise” source of revenue: the bank’s loan loss reserves. JPM fell in response to its quarterly report.

The same line of thinking could be applied to PG’s earnings. PG maintaining solid margins doesn’t guarantee that other manufacturers will, too. And with inflation still climbing, PG’s margins have the potential to slim next quarter while a Fed rate hike approaches.

“At this point, it’s very clear that the first rate hike will be at the March meeting,” remarked Albion Financial Group CIO Jason Ware.

“What we’re going to be looking at is the language around inflation because at the end of the day, inflation is what’s driving Fed policy.”

Citi CIO David Bailing felt similarly, but still believes certain industries could see significant moderate-term gains.

“I think it’s definitely a repositioning of the market to deal with really what the Fed has done. And the Fed has basically created some certainty around the fact that there will be rate rises,” he said.

“Then the question is, how much do they actually release from their portfolio? And it’s that that creates the enormous uncertainty. What we’re seeing now is a broad-based reevaluation of the highest growth shares, which obviously are the most sensitive to interest rates. But what’s happened is it’s taking place across the board.”

Bailing concluded, adding:

“This is going to present a buying opportunity in areas like fin tech, in areas like cybersecurity, where you have very steady growth, you have increased cash flows and potentially profitability, as opposed to the more speculative shares.”

We observed over the last few weeks that the market’s many oversold stocks (that didn’t really participate in the late 2021 rally) could now be set to finally outperform the major indexes.

This shift has been a long time coming, but traders may be ready to rotate out of Big Tech names and into smaller cap stocks. That doesn’t mean tech will be completely “dead,” but rather that the largest tech companies should give up some of their gains to stocks with lower market caps and more room to grow.

It hasn’t happened quite yet, but with an expected rate hike looming in March, Big Tech bulls are probably running out of time as the Fed deliberates on when to raise rates – something that we’ll learn more about following the January FOMC meeting, which wraps up next week.


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