In this week’s episode of 7 Market Movers, Doug looks beyond the headlines of the Iran conflict to understand what’s really going on with the US economy through the lens of corporate fundamentals. Watch the full video to hear his analysis, as well as his insights into the current discrepancy between hard data (like unemployment numbers and corporate earnings) and soft data (like consumer sentiment and confidence).

TRANSCRIPT:

Hello everyone and welcome to this week’s 7 Market Movers. My name is Doug Huber and I’m the Deputy Chief Investment Officer here at Wealth Enhancement. For several weeks, much of our attention and investor attention has really been paid to the Iranian conflict going on and that makes sense. Geopolitical risks matter, oil matters, shipping routes matter and markets always react quickly to uncertainty.

But I thought this week would actually take some time and turn our attention to kind of what is actually happening in the economy and corporate fundamentals behind those headlines. And right now, the answer is actually more balanced or better than the headlines are suggesting, right? The US economy is not falling apart. The labor market’s still holding up, job growth has slowed from the hottest part of the cycle, but we’re still seeing some hiring and we’re certainly not seeing elevated levels of layoffs.

And really, if you put those together, you know, it’s not what a recession or a difficult period in the economy usually looks like at the start.

We’ve seen so far consumer spending hold up through the first quarter, which I think is much better than several than a lot of market pundits expected. We’ll touch on that a little bit. But realistically, when we look under the surface today, you know, we still see an economy with a lot of forward momentum.

Now, that does not mean there’s no problems. The biggest issue right now is certainly, inflation or expectation of inflations, and that’s certainly where the Iranian conflict story really matters. The main economic transmission mechanism is not an immediate collapse of growth at this point, but it is a high, you know, it is higher energy costs, it’s higher transportation costs, it’s more stress to supply chains, and ultimately that leads to rising inflationary pressure. And that’s the key point.

I don’t think it’s a recession story today, but I do think it’s an inflation through energy story for the time being. And I think we can see that if you look to business activity data. Activity is still expanding, but companies are also dealing with these higher costs. There’s more disruption tied to this backdrop of the Iranian war.

And so the economy is still growing, but it might be doing so slightly less efficiency with a little bit more of that inflationary pressure. And I think this is where that important distinction for investors become.

And so let’s look and let’s connect that with what’s going on with the earning season, right? Because earnings are really where kind of the rubber meets the road, right? It’s showing how companies are doing, how consumers are spending. And so this is really we get our reality check and earning season started in all earnest a couple weeks ago at the beginning of April. And so, so far, it’s actually been not only better than feared, it’s been quite good. So far, the blended quarter of Q1 earnings for the S and P five hundred has shown a growth rate of thirteen point two percent.

And if that holds up, it would actually mark the 6th straight quarter of double digit earnings growth. That’s pretty strong.

I’d also say that the revenue numbers so far this quarter is tracking around almost ten percent growth rate.

And that would be the strongest revenue growth rate since the 3rd quarter of 2022. So broadly speaking, I think corporate America came into the beginning of this year and into the unknown of the Iranian conflict in a really good shape.

And it’s still frankly doing quite well, but that doesn’t mean every company is doing well. And so I think what it’s showing is that the overall backdrop has been a little bit more resilient than headlines imply. But the split between sectors and some parts of the market that still have strong structural demand versus those that are more exposed to energy inflation and that supply chain volatility are really standing out. And so we’ve seen that, right?

Banks have started the quarter with their earnings and have been relatively strong. Think first and foremost, frankly, driven by capital markets and trading activity, which we see right in periods of volatility, those deaths are very active, they clip a spread, you’d expect them to do well. But I think more importantly, the look through the consumer facing side, whether it was JPMorgan, Bank of America, American Express, still reporting a lot of resilient spending, know, some of it with a more affluent side, but retail sales number came in better. And even the middle class consumers still spending through March, even as kind of the pressure of higher gas costs and other things were hitting their wallets.

The other big one, you know, we’ve talked about this for a long time, but AI linked capital expenditures and semiconductor demand has really kind of been the engine of earnings growth and continues to be so. We’ve seen this with names like Taiwan Semiconductor, ASML, I mean, really strong quarter raising guidance. And frankly, this is just showing us that the market’s bigger, excuse me, the market’s biggest structural profit driver is still intact.

And I think what that means is that, you know, this isn’t a market that’s being held up on hope. This isn’t a market that’s just reacting to a geopolitical event that may or may not be there. It’s still real capital expenditure going on in the markets and this real demand for this core tech infrastructure. And then all of that, all of what that means to other parts of other pockets of the economy, we’re seeing real productivity growth.

Now, on the other side of the coin, you have fuel sensitive businesses, you have transportation heavy businesses. They’re certainly coming under more pressure, right? And that makes sense. Prices move higher, it’s gonna hit margins, it’s gonna raise their costs and certainly gonna make their ability to forecast their future earnings growth much harder.

And so I think, again, there’s no signs of a broad economic collapse, but we are certainly seeing selector pressure points. And that pressure point is obviously the most strong, is the strongest in the parts of the economy that are more exposed to the volatility in kind of the energy side.

Now, counter to what I just said is, is if you look at some of the sentiment and confidence data coming out, they’re quite weak. People are feeling the impact of this uncertainty when somebody surveys them and says, do you feel about the economy? You see, not very good.

And frankly, it’s because on a day to day basis, they read the headlines that quite doom and gloom. They feel the impact of higher prices, especially at the pump and confidence taken a hit. And so we’ve seen this really interesting gap emerge right now and what we call between hard data and soft data. The hard data like jobs, spending, earnings looks really good.

The soft data like sentiment and confidence looks really weak. And I think that gap is important, because it tells us that the economy is not broken yet, but anxiety is rising meaningfully. And so it’s something to pay attention to. At what point does that anxiety start to affect behavior? You have to keep that in mind.

And so when you think to yourself or when you ask your advisor what’s really going on here, think the answers look something like this. The economy still has really good forward momentum, but inflation risk has certainly become more serious again, especially tied to almost explicitly energy costs. And so, as the uncertainty of the straight over moves and other things that drive those energy costs go up and down, you’re seeing the market react to that.

The 3rd part of the leg here is earning season so far suggests that corporate fundamentals were very healthy coming into this. And that, you know, I think maybe a lot of investors underestimated kind of how good things were coming into this. And so we do expect, you know, without much broader, much longer impacts that to see that through to the end of the year, but we will be paying attention to that. And frankly, the 4th is, you know, we all need to be careful about geopolitical headlines. They’re obviously important, but we don’t want that tail to wag the dog of driving our long term investment decisions. And so the real question we’re all balancing right now is certainly do higher oil costs stay contained, or do they last longer, do they spill over to the market?

And ultimately, does that have an effect on consumer behavior, corporate margins or expectations for Fed rate cuts? And so I think that’s really what matters from here. But frankly, that all of us are watching that but underlying that, and that’s what we’re going read more and more about, but I just want to remind everybody underlying that, frankly, that the data we’re seeing is actually quite strong. So I’ll leave you all with that.

I appreciate you taking the time to come to our 7 Market Movers this week. We look forward to being back with you next week. We’ll have more updates and more topics to talk about. Thank you very much.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor’s specific circumstances. Investing involves risk, including possible loss of principal.

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