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Retail earnings: Investors selling on the news, strategist says

This quarter, it seems that even when a company's quarterly earnings report beats analyst expectations, its stock still trades lower. Qontigo Managing Director of Applied Research Melissa Brown says investors seem to have "bought on the rumor and are now selling on the news." Brown says that consumers starting to trade down may be "a little signal that the economy is not going to be as strong as we expect." On the other hand Brown says, "some of these profits look pretty good, even in the face of inflation. It could potentially give the Fed a little more reason to tighten." "Either the recessionary scenario or the tightening scenario is not particularly good for stocks overall," Brown said.

Video Transcript

- Of the retailers who have reported this earnings season, nearly 80% are seeing profit beats. That's according to the latest data from LSEG. But it's not all upbeat news, though, for retailers. Many are seeing consumers pull back amid a sticky inflation.

For more, we want to bring in Melissa Brown, managing director of applied research at Qontigo. Melissa, it's good to see you here. So on the one side, you're seeing a group of retailers, the likes of Walmart, outperform in this type of environment. You're seeing other retailers struggle because we have very sticky inflation, a higher interest rate environment. What has been your takeaway from the earnings season and what it tells us just about how consumer discretionary is positioned heading in to the final months of the year?

MELISSA BROWN: Well, first of all, thank you for having me. I think these earnings are coming out. They look good. But investors are always thinking, what's the next step? What's going to be ahead from now? And I think the idea of consumers trading down the scale, maybe, is potential-- maybe it's a little signal that the economy is not going to be as strong as we expect it to.

On the other hand, if you're seeing some of these profits look pretty good, even in the face of inflation, it could potentially give the Fed a little more reason to tighten. And so I think either of those, either the recessionary scenario or the tightening scenario, is not particularly good for stocks overall.

So my take on what's happened with these earnings reports is that investors have bought on the rumor and are now selling on the news. And they're looking at what might be coming ahead, neither side of which is particularly good.

- And I want to ask you, Melissa, is there also some of a kind of summer lull effect or stocks also just expensive from a historic perspective?

MELISSA BROWN: Well, certainly, stocks are expensive, selling probably in the US at about 20 times earnings, although with a wide variation, given the different sectors of the economy. So stocks are expensive. What's been kind of interesting is that trading volume. We usually see a big summer lull.

And I think we saw the summer lull wasn't in the summer. Actually, most of the spring, trading volume was very low. It has picked up more recently. And so if we're looking, for example, very recent trading volume is substantially higher than it was at this exact same time last year. So I think investors are tiptoeing back into the market after having been out for many months. At least they're showing up and doing more trading than they had been.

- Melissa, when it comes to what the investor, what markets are pricing in for future Fed rate hikes, so it seems like there's certainly been a little bit of a shift, at least when you take a look at the activity that we're seeing in the bond market today, with the 10-year yield, the highest level that we've seen since last October. And you have these readings that the consumer is still spending. Another print for jobless claims coming in better than expected. Is it too early to say that maybe the Fed is done raising rates?

MELISSA BROWN: I think it's too early, yes, to say that the Fed is done raising rates. They seem to have indicated that they don't see a huge need for further rate hikes. But that doesn't mean in the face of potential inflationary exposure, that they would not raise rates. So yeah, I think it is too early.

- And so, Melissa, I want to ask you just to expand on what we're looking for, following earnings season. It's wrapping up now. And the next big ticket, we're going to be looking at economic data, hearing Fed speak. We'll hear more about rates probably when the Fed heads to Jackson Hole. We know it's the hottest economic ticket in town. So what are you expecting to hear from that coming up?

MELISSA BROWN: Well, I think what we're going to be mainly focused on is that inflation number. The last report was up a little bit from the prior report. And so I think clearly, the Fed's going to be looking at that. They're going to be-- I'm sure they're going to be talking about it at Jackson Hole.

But I think investors also are going to be looking to see one uptick. Maybe it does not indicate a trend. But if we see another uptick in inflation, even if it's still much lower than it had been, I think that could cause at least a bit of concern on the part of investors.

- Melissa, when it comes to the positioning then, given all this, there's so much uncertainty out there. The data, at least to this point, not enough, like you said, to say-- for at least definitively say that the Fed is done raising rates. So what do investors do in this type of environment?

MELISSA BROWN: Well, we've seen that investors have become more risk averse. So they're buying, say, higher dividend yield stocks, or cheaper stocks, or more profitable stocks. And so I think that the view is that we want to be in stocks, but we don't necessarily want to be in the riskiest names. And even recently, we're seeing that with some of the technology names giving back some of their gains.

I think investors are looking to be a little bit more cautious. What we've said in the past is that a lot of the really risk-averse investors have gotten out because rates have been high for a while now. So if you could get a decent return in a bond, those really, really risk-averse investors have moved to the bond market. But there are still obviously investors left, and I think they're moving a little bit along that scale to risk aversion.

- So, Melissa, what puts that risk aversion to bed? What is the next catalyst? Is it the Fed saying, OK, we're done, we've reached the scenario of we can achieve this soft landing?

MELISSA BROWN: I think there would have to be very strong indications that we would either hit a soft landing or maybe no landing to really cause a big stampede back into the market. So I think that probably is going to be the catalyst. But on the other hand, investors haven't been expecting that for a while, if you look at expectations. It is that rates are going to be coming down starting next year.

So if rates are coming down without having a recession, maybe that's the best news we can hope for. But I think it's going to be tough. You've got high valuations. Stocks are expensive. And the economic news maybe is potentially already factored in, good economic news is factored in. So I'd be a little bit concerned.

- All right. Well, we will be watching for what to hear from the Fed next. Melissa Brown of Qontigo, thank you so much.