Earnings are the biggest driver of stocks, says Citi's Kristen Bitterly
It does take us to our talk of the tape, the resilient rally. How long this can last? Let’s welcome in Kristen Bitterly of City Global Wealth. She’s here with me at Post Night. It’s good to see you. Good to see you too. Is this what the next leg of this rally looks like? One that is carried by a lot of things other than tech, absolutely. I think that we’ve entering into this year, we thought that there would be a broadening out of earnings and I actually think it’s good to see this is a healthy rally in terms of seeing it across the board without that type of concentration. But I think we have to point back to the fundamentals that are driving it as well. This earnings season has actually been better than expected and there is a lot of delineation under the surface in terms of idiosyncratic events. And so companies that are not delivering are getting punished and companies that are and are raising guidance are seeing the rewards in the market. So I think we could continue to grind higher. Are you surprised at the bounce back, how quickly the market recovered from what felt like it could be something a bit worse than what we got. April was a really unique month in the sense that we were coming off the back of two quarters where we had double digit gains in the S&P 500. And so some of that was more normalization we had to give back And and when you look at the pullback that we saw, you can make an argument that that was a garden variety pullback that we tend to see those types of pullbacks in any given year. I think right now the question still Fed is front and center in terms of whether we’re going to see rate cuts, the story about the trajectory of inflation and what that’s going to do to corporate earnings. But for those companies that have strong balance sheets, I think we still see some continued strength in earnings which will drive the market. Is it? Is it fair to say we’re not as obsessed over the Fed as we were two weeks ago? Right. Powell sort of came out. He calmed us down because he wasn’t as hawkish as we feared he might be. So now we’re not hanging on every Fed speakers word. We’re kind of taking him almost at his word. It’s like we know you want to cut, OK, we can accept the fact that it’s not today and it’s not tomorrow, but we know you’re going to. And if the economy is good enough and the earnings remain as good as you suggest they might, then we’re OK. Yeah. So I think we should always take Chair Powell at his word. I actually think he’s a very clear communicator and it’s very direct in terms of what they’re watching. And what they’re watching is the data. So I think what we have to see in order for the Fed to be in a position to cut is clearly continued disinflationary forces. We don’t have that yet. So we have a pause in terms of some of their progress. We need to continue to see that. We’re starting to see a softening in terms of some of the employment data which is something we’re going to be watching very closely as well. I will caution though that when you look at the market reaction function, I mean we started this year with like six rate, six to seven rate cuts priced in, then we came back to next to none. Now we’re at 2:00. So we started this year thinking we would have three rate cuts and that they wouldn’t start until the summer months because of we needed to see that disinflation work its way into the data and we’re still sitting there. We think that’s going to be the case. Well, you guys are on the, I think it’s fair to say outlier island some in some respects and you still think there’s going to be 3, we still think there’s going to be 3. But no, we haven’t changed that the entirety of this year. So while we saw these Wilds, well that’s kind of what we saying the wild swings, we didn’t go up to six, yeah, we didn’t go down to 0. And I think the reason is, is like we have to when we go into the summer months, there are certain seasonal factors in terms of the data that we could see in employment. We obviously got the the jobless claims this morning which was something I wouldn’t read too much into it. But you start to add up some of these data points and you’re seeing a slowing in the employment backdrop and that coupled with some disinflationary pressure could actually be something that could put them in a position to cut this summer. Is this what we’re looking at on the screen right now, The treasury curve is that the most important thing that we will be keeping our eyes on the fact that you know we were pushing 5% on the two year and we were like 470 ish on the 10 and obviously we’ve settled and we’ve come down and that has enabled stocks to go up. I think there’s fundamentals that are driving at rates clearly being one of them. But I think the most important thing in terms of stocks going up is earnings right now. So when we look at earnings and the ability to deliver, rates matter of course and rates certainly matter for companies that are highly levered that where there’s a dependency upon refinancing your debt. So those are things that it’s really a tale of two markets in terms of the companies that have strong free cash flow generation that have strong balance sheets that took advantage of historically low rates to get their balance sheet in order. And so those companies are almost immune to some of these pressures. So I think earnings matter and rates certainly matter for certain parts of the market like small caps.