A strong economy means earnings remain strong, but inflation remains high, creating a difficult story for active investors. To see how rising inflation and interest rates are impacting companies, take a look at CarMax’s earnings report released this morning. Earnings and sales in the latest February quarter were lower than expected, and the company’s goal of selling 2 million cars by 2026 has been postponed to between 2026 and 2030. What was CarMax to blame? In a statement, it said: “With continuing headwinds from widespread inflationary pressures, rising interest rates, stricter lending standards and declining consumer confidence, the challenge of auto affordability is at the forefront. We believe that this will continue to have an impact on unit sales results for the fourth quarter.” Overall, this is a very tough environment for small caps, speculative tech (think Cathie Wood/ARK), REITs, and utilities. For example, rising interest rates are generally not good for his REIT because it relies on debt financing. Higher interest rates increase borrowing costs, and higher borrowing costs reduce profit margins. But in the long term, the effects may be more subtle. For example, if interest rates rise due to strong economic growth, REITs can benefit over the long term. Rising interest rates are also usually bad for utilities, as higher yields make government bonds more attractive. Higher interest rates also mean higher borrowing costs for utilities, which use large amounts of capital and therefore carry large amounts of debt. If utilities are unable to pass on higher costs, shareholders will suffer. Some sectors do well as interest rates rise The reflation trade means there’s a new focus on cyclical stocks that perform best when the economy improves, such as energy, materials and services. The problem is that energy and materials stocks are already rising due to high oil prices and a still-strong economy. Energy is the second-best performing S&P sector year-to-date, up 17%. Communication services led the way with an 18% increase, driven by the big meta movement. Other potential beneficiaries of rising interest rates due to a strong economy are defensive stocks, which tend to be less interest rate sensitive, like Kroger and Walmart. Another potential beneficiary is insurance stocks. For example, life insurance companies invest the premiums they receive from customers in corporate bonds. When interest rates rise, the yield you get from bonds increases, giving you more investment income. The key is a strong economy and continued employment growth. If this situation changes, especially if the job market weakens significantly and inflation remains above desired levels, it will lead to stagflation and market It will be a bigger problem for What is important is whether the economy remains strong and whether this supports earnings. Earnings are also stable due to the favorable economy. LSEG said first-quarter forecasts have held steady in recent weeks, with the S&P 500 expected to rise 5% and full-year growth in 2024 expected to rise 9.8%, up from January forecasts of 11. There is almost no change from the % increase. First place. If the economy, and especially employment, turns south, all that changes. Forget it, even if the market has led you to believe that falling employment growth with rising inflation means “stagflation” and that is a likely scenario. The S&P 500, which closed at 5,160 on Wednesday, will soon reach the mid-$4,000s.
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