3 reasons your money is at risk the rest of October: Morning Brief

Brian Sozzi · Executive Editor

Updated Mon, Oct 10, 2022, 3:00 AM 4 min read

That's not a scare tactic so you share this newsletter with five friends. It's just the assessment of one person who has been doing this close to 20 years now. I think investors took too many hits on the "hopium pipe" (thanks RSM Chief Economist Joe Brusuelas for this new fin-term for my vast arsenal) during the two-day, rip-your-face off rally to start the fourth quarter.

Now, it's reality check time again as the high wears off.

Here are a few risks barreling toward you...

Inflation data

This week, inflation data in the form of the Consumer Price Index (CPI), the Producer Price Index (PPI), and price expectations from the University of Michigan's consumer sentiment survey are coming out. The CPI report is arguably the most important at the moment as investors look for signs that inflation is cooling at the hands of the Fed's aggressive rate hikes.

The problem is that the CPI report isn't expected to slow much on a month-to- month basis. "Core inflation continues to wield significant momentum," Wells Fargo Economist Sarah House pointed out in a client note.

In turn, that sets the table for a harsh market reaction like what we saw on Friday to a too-hot September jobs report.

Raw earnings numbers

Warnings in recent weeks from AMD, Micron, Nike, FedEx highlight how crappy this earnings season will be. The negative reactions to those warnings underscore how the market hasn't truly priced in downside risks from the stronger dollar, still-high inflation, and the higher cost of capital.

The ugliness of the top and bottom lines could surprise investors, even when considering expectations have been marked lower.

Consensus expects 3% year-over-year EPS growth for S&P 500 companies, 13% sales growth, and 75 basis points of margin contraction to 11.8%, according to data crunched by Goldman Sachs. Excluding the energy sector, EPS is expected to fall by 3% and margins to contract by 132 basis points.

I expect investors to be reminded of this new economic normal (which mirrors stagflation) in earnings out later this week from banks Citigroup, JPMorgan, Morgan Stanley, and Wells Fargo.

Executive tone

If you hate listening to earnings calls, suck it up and get on them this earnings season. The economy is downshifting and you need every clue possible on companies to survive.

I think the tones on conference calls will be decidedly bearish. Two good points on this one from Goldman Sachs:

"Topics for managements to discuss: (1) headwind to sales due to a stronger U.S. dollar, (2) headwind to margins due to elevated inflation and high inventories, (3) tax changes effective in 2023." All bearish topics.
"Early guidance from managements has demonstrated the various headwinds to corporate profitability. CEO confidence for the six months ahead fell to levels last seen in 1980. Earlier in September, FedEx pre-announced a large EPS miss and withdrew 2023 guidance. More recently, Micron guided revenue and EPS below consensus expectations, citing uncertain demand and growing inventory. In addition, more than 10% of S&P 500 market cap has pre-announced earnings this quarter, consistent with prior periods of high uncertainty as companies manage investor expectations." Expect other companies to act in a similar fashion to these early reporters.

On a more upbeat note, Constellation Brands CEO Bill Newlands told me on Yahoo Finance Live demand for Corona and Modelo remain strong. So maybe the world isn't ending — just any market rallies. Cheers to that!