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The market reacting positively to earnings isn’t because they’re ‘so great’: Sevens Report Research Pres.

In this article:
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Tom Essaye, Sevens Report Research Founder and President, joins Yahoo Finance Live to discuss the market reaction to earnings season thus far, outlook on inflation, and the Fed.

Video Transcript

BRIAN SOZZI: Mr. Market seems to be loving itself some earning season, but will the love continue? Tom Essaye is the founder and president of Sevens Report Research and joins us now. Tom, always nice to see you here. Look, the Street seems to really be liking what companies are saying in terms of profits, but do you think they're just too optimistic here, given all the inflationary headwinds that companies are dealing with?

TOM ESSAYE: Thank you very much for having me on, Brian. You know, it's been an interesting start to earnings season. So I think the reason we're seeing the market react positively to earnings so far isn't because they're so great-- they're not. It's because expectations going into the past two weeks were really low, right? Because we had a whole bunch of negative preannouncements in late September and then very early October.

Positively, we have not seen any major damage from higher inflation, higher commodity prices, and supply chain issues. But we're very early in this process, right? That really, you know, the next three weeks are sort of the key, the heart of earnings season. We're off to an OK start, not as bad as feared. But I think it's a stretch to say it's really good yet.

KARINA MITCHELL: And what do you expect to see from the rest of earnings season, as particularly as far as cutting into profit margins with all of these inflationary pressures?

TOM ESSAYE: Well, it's really going to be about management, I think. You know, Procter & Gamble was a very interesting report today. You know, their commodity costs and their inflation costs were much higher than they expected them to be back in July. Yet they were able to maintain full year guidance through price increases and through, frankly, very good management, right? Cutting some costs, really handling their logistics. So I think it's really going to be a company by company issue. They're all going to be facing higher costs, but management's really going to have to earn its salary this time.

BRIAN SOZZI: Yeah, that much, to say the very least. Tom, hit us with some trades here. Are you on the train that is all in on bank stocks?

TOM ESSAYE: Yeah, I am, and I have been all year. And it's a very simple idea, right? Yields are going higher. I don't know how fast they're going to be going higher, but they're going higher. And people's personal balance sheets are as strong as they've been in decades, if not, you know, maybe multi-decades, right?

So that equates to a very good environment for banks because their margins increase as rates rise, and the defaults should be low. The missing ingredient is loan demand. In sort of a weird way, people are so flush with cash right now, they're not borrowing as much money as they typically would, although we're starting to see improvement in some of these quarterly results from last week and then a little bit this week. So I remain a strong bull on banks.

KARINA MITCHELL: Tom, I want to turn again to the inflation picture. RBNZ and BOE have turned hawkish. Do you expect that to follow through to other central banks? And does that give any impetus to the Fed to act sooner to start tapering?

TOM ESSAYE: I think that there's general pressure, yes. And I mean, every central bank is going to act independently. But at the end of the day, if you're looking around and you're seeing the Bank of Canada's is already hiking rates, the Bank of England may hike as soon as November, right? The ECB is going to wind down its pandemic era QE program. Yeah, there's a rising hawkish tide. Now, the one outlier is the Bank of Japan. They seem to have no interest in removing or in stopping accommodation at all. In fact, they may actually increase accommodation.

But here, at the Fed, it's not enough to say that tapering is going to be dramatically quicker than we thought or that we're going to have some sort of much sooner than expected rate hike. But look, at the end of the day, if we're central bankers and inflation is supposed to be 2% and it's above 4%, they can only tolerate that for so long before they have to act more forcefully.

BRIAN SOZZI: I was talking this morning, Tom, to Scott Minerd over at Guggenheim, and he told me that the Fed has socialized Fed policy, and that really-- that statement took me by surprise. I mean, what do you think of those comments? And if you agree, Tom, isn't that a big problem? Isn't it going to be a big problem for investors next year as the Fed tries to unwind its very, very easy policy?

TOM ESSAYE: Yeah, so far be it for me to disagree with Scott Minerd. He's one of the best minds in the market. But I think this kind of idea that the Fed has essentially become sort of politicized or is using policy to sort of accomplish some sort of a goal, I think is a bit of a bridge too far.

And here's why. We know that the Fed is comprised of both people on different ends of the political spectrum, right? That's only natural. Yet every policy meeting for the last however long, well over a year, well since the pandemic started, has been unanimous, right? So there doesn't appear to be any material disagreement within Fed members about the course to go on.

I think, unfortunately, what's happening is this is a symptom of the Fed talking too much. The Fed comments on sort of everything now, whether it's a social program, something Washington may be doing. Back in the day, you know, the Fed only spoke when it did something to rates.

And so now I think, unfortunately, they're just having to comment on so much stuff that there are things that are appearing to be sort of favoritism to one policy or the other. I think the Fed has reason to believe inflation is temporary. There are things that will fade over time. The question is, how long can they tolerate this higher inflation? I don't think they can tolerate it for over a year. So if it doesn't start to go down soon, they will have to get more forceful.

BRIAN SOZZI: My wallet can't tolerate it for another year, Tom.

TOM ESSAYE: You and me both.

BRIAN SOZZI: We'll leave it there for right now. Tom Essaye, Sevens Report Research founder and president, always good to see you.