Uncharted Week Ahead With Earnings and CPI Reporting

Earnings next week

Market momentum is Red. Choppiness in FAANG stocks suggests that a reversal is possible. But next week presents the most important in the history of my momentum readings. I want to give you a very good sense of where we will be heading in the next seven days.

I’m not a person who uses hyperbole. 

  • Best restaurant ever! (A crab shack in Baltimore)
  • Best cup of coffee in the world! (A grainy bag of brown water somewhere in the Bronx)
  • Most important thing to do with your money… RIGHT NOW! (Buying life insurance?)

These are hyperbolic statements created by people who likely haven’t been to a five-star restaurant in Istanbul, drank coffee under a terrace on the Lake of Zurich, or bought alternative investments in 2009 after the crisis… 

But I’m going to come out and make a statement. Next week, we are kicking off the most important earnings season… in 20 years. And it’s not even close. With momentum negative, and a lot of questions ahead – this is your time to focus.

Seven Days in July

Over the last 13 years, the Federal Reserve has used its balance sheet to aggressively buy bonds and support the U.S. economy against inflation. That capital has somehow ended up in the U.S. equity markets. The truth is that the Fed started buying after the Dot-Com bubble… 

But most media outlets don’t do that diligence. The Fed’s impact on the stock market since 2002 can’t be debated. As it expanded its balance sheet, it helped push the markets higher. When it reduced its balance sheet in 2018 – the only time before today that it started that process – the S&P 500 fell 6.56% over 12 months, and the equity markets crashed 19.8% in December of that year. 

So the Fed’s commitment to reducing its balance sheet heading into September – while raising interest rates this year – is the most important narrative of the market. The Fed is the largest driving force of this market. Then, there’s about 87 miles of dirt. Then, there’s earnings season. And, we’re just a few days away.

Corrections… Mistakes… Misdirection…

Ahead of the upcoming earrings season, Wall Street remains adamant that future earnings expectations will increase by 10%. What? On what earth are U.S. consumers spending MORE money? We’re on the verge of recession! We’re facing a challenge we haven’t seen in 13 years

The last six months have largely been fueled by valuation compression. Investors aren’t willing to pay 36 times earnings for the S&P 500. And that has contracted… significantly in the last few months. But now, companies must start to analyze the impact of inflation, supply chain woes, AND tighter spending among consumers in the months ahead. 

If they reduce their forward guidance, the concept of “Earnings compression” will start to impact the market. As of now, that hasn’t happened on a broad scale. Yet, we’ve already seen a few companies reduce their guidance in very important consumer spending categories. Those stocks include spice giant McCormick (MKC), department store Kohl’s (KSS), and financial lender Upstart (UPST). 

Don’t try to time this bottom. You need to see consistent buying, consistent earnings, and a clue that the worst is over. We’re not there so long as momentum remains negative, and institutional capital largely remains sidelined. Go have a drink. Go have dinner. Don’t worry about the market. We’ll get to work on Monday.

Earnings and CPI Reports Next Week

Banks will report earnings, but all eyes are on Wednesday’s Consumer Price Index update. The latest projection is an 8.7% increase in the CPI, and a 1.0% increase month over month. Core CPI will be around 0.6%. I think there is about a 65% chance that the CPI comes in under expectations, and a 10% possibility that we get a double-digit print due to rent costs across the nation. The balance of the estimates comes at or just above expectations. 

Despite inventories and falling oil prices, there remain a lot of problems. I don’t see us getting back under 8% until September at a minimum. And even at that point… we’d still be sitting at roughly 8% in annual inflation. We have a long way to go until the Fed does its job the right way. Again, don’t worry about it right now. Go enjoy your weekend. I’ll be back with a list of banks to buy ahead of earnings next week.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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