Earnings results are an important driver for any company. They tell you the direction the company is headed and how profitable management is. But there is an adage in the market that should not be forgotten: "Better to travel than arrive."
Sometimes it is about a lot more than just earnings and fundamentals.
It matters how investors and analysts are positioned in the name. If everyone is bullish and invested, with no room for marginal buyers to come in, there is little room for error. The bar is set high and any soft guidance or holes in the balance sheet can set off alarms, especially when investors are paying price/earnings multiples in excess of 30-50x, which is above any historical precedence.
In other words, one needs to be absolutely sure that the only way is up.
We've recently seen earnings results from some of the Magnificent Seven Technology names, including Microsoft (MSFT) , Netflix (NFLX) and Advanced Micro Devices (AMD) . Earnings per share bet Wall Street expectations, yet the stocks of these companies fell. Why? At these lofty levels, soft guidance for the second half of the year and lack of margin expansion are to blame.
At the start of 2023, when (almost) everyone was bearish and numbers slashed, the bar was low to beat. These companies did an excellent job to cut costs, trim the fat so to speak, to keep their margins up and earnings as well. But now, as we potentially enter a recession, the real question is, will they be able to grow their top and bottom lines as easily as before? The jury is still out but the year-over-year comps will not be as easy.
There is another adage that says, "Don't fight the Fed." However, the market -- and especially the retail crowd that only looks to buy the dip as it has served them well over the past decade -- continues to ignore the Fed as the central bank says it has more work to do.
While it may be debatable whether one should trust them, the Fed usually does what it says it is going to, even if it is the wrong move. The Fed, in my view, is a backward-looking institution, that only knows how to put fires out once it creates them. It print moneys, creates a bubble, something snaps as the system collapses, then it prints more. Rinse and repeat. This has been the case since 2008.
This game will end soon, however. To assume that one of the fastest rate-rising campaigns in history will achieve only a soft or smooth landing defies anything we have seen in the past.
Remember, these are the same Fed officials who said inflation was transitory or that "we are not in a recession" right before the 2007 crisis. After printing close to $5 trillion over the Covid crisis and fiscal spending to no end, they managed to escape the debt-ceiling debacle as the Treasury General Account was replenished from the RRR account. Only to then announce the U.S. Treasury needs to print another $1 trillion in new debt over Q3 and another $800 billion in Q4!
There is no stopping this endless issuance of debt. But who will be able to buy it now? As of today, U.S. interest rate payments amount to $1 trillion alone, so how much more do they need to print to pay off the old debts? It seems like one big Ponzi scheme and we know how that ended for Japan.
Fitch downgraded the U.S. Debt Rating to AA+ from AAA Wednesday. This may be the straw that breaks the camel's back. Macro indicators have been flashing red for months now yet stocks have failed to listen.
If one were to look at ISM, PMI, Retail Sales, or any indicators it would seem the global economy is already in a recession. The federal budget is close to 8.5% GDP, same level as 2008, yet rates are much higher and more restrictive. And the Fed has no intention to take them down, the despite market narrative, till it sees its inflation goal of 2%.
How much longer can a system so entrenched with debt stand with such high interest rates? It is a ticking time bomb. Bond market yields are going higher. The elastic band can only stretch so far until it snaps eventually, and rest assured, it does snap.
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