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These Three Themes Will Rule Q2 2023 Earnings

By:Jermal Chandler

A contrarian's take on the expected drop in corporate earnings

  • Will artificial intelligence stocks step up to the plate and deliver home run earnings?
  • Has the Fed's war on inflation helped or hurt the bottom line of companies?
  • How are consumers handling high interest rates, and are companies passing the buck on to them?

The 136th edition of the Wimbledon men's final was nothing short of breathtaking. Carlos Alcaraz won his first Wimbledon title by defeating four-time defending champion Novak Djokovic in an epic tennis match that pitted a seasoned veteran against a 20-year-old star. The four-hour-and-42-minute match came down to the wire and ended in spectacular fashion.

Sports betting can be a crapshoot, but so can trading around earnings

The biggest loser of the day? Me. I had a three-legged round robin-style parlay that didn't quite make the cut. See, if Djokovic had won, then I would have had enough money to buy three sets of new Crocs. But, alas, it was not meant to be. Sports betting is a crapshoot. It is unpredictable and yet millions (like myself) continue to do it for a multitude of reasons. Why do I bet on sports? I like the action.

Speaking of action, the $10 trillion global stock rally of 2023 gets a major test over the next few weeks as hundreds of companies report second-quarter earnings. S&P 500 firms are expected to post a 9% drop in profits in Q2 which would make it the worst earnings season since 2020. As a contrarian, I would not put too much stock in that statistic, but I will be paying attention to three areas of focus that companies will likely identify on their earnings calls.

Artificial intelligence: the great savior

Enthusiasm for AI has boosted the Nasdaq 100 to its best first half ever. Now, traders will be looking to see if all the new applications have staying power. It has been such a banner year for tech stocks that the Nasdaq is undergoing a rebalance to address over-concentration in the index—which, arguably, was caused by the AI revolution. Look for Apple (AAPL), Nvidia (NVDA), Google parent Alphabet (GOOGL) and other tech companies to mention AI in their earnings press releases ad nauseam.

The effect of disinflation

Inflation has come down in a big way since a year ago. The Fed made inflation its top target in November 2021, and the following March, they began the fastest rate-hiking campaign in history that saw 10 straight rate hikes over 15 months. As a result, companies have been placed in a conundrum as labor and other costs remain elevated while they are grappling with the decision of whether to raise prices for customers any further. So how much have rate hikes hurt? How much has disinflation helped? These are the questions companies will have to answer.

Squeezing the consumer

Consumers have propped up the economy for months, spurred by a strong labor market and excess savings. Now, with credit card rates as high as 22% and mortgage rates above 7%, one might wonder how long consumers can withstand these elevated levels and still function on a day-to-day basis. Additionally, if CEOs mention they are passing costs over to the consumer, that could spell trouble for this strong economy. This is a dynamic that deserves your attention.

Jermal Chandler, tastylive head of options strategy, has been in the market and trading for 20 years. He hosts Engineering the Trade, airing Monday, Tuesday, Thursday and Friday. @jermalchandler

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