More than 100 S&P 500 (^GSPC) companies will report their earnings this week, including Disney (DIS), Alibaba (BABA), and Pepsi (PEP). While general economic data may be sparse this week, the overwhelming amount of data from these company earnings may give key insight into how the broader markets may be moving.
Charles Schwab Senior Investment Strategist Kevin Gordon joins Yahoo Finance to discuss the upcoming week of earnings, how the Federal Reserve's recent policy decision may factor in, and potential market reactions as a consequence of the releases.
Gordon explains what will be in focus during this slew of earnings releases: "I think a lot of focus is probably going to shift on, at least on the part of the market, is what the revenue growth story looks like. You're seeing a lot of earnings estimates being revised higher, but that's not as much coming from the revenue side, it's more coming from the cost side, so companies aggressively cutting costs... a lot of them recently via layoffs, but you're not really seeing the revenue component kick back in, which I think is fine in and of itself right now."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
RACHELLE AKUFFO: Well, as we've been looking at stocks moving lower as we settle into the first trading day of a week pretty light on economic data. What we lack in data, though, we make up for in earnings.
Latest FactSet data shows 104 S&P 500 companies reporting this week. So how will they impact the market's momentum? Joining us now is Kevin Gordon, Charles Schwab Senior Investment Strategist. So, Kevin, we've had the week that was with big tech. What are we focusing on now in this week coming up?
KEVIN GORDON: Well, I think, as you mentioned with earnings, the focus is probably on a lot of the guidance metrics and what companies are saying about, you know, labor costs, overall input costs. But I think what a lot of the focus is probably going to shift on at least on the part of the market is what the revenue growth story looks like because you're seeing a lot of earnings estimates being revised higher. But that's not as much coming from the revenue side. It's more coming from the cost side.
So companies aggressively cutting costs a lot of them recently via layoffs. But you're not really seeing the revenue component kick back in, which I think is fine in and of itself right now. But at this part of the cycle for many companies, which you're going to have to see in terms of the end of this year and sort of turning into next year is the estimates for revenue moving higher.
So I think that is probably the dynamic worth watching mostly because if you look at the market's reaction, you know, to companies that have missed both on the earnings and the revenue front and have been guiding lower, that's where the bulk of the underperformance has been on the part of the market. So I think the revenue story is probably going to come more into focus this year.
AKIKO FUJITA: Kevin, so much of the focus last week was on the Magnificent Seven minus NVIDIA here. But to what extent have these results that we've gotten so far this quarter really changed the leadership in the market?
KEVIN GORDON: Well, you know what's interesting about that group in particular is I really think that magnificent as a descriptor is really in the eye of the beholder. And if you want to just use that only in terms of those companies' size, even that is starting to not work as well as a descriptor because you have a couple of companies that have now surpassed Tesla. So the mix is getting a little bit murky.
And then when you go in terms of performance, I really wouldn't use that descriptor at all for that sort of magnificent word and lumping all of them together because you've got sort of max dispersion now with NVIDIA and Meta being at the top-- the very top of the leaderboard year to date but Tesla being at the very bottom if you're looking at the S&P 500.
So even within that group, let alone the broader market, you are seeing a wider dispersion, you know, lower correlations in, you know, probably a better environment for active stock picking. And I think that's probably more of the story this year where you're still going to have a lot of churn underneath the surface. And maybe the index level gains are still solid but maybe not as what you were gonna see last year because that cohort is just not moving altogether as a monolith anymore right now.
RACHELLE AKUFFO: And so, Kevin, when you look at some of the key themes that are going to dominate this week, especially on the heels of what we heard from Fed Chair Powell, do you think the markets are making too much of what they heard from the commentary there? Or do you think they're finally sort of settling in to what the Fed has essentially been telegraphing all along that it's going to be higher for longer potentially later and steeper?
KEVIN GORDON: Yeah, I think you've got a digestion phase that has to happen at least in the short term just because there had been clearly an expectation on the market's part when you look at Fed funds futures and what was being priced in for a move in March.
I don't think, though, that in and of itself, the Fed just pushing back the timeline to starting the rate cut cycle is an inherent negative for the stock market, because, you know, if we get the current set of economic conditions, you just extrapolate that forward with relatively resilient labor growth, a sub 4% unemployment rate, the inflation trajectory still drifting towards the Fed's target, and then relatively strong and almost reaccelerating economic growth in terms of GDP from here.
And if the Fed is just easing a little bit and cutting a few times, they're really actually not easing policy. You're still keeping it in restrictive territory. All of that together as a package means that the economy can withstand higher real rates. And I actually think that that's a fine scenario for risk assets. It doesn't necessarily need to be sort of that doomsday scenario that those on the more bearish end of the spectrum would predict.
I think the rub would come if you had the Fed reacting to-- and Powell mentioned this in his press conference last week-- the Fed reacting to some unexpected weakness in the labor market, which would then prompt them to go aggressively to rate cuts and, you know, larger rate cuts at that.
I think that's the more important dynamic to look at when you're assessing Fed policy this year, is not when they start cutting or how many cuts you get. There's always going to be variability in those estimates. But it's really why they're cutting.
So if they're cutting for the so-called right reasons because they can and they're just cutting a few times to keep real rates in check, again, I think that doesn't necessarily need to be, you know, sort of pessimistic scenario for risk assets.
