Markets Will Struggle Going Forward, 22V's DeBusschere Says

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Bloomberg Apr 22 04:11 · 12.8k Views

Dennis DeBusschere, 22V Research president and chief market strategist, says earnings are strong and improving but expectations are a little high amid the current inflation environment on Bloomberg Television.

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  • 00:00 Dennis, I do wonder if this is much more now a story about corporate fundamentals rather than the obsession that we've had for the past couple of years over what the Fed is going to do next.
  • 00:10 Well, I do think corporate fundamentals are an underlying support for the market,
  • 00:13 but there is a particular problem and as it relates to financial conditions right now that are impacting the market, we ultimately think it will be a short term
  • 00:22 headwind in nature.
  • 00:23 But the fact of the matter is we started this year with economic growth outlooks from a consensus point of view, about 1.3%.
  • 00:30 There was a
  • 00:31 very large consensus that thought there was going to be 6 cuts,
  • 00:33 which meant that inflation was going to be benign.
  • 00:36 And lo and behold, we ended up with much stronger economic growth than people were expecting.
  • 00:40 Atlanta Fed's GDP now casts at 2.9%,
  • 00:43 and inflation, that's clearly sticky to the high side.
  • 00:46 So we're in a situation that was similar to three Q last year, where financial conditions are tightening now led by the US Treasury yields.
  • 00:53 As you've seen,
  • 00:55 that will probably go to a point
  • 00:57 that make investors comfortable that there's less upside inflation and economic risk
  • 01:02 and we don't have to worry about the Fed potentially even raising rates.
  • 01:06 And until we get through that process, again, a lot like we did in Three Q
  • 01:10 last year,
  • 01:11 until we get through that process, the market's probably going to stop struggle.
  • 01:14 So earnings, yes, there are support, don't get me wrong.
  • 01:17 But we do have this
  • 01:18 little FCI tightening that's happening right now,
  • 01:21 which is complicating.
  • 01:22 And the way out of it is just lower inflation over time and investors getting comfortable with that outlook.
  • 01:27 They were very comfortable to start the year less So now.
  • 01:31 Do you have, I guess, any confidence or are you seeing that confidence in the folks that you survey
  • 01:36 that we are going to maybe see that relief
  • 01:38 soon, meaning like maybe within the next 6 to 8 months?
  • 01:42 Yeah, that's, I think the issue is I think there was too much confidence in that.
  • 01:46 So there is a significant amount of confidence that you'll see some deceleration in inflation over time.
  • 01:52 You know, I'd say it's 6040.
  • 01:54 So that's a little bit harsh for me to say it's too much
  • 01:56 confidence.
  • 01:57 But yeah, I think most people are still set up for the idea that over the next year, you should see inflation
  • 02:02 on a core basis decline in a way that would be friendly for asset prices, meaning the Fed can
  • 02:07 continue or will, I'm sorry, reduce rates in a way that they somehow get back to
  • 02:12 to neutral.
  • 02:13 And any data point that questions that is an issue for the market
  • 02:17 and most now being felt most definitely in say price momentum factor, which is coming under pressure today, which is NVIDIA and Netflix and stuff that you already noted.
  • 02:25 I know you don't talk about individual stocks.
  • 02:27 You mentioned earnings are a source of support, Dennis, except some of the high Flyers are,
  • 02:31 I don't know, giving less information about earnings.
  • 02:34 You look at Netflix yesterday saying that it's no longer going to give subscription numbers
  • 02:38 the way that it used to, following in Meta's footsteps.
  • 02:41 And we've seen how Apple in the past has stopped reporting sales of units of iPhones or iPads or Macs.
  • 02:47 What,
  • 02:48 what kind of statement does this send to investors in terms of the information that
  • 02:52 companies are willing to impart
  • 02:54 to the market?
  • 02:56 Well,
  • 02:57 I'll, I'll use a little sell side trick here.
  • 02:58 I think
  • 02:59 ultimately
  • 03:00 earnings are support
  • 03:01 for the market over the course of this year.
  • 03:03 The problem with earning season now is earnings expectations came in
  • 03:08 or inflected higher into earnings season.
  • 03:10 So the bar was high.
  • 03:11 Basically since the Fed tightening program started,
  • 03:14 earnings expectations had collapsed into earnings seasons.
  • 03:17 And this is the first one we've seen basically in two years
  • 03:19 where you had this big lift.
  • 03:22 So it's not that earnings are necessarily poor,
  • 03:25 it's just that that expectations were very high going into this quarter.
  • 03:28 So in aggregate, earnings are strong, they're improving.
  • 03:31 You'll probably end up at 23243 to 2:45 this year, which is great.
  • 03:35 You know, I mean, that should support the market over time.
  • 03:38 Just that expectations were a little bit elevated in an environment where you have an inflation concern, right?
  • 03:43 I hear what you're saying about how expectations perhaps are a little bit stretched going into this earnings season, but the fact that companies are giving less information to investors who are
  • 03:51 for
  • 03:52 evidence that their
  • 03:54 valuations are justified,
  • 03:56 Yeah, it's a good point.
  • 03:58 I think leaning on company commentary about the future, certainly the macro backdrop is what one of the worst thing investors can do.
  • 04:05 Because when we've looked at this using a natural processing tool, what they say about their own business is actually very positive and has consistently been positive.
  • 04:13 What they say about the outside world and the macro backdrop and inflation backdrop and uncertainty and every analyst on the street beating them up about the world is going to end.
  • 04:22 You've ended up with company commentary that has consistently been subdued.
  • 04:27 So I think it's just a little bit more being felt now because expectations were were lifted going into the quarter.
  • 04:32 But I, I would fade this idea of like uncertainty
  • 04:36 and not being a signal because that has been really consistent and wrong by the way, for the last two years.
  • 04:42 I am curious about other signals, particularly when it comes to money flows, Dennis.
  • 04:46 There's been a lot made
  • 04:47 of some of the retrenchment that we've seen in equity markets as well as this idea
  • 04:51 that you still have
  • 04:53 money markets that are still sitting near record levels
  • 04:55 and a lot of other cash that
  • 04:57 certainly isn't being deployed to risk assets, if at all.
  • 05:01 Yeah.
  • 05:01 I mean, I take a little, you know, I understand that view.
  • 05:04 I just take a little bit of a more.
  • 05:07 And when you think about it this way,
  • 05:09 if money sitting in those assets is because interest rates are higher because the nominal growth backdrop is better,
  • 05:15 right, and equilibrium interest rates have shifted higher
  • 05:18 than your earnings growth over time should be significantly stronger and your earnings growth is significantly stronger than the cost of capital, which is the case right now for most of the S&P.
  • 05:28 Then the market will be biased.
  • 05:29 Over time, money will find its way into the market.
  • 05:31 So
  • 05:32 I fade the idea that there is like this
  • 05:34 lower return profile in equities relative to what you could get in cash.
  • 05:39 The reason cash rates are high
  • 05:41 is because demand growth and inflation as a result is a little bit higher than normal.
  • 05:45 So you're just kind of shifting up
  • 05:48 now with interest rates to just help keep inflation and demand growth in check.
  • 05:52 But ultimately, you're looking at a pretty good nominal growth slash, nominal earnings backdrop,
  • 05:57 enough to offset whatever you're going to be getting in a Cash, Cash account.