How Will Inflation Impact Earning's Season?

Jul 10, 2022 | How Will Inflation Impact Earnings and what can we expect?

Inflation Stays Hot as Earnings Seasons Begins

Last week was strong for the stock market, as all major indexes appreciated- the Nasdaq jumped 4.6%, while the S&P and Dow were up 2.0% and 0.8% respectively.

We also received very favorable job data for June, with over 370k being created (well above expectations of 250k). While the report was a positive sign, this could be another example of good news for the economy but bad news for stocks. The last time we had extremely favorable job data, the Fed was quick to implement additional rate hikes.

 

What We’re Watching in the Market this Week

Red-hot inflation and the start of the second quarter of earnings could be catalysts for a bumpy ride for stocks in the coming weeks. The consumer price index (CPI) for June is set to release this coming Wednesday. Inflation continues to soar, as estimates predicate another increase in the year-over-year rise in prices.

Investors are keenly watching the rate of inflation, as the second quarter of earnings begins. As the cost of doing business has been steadily rising, this has forced companies to slash their overall profit estimate. As an example, the entire S&P 500 is expected to gain close to 6% this quarter. This number is down from initial predictions of 10% quarterly growth.

In typical fashion, the banks and the financial sector will kick off the earnings season. JP Morgan, Chase, Morgan Stanley, Wells Fargo, and several other banks are all on deck to report this week. As the Fed continues to affect interest rates, banks have been a key sector to watch, especially when assessing borrowing and overall consumer sentiment.  We’ll also hear from Delta Airlines, and review if consumers are still spending up for ‘experiences’ while the price of everything continues to increase.

 

Inflation Stays Hot

As we noted earlier, June CPI is due out Wednesday, and this is sure to be a key driver for market sentiment this week. Inflation data is expected to stay hot, mostly in part to gas prices staying sky-high. While the price of a barrel of oil has since come down from its June high of $122 per barrel, oil still trades at $105 per barrel as of last Friday.

The key question to watch is when will inflation begin to slow down?? After strong job growth, economists are predicting another big rate hike from the Fed this month. As we’ve discussed in previous newsletters, the Fed wants you, the consumer, to collectively spend less. As more people are put to work, more spending ensues. This may once again trigger aggressive rate hikes from the Fed, in an attempt to slow down consumer spending.

What it Means:  Once again, good news for the economy may represent bad news for stocks. As positive job growth may end up being yet another catalyst for an aggressive rate hike from the Fed. This week starts the beginning of the quarterly earnings season, but it comes when the CPI inflation report is expected to stay red-hot. Despite all the selling we’ve seen in the stock market lately; this week could lead to more pain for investors.

 

NFT Sales Continue to Plummet

NFTs or Non-Fungible Tokens burst on the scene in 2021 as the crypto market exploded. NFTs use blockchain networks to sell unique ‘digital art’. But now, as Bitcoin struggles to gain traction and as investors look to minimize risk in their portfolios, sales for NFTs have been steadily decreasing.

While the overall sales of NFTs will increase from 2021 to 2022, declining monthly sales may spell trouble for the once red-hot market. Sales of NFTs have already hit $37B for 2022. NFT sales totaled $40B in all of 2021. Even conservative estimates predict NFT sales will total close to $70B for the entirety of 2022.


Monthly Sales Continue to Decline

Still, total sales continue to drop month-to-month, averaging nearly 20% down each month from January to April. The slowing sale of NFTs also coincides with the entire crypto market crashing over the last 6 months. Both of these trends have been occurring while the Fed has been tightening its policies, forcing investors to de-risk their portfolios and remove assets like crypto.


Social NFTs Holding up the Best

The vast majority of the 88,000 NFTs sold thus far in 2022 have not held their value. Though, NFTs in the ‘Social’ space have been the most resilient, both in volume and in maintaining their value. Since NFTs have begun to slow, the art projects that are most directly tied to community, and social governance, while constantly delivering new products and events have held up the strongest.

What it Means:  NFTs were red-hot in 2021, but since then, trading volume and the total value for these assets have been on the decline. While NFTs have a direct correlation with Bitcoin, it’s no surprise their value has been dropping. Despite slowing sales, the NFT market is expected to grow substantially year over year compared to 2021. When looking for an NFT to invest in long-term, investors should look to socially conscious projects that have the highest rate of seeing returns in the years to come.

This Week’s Picks

EDR (Endeavor)

August 14, 2022

Entry Price:

24.50

Stop Price:

23.35

Target Price:

26.46

Time Frame:

3 Week Hold

EDR has been in a channel pattern over the last few weeks. As it approaches the bottom band, after a some mid-week volatility, look to make enter the trade off the rebound. As noted in KMX, keep a trailing stop loss and close the position quickly should the market turn.

KMX (Carmax)

August 14, 2022

Entry Price:

101.85

Stop Price:

96.45

Target Price:

109.15

Time Frame:

4 Week Hold

KMX, along with most of the market, has been rebounding off June lows. We've seen strong momentum and a crossover of our long-term MAs. Watch for a market pull-back and keep a trailing stop loss. We're riding strong tailwinds, so get in and out quickly

Bitcoin Sees Largest One-Month Drop in 11 Years

Bitcoin slide 38% in June to record its second-biggest monthly loss, since its debut in 2009. The asset traded over $31,000 on June 1 before dropping as low as $17,700 mid-month and now hovers below $20,000.

As we’ve continued to highlight, these losses can be directly tied to inflation and growing risk within the crypto sector. Additionally, the Fed has continued to roll out policy making the crypto sector less appealing.

Indicators currently show the stock market has an extremely fearful outlook right now, but many believe in another long-term bull market for Bitcoin. While short positions still heavily influence crypto, we could see Bitcoin continue to trade down toward even $10,000 in the short term.

We’ll be watching to see how Bitcoin volume fluctuates, as the price continues to look more and more attractive to long-term investors.

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Weekly Review

Market Performance- Week of 08.14.2022

Recent Winners

CF (CF Industries)

CF (CF Industries)

Entry Price:

87.40

August 14, 2022

Price at High:

105.10

Return for Members:

16.84%

Timeline:

4 Week Hold

CF is a manufacturer of fertilizer and other farming products. Similar to our thesis on oil last week, we're expecting more global tensions to arise over the coming months. Although not directly related, CF should appreciate if adverse events occur. Technically speaking, we're seeing a bounce off the 180MA. However, there is negative momentum so be careful with entering too early.

MRNA (Moderna)

MRNA (Moderna)

Entry Price:

168.85

August 7, 2022

Price at High:

197.33

Return for Members:

16.86%

Timeline:

1 Week Hold

We're starting to see a reversal take place. Watching the 50 day moving average cross over the 100 day. Saw some weakness to close this week, so wait for upward momentum before jumping in.

X (US Steel)

X (US Steel)

Entry Price:

20.15

July 31, 2022

Price at High:

23.75

Return for Members:

17.86%

Timeline:

1 Week Hold

Stark momentum shift from the lows on this one. Tracking our moving averages on the 2-hour time chart. Looking for an early entry and quick trade.

Recent Watchlist Winners

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