Markets are hard-pressed this week over a barrage of headlines and market trends: March CPI (Consumer Price Index) is due out, companies are to report first-quarter earnings, crude oil prices (CL=F, BZ=F) are swinging higher, and anticipation over what to expect from lagging Magnificent Seven member stocks.
Charles Schwab Chief Global Investment Strategist and Managing Director Jeffrey Kleintop sits down with Yahoo Finance Live to discuss which headline event is affecting equity markets (^DJI, ^IXIC, ^GSPC) the most.
"We've been so powered by those Mag Seven stocks and now showing signs of weakening... we're starting to see new life from other sectors. Analyst outlook for broadening earnings outlook isn't just hope, it's supported by the Global Manufacturing Purchasing Manager's Index, my favorite economic statistic," Kleintop explains. "That rose to 50.6 in March. that release marked the second month in a row above 50.7, the dividing line between growth and recession after spending 18 months below 50..."
MADISON MILLS: It seems like just yesterday we were wrapping up that fourth-quarter earnings. It's always earnings season when you cover markets, right? We saw the Mag Seven companies continue to dominate the conversation, especially around growth. Some of the more troubled companies in that group, your Apples, your Teslas starting to slide.
So could the Magnificent Seven's reign be coming to an end? Joining us to discuss we have Jeffrey Kleintop, Charles Schwab chief global investment strategist. Jeffrey, I want to get into the Magnificent Seven's kind of decline here. But I do want to start with what's going to be more important this week in your view, the CPI data coming out tomorrow or the start of earnings season here?
JEFFREY KLEINTOP: Well, I guess, it's almost a tie. I think one of the things that really does matter is the CPI number, and that's tied to the outlook for oil prices oil. You know, oil has just been an absolute terror-- up to 20% this year. Today at noon, we're going to get the oil report from the US Energy Information Agency. And the energy sector has been the best performing sector of the stock market over the past month. Oil demand might be revised higher in today's report given the strengthening global economic data.
And that could push oil to a new high on the year along with all those geopolitical concerns we're so aware of-- war returning to the Middle East, oil tankers under attack in the Red Sea, Ukraine targeting Russian energy infrastructure, all of that. So even a temporary move higher could further boost the energy sector. But at the same time, a major and sustained upward move in oil prices could negatively impact inflation and worsen the outlook for rate cuts.
SEANA SMITH: So what does that mean then for the broader equity market?
JEFFREY KLEINTOP: Well, I think it's good news for sectors like industrials and financials and energy and materials, areas that have started to lean in the last couple of months, but probably bad news for the tech sectors and other parts of the market that are more momentum-driven and might be more dependent on the flood of a return of liquidity from the Fed and other central banks.
MADISON MILLS: Well, I want to get your take Jeffrey on this note from Wells Fargo because we have this note obviously pushing the price target up to $55.35. I want to pull up a quote. He says, "the bull market, Au's secular growth story, and index concentration have shifted investors' attention away from traditional valuation measures and toward longer term growth and discounting metrics." So my question for you, if valuations don't matter, why wouldn't the Magnificent Seven continue to have growth?
JEFFREY KLEINTOP: Well, you know, we were in a different environment over the last 18 months than the environment we've started into now. Over the last 18 months, we've seen the Magnificent Seven companies deliver spectacular earnings growth as part of a longer-term trajectory of very strong growth while the rest of the market delivered well, nothing. Earnings declines. That is changing.
This is the last quarter here, Q1, where analysts are expecting the Magnificent Seven earnings growth to be positive while the rest of the market is expected to be negative. I'm not just talking about the S&P 500, but globally speaking, negative earnings growth, that's expected to flip over the remainder of the year. By the fourth quarter, the earnings growth for the rest of the market is expected to eclipse the growth in the Mag Seven, and that might further shift away from the Mag Seven to other sectors where earnings are improving.
SEANA SMITH: Jeffrey, when it comes to some improvement in earnings, is that going to solidify some of that rotation that we've seen away from the Mag Seven into some of those more beaten down names or areas of the market that hasn't necessarily participated in this rally over the last several months? And then what does that say just to that momentum potentially increasing here in the coming months?
JEFFREY KLEINTOP: Yeah, I think it's good for the overall market. It's kind of a second wind for the stock market. We've been so powered by those Mag Seven stocks, and now they're showing some signs of weakening as you pointed out with Tesla and some of the others. We're starting to see new life from other sectors.
Analysts outlook for broadening earnings growth isn't just hope. It's supported by the Global Manufacturing Purchasing Managers' Index-- my favorite economic statistic. That rose to 50.6 in March. That release marked the second month in a row above 50.0, the dividing line between growth and recession, after spending 18 months below 50, the longest in manufacturing recession since it began 30 years ago.
Now, historically, when global manufacturing PMI is above 50, that means earnings growth is broadly rising. That's where we are now. So expect to see better earnings revisions in those sectors like industrials, financials, materials, and energy. Those that were left behind last year.