S&P 500 companies' 'bar was set relatively low' this earnings season: Strategist

Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance Live to discuss how Q1 earnings are trending in the stock market, which stocks performed well, takeaways from tech and retail earnings in Q1, and investor sentiment regarding the stock market.

Video transcript

RACHELLE AKUFFO: We're most of the way through the first quarter earnings season. And, so far, markets don't seem impressed. [? 90% ?] of S&P 500 companies have reported results as of Friday. That's according to FactSet.

But there have been a fair few beats, of course. But the index remains little changed in the past month. In short, it's stuck, that it's been trapped in the same range for around six months now.

A little different, over on the NASDAQ, it's moving more on upbeat, tech earnings. So where is the upside for equity investors in the coming weeks and months? We turn to Steve Sosnick, Interactive Brokers Chief Strategist. Thank you for joining me so far this morning.

So a bit of a mixed reaction, especially from the S&P, over this earnings season, staying in that same range. Why do you think we didn't see much movement? And what if it was already priced in?

STEVE SOSNICK: Good morning, Rachelle. I think, to a certain extent, we got what was priced in, which was not much. We weren't expecting much in the way of positive earnings in terms of big boosts. But we have the usual assortment of companies beating as-published estimates.

Remember, the vast majority of companies in any given quarter typically beat their published estimates by a penny or so. I consider that a testament to management's ability to manage the analysts, as much as their own business, to some extent. We didn't get much in the way of either positive or negative outlook surprises.

And that's often what really drives the big winners and losers around earnings. And there weren't that many true outliers. And, to a certain extent, the ones that were a little bit of an outlier, particularly on the downside, got swallowed up a little bit.

So the bar was set relatively low. If we're thinking of this, let's say, as a track meet, it was a relatively low bar in the pole vault. And most of the hurdlers-- most of the people attempting the jump got over it.

RACHELLE AKUFFO: Just sort of made it over, but no big round of applause, as it were. So I want to break down your top winners and losers so far this earnings season.

You have four picks. You have Chipotle, Meta, Tesla, and Amazon. So break down the base cases as you're starting with your top winners there.

STEVE SOSNICK: Well, Chipotle blew it out of the water. Chipotle, I think, was emblematic of what we saw in a lot of consumer stocks. There's a wide range of them-- McDonald's, Kimberly-Clark, Pepsi. What we found were that companies that were able to raise-- many of these companies were able to raise prices and pass along those price increases to consumers who were willing to pay them. That, to me, was a sign that we know that consumers have jobs.

The unemployment rate is 3.4%. And when people have jobs, they want to spend some money on themselves and they want to buy the products they like. And so Chipotle, they did say that some of their growth came from people trading down a little bit. That may be reflective of some of the economic concerns.

But, for the most part, it's a relatively expensive fast food item. And people are willing to pay for it, as they were a whole range of others. But that one was a real-- that one was the real blowout among a wide range of consumer winners.

RACHELLE AKUFFO: And Meta, of course, was an interesting one. You had the huge push from ads, as well as a lot of people, this talk of this year of efficiency, wanting to see if some of the cuts that Zuckerberg had made would start showing up in some of the bottom lines as well. What did you like in Meta?

STEVE SOSNICK: Well, I think what I liked about Meta was just, first of all, remember, this stock got deeply oversold into the end of last year. And so a lot of the rally that we saw in the beginning, I characterized this sort of a delay, the January effect on steroids. But the fact that they've been able to keep the momentum up, the fact that they're saying the right things and, apparently, doing the right things and able to give good outlooks reinforces the idea that this stock has been more than just a fluke year to date. It is also benefiting a lot from the idea of the fact that mega-cap tech stocks are really the big beneficiaries throughout this earnings season-- well, throughout this year to date so far.

We can argue that might pose a little bit of a risk in terms of narrowing leadership. Because a lot of the leaders are these same stocks that are very heavily weighted at the top of SPX, certainly the NASDAQ 100. But Meta did clear a very high bar with these.

RACHELLE AKUFFO: And let's talk the losers now from your list. Tesla and Amazon, usually not on people's losers list. But in terms of this earnings season, made your list. Why is that?

STEVE SOSNICK: Well, Tesla, you know, Tesla really had some huge momentum going into the numbers. And it just didn't deliver. Now, it's well-- this, to me, is emblematic of the earnings season in the sense that Tesla is off its lows now. I mean, we went from 200-ish down to about 150-ish in the aftermath of the earnings. Now we're sort of in the high 160s. And around 170 is sort of where it's mired, been mired.

