Stock Tips: Insights from Michael Lee on Earnings Season and the Economy

As we delve into the first quarter earnings season, major companies such as BAC 39,78 +0,08 +0,20%, GS 453,55 -1,36 -0,30%, NFLX 621,10 +10,58 +1,73%, MS 95,21 -0,44 -0,46%, and TSLA 174,77 -1,52 -0,86% are set to release their financial reports this week. In a recent interview on Mornings With Maria, Michael Lee, the founder of Michael Lee Strategy, shared his thoughts on the earnings season, market expectations, and the state of the economy. In this blog post, we will share some valuable stock tips based on Lee’s insights.

Lee began by addressing the consensus earnings estimates for the fourth quarter of 2023, which predict 8% growth. He expressed doubt about these projections, stating, “I think earnings estimates, probably not as much for this quarter as for the rest of this year, are completely out of touch with reality.” This skepticism is rooted in Lee’s observation that the economy is decelerating, casting doubt on the likelihood of significant earnings growth in the coming quarters.

One example Lee provided to support his argument was JP Morgan’s recent earnings surprise. He pointed out that “most of their earnings surprise came from the fact that they could take their customer deposits, park it at the Fed, and get four and a half, four and three quarters percent from the Fed.” However, he also noted that the bank’s capital markets division, which he referred to as a leading indicator for the economy, experienced a 25% decline year over year.

Drawing on this example, Lee believes we may see similar trends emerging in the upcoming earnings reports of other major financial institutions. He anticipates “lots of stories about margins compressing, earnings growth compressing, in fact, contraction,” and expects these factors to contribute to growing uncertainty for the rest of the year.

To further illustrate his concerns about the economy, Lee mentioned the historical relationship between collapses in housing and manufacturing and subsequent earnings declines. He explained, “Historically, when you see a collapse in housing and manufacturing the way we saw in 2022, the following year you have a 10 to 15 percent earnings decline.” Despite these historical patterns, current estimates still predict positive earnings growth.

Lee expressed his apprehension about the market’s response to this economic uncertainty, likening the situation to a child playing on train tracks. He said, “I liken the equity markets to a child playing on those same train tracks, just hoping for the rate cut, not seeing the train wreck coming because markets can remain irrational far longer than you could remain solvent.” This metaphor highlights the potential dangers lurking beneath the surface of the markets as they hope for rate cuts but may not be prepared for the economic challenges ahead.

Nancy Tangler, CEO and Chief Investment Officer at Laffer Tangler Investments, joined the discussion, offering her perspective on the recent rally in technology stocks. She advised caution in investing in these stocks after their massive run-ups, suggesting that investors wait for a better opportunity to buy in. While she acknowledged the digital economy’s potential as a secular tailwind for companies embracing technology, she also recognized the need for a more cautious approach in the current market environment.

Both Lee and Tangler expressed concerns about the economy and the markets, with Lee particularly emphasizing the potential risks that could arise if the markets continue to ignore the economic realities. As investors navigate the earnings season and make decisions about their portfolios, they would be wise to consider these insights and remain cautious in the face of potential turbulence.

To summarize, Michael Lee’s insights from the interview include:

  • He believes consensus earnings estimates for the rest of 2023 are “completely out of touch with reality” due to the decelerating economy.
  • Lee anticipates a trend of compressing margins and earnings growth contraction, which may contribute to growing uncertainty for the rest of the year.
  • He likens the equity markets to a child playing on train tracks, hoping for rate cuts but not prepared for the potential economic challenges ahead.

As the earnings season progresses, it will be crucial for investors to closely monitor the reports and management guidance from major companies BAC 39,78 +0,08 +0,20%, GS 453,55 -1,36 -0,30%, NFLX 621,10 +10,58 +1,73%, MS 95,21 -0,44 -0,46%, and TSLA 174,77 -1,52 -0,86% like Bank of America, Goldman Sachs, Netflix, Morgan Stanley, and Tesla[/stock_quotes]. This will not only provide a better understanding of the current market environment but also help identify any potential warning signs or opportunities.

In the face of economic uncertainty, investors may need to adopt a more cautious approach and be prepared to make adjustments to their portfolios as new information emerges. As Michael Lee emphasized during the interview, it is important to recognize that “markets can remain irrational far longer than you could remain solvent,” which underscores the need for careful decision-making and prudent risk management.

In conclusion, navigating the earnings season and the broader economic landscape requires a thorough understanding of the factors at play, as well as a willingness to adapt to changing conditions. By considering the insights provided by experts like Michael Lee and Nancy Tangler, investors can make more informed decisions and position themselves for success, even in uncertain times. Keep these stock tips in mind as you evaluate your investment strategy and make adjustments based on the evolving market conditions.