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  • Malik: It's a High Bar for Earnings

Malik: It's a High Bar for Earnings

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Bloomberg Jan 28 22:40 · 12.8k Views

Saira Malik, Nuveen CIO breaks down big tech names that are set to report earnings next week tell us which companies she believes will end up on top. Malik also explains why more volatility is seen during election years and what we can expect this year.

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Transcript

  • 00:00 I I guess my question is that when it comes to equities, what is causing all this momentum?
  • 00:03 It just keeps coming.
  • 00:06 Good to see you David.
  • 00:07 Well, the January effect is in full force this month and it's been driven by the bellwether technology sector.
  • 00:13 There's been three reasons for the for the rally.
  • 00:15 First, inflation is moderating.
  • 00:17 Second, the economy remains surprisingly strong and 3rd expectation for rate cuts.
  • 00:23 Now we got two data points this week that support that narrative.
  • 00:26 PCE which is the Fed's preferred barometer of inflation came as in as expected and GDP blew past expectations coming in at 3.3%.
  • 00:35 So where do we go from here?
  • 00:37 But we have an FOMC meeting next week.
  • 00:39 I think the Fed continues to watch and wait, there's no reason for them to start talking about rate cuts at this point with the economy so strong and also with inflation while it's moderating.
  • 00:50 I'd like, I think they'd like to see more of a consistent trend.
  • 00:53 So, but when we're going past earnings season with 40% of market cap reporting next week, I think it's going to be tough to find a catalyst after that S&P valuations that are about a 20% premium to average, I think that's going to be your headwind going forward and that'll cause a rally to Peter out eventually.
  • 01:09 So Sarah, before we get to what comes after, let's talk about next week in tech.
  • 01:13 You mentioned technology being a big driver.
  • 01:15 We've got some big tech names out next week.
  • 01:17 What are you expecting?
  • 01:19 So it's a high bar for earnings season in general where consensus expects earnings to grow by about 5%.
  • 01:25 And what we're seeing is the haves and the have nots.
  • 01:27 So the haves are the companies
  • 01:29 beating sales and earnings.
  • 01:30 Those stocks are going up by about 2%.
  • 01:32 When that happens the have nots companies missing on sales and earnings are dropping by about 5%.
  • 01:37 So next week all the mega cap companies, Amazon, Apple, Alphabet report, I think they are going to be the leaders for earnings growth.
  • 01:44 But we prefer Amazon and Alphabet over Apple.
  • 01:47 Apple I think still has headwinds.
  • 01:49 Huawei coming back into the market could cause them to lose market share.
  • 01:53 And importantly, iPhone at 50% of their profitability has been normalizing to flat unit growth post the covic bump.
  • 02:00 Also, we're worried about their App Store and the profitability.
  • 02:02 They're given regulations
  • 02:04 now, Alphabet and Amazon.
  • 02:05 They're benefiting from a cyclical upturn in advertising.
  • 02:09 Also, Amazon finally bearing the fruits of their investments in their retail business.
  • 02:13 All of that, I think, positive for Alphabet and Amazon.
  • 02:16 Sarah, what about some of the risks, the downside risks for equities, in particularly those expectations about rate cuts?
  • 02:21 I mean, there's been a back and forth between the Fed and the markets here about what's coming up.
  • 02:25 What is the risk here that in fact the markets may be disappointed.
  • 02:30 I think that's a good risk that is definitely out there.
  • 02:32 We came into 2024 with the market expecting six to seven rate cuts this year starting in March.
  • 02:38 As of today the March rate cut is now a 5050 chance.
  • 02:41 So we're already starting to push those out.
  • 02:43 I don't think we're going to get six rate cuts with the economy functioning so strongly.
  • 02:47 Second risk for the market is valuations.
  • 02:49 We came into this year with S&P valuations at about 20% above average.
  • 02:54 That's going to be a headwind for the market.
  • 02:56 And also let's take a look at yields.
  • 02:57 The 10 year yield now backing up to about 4.2%, that's a headwind for equities too.
  • 03:03 So that's why I said post earnings, the catalyst for the next leg up for equities to cross 5000 on the S&P is hard to find.
  • 03:10 What about risks in the economy?
  • 03:11 We had some really strong GDP numbers this, this week.
  • 03:15 At the same time we spent all 2023 anticipating A recession that didn't come.
  • 03:18 Are we past that risk now?
  • 03:21 Yeah, I don't think we're past it.
  • 03:22 A lot of people did just kind of kick that forward.
  • 03:25 But will a recession come?
  • 03:26 I think we need to watch the consumer and employment numbers to figure that out.
  • 03:30 So employment numbers have been very strong.
  • 03:32 We'll see payroll numbers again this Friday.
  • 03:34 One thing though, under the hood, while we're beating on payrolls every month, under the hood they've been constantly revising down the prior month's payroll.
  • 03:41 So I think employment markets are more balanced than they look on the surface and the consumer continues to spend very strong holiday season, but delinquencies on credit cards and autos are are increasing.
  • 03:52 So there are some cracks in the foundation of the consumer employment markets that could eventually lead us to a recession.
  • 03:58 I still think we get one because there is some damage that has been done by this period of significantly higher interest rates.
  • 04:05 And finally, Sarah, what about the election?
  • 04:06 You might have noticed we're having an election here in the United States.
  • 04:08 There are some other elections around the world as well.
  • 04:11 How do you price that in?
  • 04:13 It's a big election year for the world, 77 countries going to the polls representing 60% of GDP.
  • 04:20 In a normal year,
  • 04:21 volatility in election years is about 10% higher than average.
  • 04:25 But in a year such as this, I think we're going to see more volatility.
  • 04:29 Also
  • 04:29 at less predictable outcomes for elections lead to even higher volatility.
  • 04:33 I think we're going to get that.
  • 04:34 But whichever candidate wins in the
  • 04:37 US is going to have to deal also with the fiscal budget issues given the debt to GDP ratio of our country and also international national issues like tariffs and whether we can afford to maintain tax cuts given the level of U.S.
  • 04:49 debt.
  • 04:49 So that's going to be issues that we're going to have to deal with over the short and medium term going forward.