But that's, I think that was emblematic of the fact that the expectations got out ahead of the stock. It did actually manage to do OK on its earnings, but not enough, not enough to satisfy everybody. And I think that was sort of, that could have been a real harbinger sort of a difficult earnings season.

Because it was the first mega cap to go. It was the first one not to report well. But it wasn't terrible. But I think, just again, it was emblematic of the idea of how fragile some of these stocks can be if expectations get too high.

RACHELLE AKUFFO: Speaking of high expectations, we heard a lot about AI. And every company is sort of throwing everything in the kitchen sink at it. But I want to ask you, obviously, we have Nvidia that still has to report here. So you have it both as a chip maker, but then also this leader in the AI space. What are the expectations there when they report?

STEVE SOSNICK: I think Nvidia has a very high bar to clear. Because these guys, I give their management a lot of credit. Because they managed to put themselves in the forefront of whatever market story is out there. When crypto was the biggest game in town, they were the chipmaker that benefited from crypto. Now that AI is the big game in town, they've positioned themselves as the big winner in AI.

In their last conference call-- I forget the exact number. But they referenced AI, I think over 50 times in just the prologue. I'd have to double check those numbers. I don't have them in front of me.

But they know how to position themselves in the forefront, certainly, of investor mindset. And they've been a huge winner on the AI front. Now, they're one of many. Microsoft, of course, and Google playing catch-up a little bit over the last week or so. But I think the bar is set very high for them. And it'll be very interesting to see to what extent they really throw out the AI terminology when it comes time to talk about the stock.

RACHELLE AKUFFO: And another thing we'll be watching, retail earnings this week. We'll hear from Walmart, Target, Home Depot, Alibaba as well is going to be reporting as well. And then when you sort of look at what we're seeing with consumer sentiment, what are the expectations there? Because are we going to start seeing that show up, perhaps, in some of these earnings calls when they sort of add that into this macro conversation about where inflation is still headed in some of these sticky areas?

STEVE SOSNICK: That will really be the key. I think the conversation will be more important than the numbers themselves. Because, quite frankly, I refer to the consumer sentiment numbers as being as they suck.

There was no real way around it. Now, it's an interesting problem. Because we just learned from PepsiCo, et cetera, McDonald's, Chipotle, that consumers were spending more on the brands they liked. But are they able to continue doing that from a retail level?

Walmart could benefit if people are trading down, as we saw with Chipotle. Home Depot, how is the housing cycle benefiting people or not-- or benefiting or not benefiting them. And Target is a bit vulnerable to me because they may be one of the companies that someone trades down from to get to Home Depot-- I'm sorry, to get to Walmart. And then, you know, of course, we had the inventory issues, particularly the Target.

I think we've managed to sort of put those behind us. I think they've normalized all that. But it'll be interesting to see if any of that stuff persists. There's a lot to learn about the consumer.

Because the reports, as you mentioned, from Friday, they were quite a downer-- higher inflation expectations and much lower sentiment. Something is not going to add up. And let's see if it's affecting the retailers yet.

RACHELLE AKUFFO: So how is that squaring with some of the activity that you're seeing with marginal buyers? Because I know you've written about that. That was a really fascinating part of it.

STEVE SOSNICK: Yeah, it's interesting to figure out who the marginal buyers are in this market. It's easy to say, it's just-- it's individual investors, just in love with their favorite stocks. And to some extent, it can be true.

As we noted in the piece and it's available on IBKRcampus.com or IBKR Traders Insight, as you see behind me. And, basically, if you buy 100 shares of Apple and take it up a penny, the market cap of that company increases by about $150 million just by one share trading a penny higher-- so $150 million, sorry. So it's a strange phenomenon. But, for example, today, I saw a headline go by that Tiger Management was adding their position in Nvidia. So it's big investors who are chasing the momentum as well.

I think the risk is that these popular stocks are becoming very, very crowded trades. We have maybe 20 stocks accounting for the bulk of the market leadership this year. If you look at the outperformance, let's say, of NDX over SPX and then SPX over the Russell 2000, it sort of becomes a little evident that the bigger, the more top-heavy of an index, the better you've done.

But it's easy to say that it's individuals chasing their favorite stocks. But it's clearly institutions hopping on. They understand what momentum is. They understand where the leadership is.

And so right now, you're getting a real big flood of money flowing into the biggest stocks. The question is, is that can this, A, continue, B, for how long, and, C, what happens if someone decides to rush for the exits? But we haven't hit that point yet.

RACHELLE AKUFFO: We'll certainly be keeping an eye on that. A big thank you to Steve Sosnick there. Thank you for joining me in this morning on Yahoo Finance.

STEVE SOSNICK: My pleasure.