Opportunities Between The S&P 500 And CPI

Todd Moses
May 13, 2024

The 459 companies in the S&P 500 that have reported this quarter have posted profits on average 8.4% higher than expected.

Inputs that matter: The anticipation of a recession may contribute to notable outperformance.

  • Companies are strengthening their bottom lines, cutting costs, and stockpiling cash to ward off the impacts of an economic slowdown.
  • Earnings revisions also dipped heading into the first quarter, leaving room for more upside potential.
  • Lombard Odier Asset Management Head of Macro Research Florian Ielpo said in an interview that companies have been "trying to do more with less."

The opportunity: CNBC's Jim Cramer on Friday guided investors through next week's market action, telling them to pay attention to several earnings reports, including Home Depot, Alibaba, and Walmart.

  • Remarks from Federal Reserve officials will continue to shape the market.
  • "The more these Fed officials entertain us with their hawkish commentary, as long as they keep us on the edge of their seats, the more likely it is that the Fed can cut rates in the not-too-distant future," Cramer said.

Zoom in: "The utilities perform best when the economy's throttling back," he said.

  • If the Dow Jones Utility Average (DJUA) were up for a week or even two weeks, I might ignore it.
  • But for the utilities to rally this long, it is flashing red for the economy, telling us we're headed into the slowdown.
  • These stocks do well in a slowdown because they are not discretionary, as consumers must pay their utilities bills.

Between the lines: Rising housing costs and stubbornly high inflation are battering many consumers, and the hit to their wallets is now hurting America's low-cost restaurants.

  • Chains, including Red Lobster, which is considering a bankruptcy filing, and TGI Friday's Inc. are becoming even more distressed as their labor expenses increase and more diners eat at home.
  • Analysts from Moody's Ratings wrote last week that the fast-casual segment's reliance on lower-income households means its customer base has been disproportionately impacted by rising prices.
  • Chains relying on that demographic "are feeling it the most," said Dennis Cantalupo, chief executive officer of credit-rating and consulting shop Pulse Ratings.

Follow the money: It seems clear at this point that the path for monetary policy is higher for longer.

  • Don't be surprised if the April Consumer Price Index (CPI) report suggests more trouble for the Fed.
  • After all, the CPI is just an index of goods and services, and the index, both seasonally and non-seasonally adjusted, has been rising consistently since August 2022 in a nearly linear path.
  • CPI swaps are assigning a risk of the CPI report rising by more than 3.4%, with swaps currently trading at 3.42%.

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Read More

  1. https://finance.yahoo.com/news/doomsday-recession-mentality-keeping-p-160000276.html
  2. https://www.cnbc.com/2024/05/10/cramers-week-ahead-earnings-from-home-depot-alibaba-walmart.html
  3. https://www.cnbc.com/2024/05/08/cramer-says-ongoing-rally-in-utilities-signals-an-economic-slowdown.html
  4. https://finance.yahoo.com/news/fast-casual-dining-hurt-consumer-190000616.html
  5. https://seekingalpha.com/article/4692505-the-april-cpi-report-may-shock-the-market-and-the-fed