CPI vs. Corporate Profits

CPI vs. Corporate Profits

This week will feature the Consumer Price Index (CPI) reported on Wednesday, following with the Producer Price Index (PPI) on Thursday.

In addition, 2nd quarter profit reports begin with PepsiCo, Conagra, United Health, JP Morgan, Wells Fargo, and Citi reporting.  Next week earnings start to kick into high gear.

Will the Fed continue to raise rates? Will Corporate Earnings start to bottom?

Expectations for the CPI report are the headline number, including Food and Energy will begin with a 3 handle and not a 4.  In my opinion, this alone may not stop the Fed from raising rates later in July. A .25% rise is expected at this point.

Last Friday, the jobs report came in at 209,000, lower than expected. I think we need to see more weakness in this report going forward for the Fed to be satisfied they have tightened sufficiently to tame inflation.

Corporate America profits will likely beat expectations however we still expect profits to shrink from the same quarter last year.

Many investors are believing profits will shrink by 6% this quarter, come in flat for the third quarter, then increase starting in the 4th quarter.  If this happens and the economy does have a “softer” landing from higher rates, stocks could be in good shape, even with the S&P PE ratio elevated.  Let’s hope this plays out!

Market Last Week

Major stock indexes were down last week with the Dow off (1.96%), the S&P 500 (1.16%), the Nasdaq (.92%) and the Russell 2000 down (1.27%).

Foreign stocks were down, losing (2.21%). Emerging Market stocks were down (.43%).

The 10-year US Treasury yield moved above 4%, ending the week @ 4.066%.

The 2-Year rate is yielding 4.95%.

Energy Sector

The energy sector of the S&P 500 is down approximately 7.87% year-to-date. The reason, perhaps investors believe energy consumption will slow as higher rates fully impact the economy.

It’s challenging to believe the Energy sector will not come back to life.  Oil demand is not going away anytime soon. Well over 90% of the cars sold today are gas-powered. Cars sold today will most likely be around for about 15 years.

With less oil being produced and the demand projected to stay consistent, it’s hard to believe oil and oil stocks at some point, move higher.

This is certainly an area we are keeping our fingers on the pulse.

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