Earnings season is upon us. The banks go first. Their numbers aren’t good enough to inspire a lot of applause.
Applause wasn’t necessary. And it was never really on the agenda. We knew the banks are making less money than they were a year ago . . . that isn’t news.
And nobody was expecting the banks to do well in the coming year. There were no hopes here and so anyone who claims to be disappointed is just looking for a reason to stay on the sidelines.
But more realistic investors are looking behind the headlines. While the banks are anticipating higher levels of bad loans ahead, that’s just what happens when interest rates climb.
Borrowers can’t borrow as much when more of their payments go to interest. And in a rockier economy, they might have have a harder time making their payments at all.
We know all that. What’s interesting is that on the whole the banks are rolling as best they can. Anticipated losses aren’t huge. Profit drag is significant but the bottom line isn’t falling off a cliff.
In fact the banks are holding the line a little better than expected. They’re doing the job the market as a whole needs them to do.
Their job is simply to hold the line. It’s not about growth. The industrials, commodity producers and mighty Amazon (AMZN) are tracking well enough to keep the economy as a whole well ahead of the Fed.
That’s where the heat is. People can argue over whether these stocks have gotten ahead of their growth factors, but they can’t deny the actual year-over-year dynamism here.
Energy stocks are probably going to boost their earnings 80% this year. If you’re looking for the bright side to pain at the pump, this is the place.
Once-depressed manufacturers are also bouncing back with roughly 30% earnings growth. Like the oil companies, they’re a relatively small part of the market . . . but a big slice of the economy.
Commodity producers are doing well. So are the landlords, the real estate companies. Rents are going up. That’s inflation at its purest.
Home ownership may be getting choked as mortgage rates surge back above 5% . . . but if you’re trying to build a house, construction calendars are as packed as ever.
You can’t get skilled help unless you’re willing to put money down and wait for months to get an opening. And a lot of the time, those contractors can’t get the materials they need.
Sometimes just having enough paint to do a job is an achievement. And with job calendars booked into next year, this end of the economy is going to stay hot for some time to come.
So if you aren’t thrilled with the bank stocks . . . don’t buy the banks right now. They aren’t on the hot side of the economy.
As they adapt to the Fed’s pivot, they’ll shift back to their growth cycle. Ask me again later this year.
Is the hot side a big piece of the market? No way. AMZN on its own is practically as heavily weighted on the S&P 500 as the entire energy sector.
But if you’re chasing instant returns, you can’t ignore the heat. Yes, those sectors are getting crowded. They aren’t attractive long-term core holdings.
However, heat is what drives a healthy market. Money rotates int the hot spots and then out again when they get too crowded.
Technology isn’t growing fast enough to hold much heat. The Fed has seen to that. And the banks were never all that hot to begin with.
That’s just how it goes. There’s always a hot spot, even if it’s just relative to a deep freeze elsewhere. Right now that’s in the stocks that laugh when inflation rises.