Corporate America is in the middle of a historical earnings boom with for profits surging and as more than 300 companies report this week, including heavyweights such as Alphabet and Tesla.
The market does face a valuation battleground and chip stocks did tumble into a technical bear market at the end of last week.
Also all eyes on the looming Fed meeting as we continue to monitor inflation data as well as oil prices.
Well here to break down the Risks right now is Brian Jacobson, chief economic strategist at Annex Wealth Management.
Brian, good morning.
Thank you so much for joining us.
Well, let's start out with a look at earnings.
Wall Street is expecting a strong earnings growth this quarter, pushing for profits to a record.
But do you think Wall Street has set a high bar for companies, and would you say perhaps it might be too high for many of these companies or not quite?
Yeah, thanks for having me.
I think that it is a little bit too high for most companies.
Obviously some people will easily be able to clear it, so we'll see those surprises to the upside, but I just fear that we're at this point now where even just beating the expectations isn't really enough, as has been shown over really the last two years.
It's mostly the forward guidance that's being given that Investors really react to.
And so when I look at the stock market reaction to the earnings announcements, you can have a beat on the earnings as far as what you did for me the last quarter or the last year, but the big movement is always about the sentiment about what's being told about the guidance.
So if we don't have a situation where they're beating and raising guidance, it's the key thing there is the raising guidance.
I think that's really What could push a lot of stocks lower.
I think we are at that point where management is going to want to temper some expectations about how long some of this growth can happen.
And as a result, I would not be surprised if between now and the next earnings season, so we always have that to look forward to, that's right around the corner, but between now and then, I wouldn't be surprised if we see some continued weakness for the broad market indices.
Yes, and all eyes are on the chips and the semiconductor index to tumble 20% into a technical bear market, but this morning we're seeing some headlines and we are seeing a rise in chip makers.
But we've been seeing this intense sell off and there's been a lot of volatility in the AI trade.
So how are you making sense of what we're seeing so far in 2026?
Yeah, I think that this volatility is just basically the price you pay for the ride in terms of uh what is the long term growth potential, because when I think about the definition of a bear market, right, it's not like it's the definition of like the specific heat of water or aluminum or something like that, right?
It's a convention and it's usually applied to like the S&P 500, so a 20% decline a bear market for the S&P 500.
If you try to apply that to something like the NASDAQ or the semiconductor index, you're going to have a lot more bear markets.
And so I think that really we need to almost rethink about what is a bear market for semiconductors, and it's probably a peak trough of something closer to about 35% instead of just 20%.
So the way that we've been positioning things because with some of this chip sell-off, we do like still some of the names and as a result it's like, OK, well if you move down 20%, that's just unfortunately part of the ride here and maybe that becomes more of a buying opportunity.
So with some of this chaos that we're seeing, we're actually trying to find more longer term value opportunities.
Some of that could Be in domestic chip manufacturing because I am a little concerned about what's going on with South Korean stocks, especially with these levered single name ETFs, the way that they can amplify the moves.
So instead of these different financial instruments dampening some of the moves in the stocks, it seems like a lot of the technology, this innovation is amplifying the moves higher and lower.
Yes, and Brian, of course we're watching for earnings out from the MG 7 names starting out with Alphabet, which reports this week and of course we're tracking the billions of dollars that Alphabet is pouring into data centers.
But how long will investors out there tolerate Ca spending before seeing revenue from these applications and what are you paying attention to when it comes to Alphabet's earnings?
I think it is really make or break for a lot of these companies to show that there is a road to revenue and return on equity for a lot of this investment.
It was one thing when the companies were spending internally generated cash, right, cash flows from operations funding it.
It really changed the calculus when they went to issuing debt and now equity in order to fund.
The Capital expenditure.
So I think the bar is a lot higher and the timeline is a lot shorter for needing to demonstrate a return on equity.
I was a little disappointed when I heard about Google or Alphabet, how they had postponed the launch of their new model.
Maybe we can get some clarity there.
And so I think that with Google, right, they still do thankfully have the search business.
And the extent to which the modification with those AI summaries is killing a lot of smaller businesses that really relied on search in order to drive revenue for them, sponsored ads and things like that.
And so I want to hear what they're doing to reach out to their bread and butter customers out there who kind of built their whole business models on that Google platform.
And Brian, while I have you here, I do want to get your take on energy prices and inflation.
So we have been hearing from Fed officials in the previous week and we're counting down to the July Fed meeting, and we all know that we saw cooler consumer and producer prices.
But given the fact that we're monitoring the Middle East conflict and we're looking at oil creeping higher despite coming off of overnight highs.
What do you expect to see?
And we're also hearing rumblings that Kevin Warsh might not issue a press conference next week and might not even have a live meeting.
So can you walk us through what we're hearing?
Sure, so I would actually be really looking at it as far as does Kevin Warsh actually speak after the press conference.
I think he will, mostly because it's already on the calendar, right?
So if you think about the way that the Fed operates, they always publish their calendar, and it would be a dramatic change to suddenly see that drop off of the calendar.
But what he could do is take this next meeting to say he's not going to offer a press conference after every meeting.
But then, of course, what does he do logistically speaking to make sure that the report are in the room.
What sort of chaos could ensue if he decides at the last minute to call a press conference?
So I think it's better to keep it on the calendar and to just go in and say no comment or just to reiterate, right, I'm going to do a dramatic reading of the statement that we already released, and then he can walk out of the room.
So I think we'll still have the press conference because it would be a little too disruptive, I think, to the markets if he decided just to get rid of it.
Now in terms of the inflation number, right, economists are always told, told about how We have two hands, right?
Always saying on the one hand this, on the one hand that.
Well, these hands need to be wearing oven mitts in terms of how hot inflation still is, even though it has cooled down.
So inflation, it does look like, especially core inflation, has moved in the right direction, but it is still too hot to handle, and I think they're going to want to see at least 3 more months of inflation not moving higher in order to continue to justify a pause.
Well, Brian, a lot of moving parts here as we kick off a new trading week.
So, so thank you so much for joining us and thank you so much for weighing in with your insights as well as your perspective.
Thank you.
