3 investing themes for the ‘noisy’ second-quarter earnings season: Strategist

BlackRock Global Allocation Head of Thematic Strategy Kate Moore joins Yahoo Finance Live to discuss monetary policy, inflation, geopolitical tensions, commodities, digital transformation, the expectations for second-quarter earnings season, and the outlook for economic growth.

Video Transcript

BRAD SMITH: Let's bring in Kate Moore, BlackRock Global Allocation Head of Thematic Strategy. Kate, great to have you here with us today. Particularly in a time like this where people are looking for a strategy and trying to best position their portfolio, what type of themes would you believe emerge where we're looking towards through the Fed activity and their policy decision making, at the same time that they could potentially trigger a recession with that same policy activity and decision making?

KATE MOORE: Yeah, Brad, thanks so much. This is actually a really difficult time to be thinking very long-term. We know, as you mentioned, that there are a tremendous number of crosscurrents right now in the market. It's not just monetary policy, the reaction to inflation, the durability of inflation, but also kind of what's going on geopolitically.

Certainly, Russia's invasion of the Ukraine, that persistent pressure is having on the energy market and on resources combined with the stimulus Ines was just mentioning that was announced overnight in China-- all of these sort of crosscurrents make it really difficult to discern a specific trend. And this is coming against the backdrop, of course, of the beginning of second quarter reporting season where we expect companies are going to be offering, I won't call it tepid, but more cautious guidance over the future four quarters in terms of earnings, or at least expressing their uncertainty around the path for earnings.

That said, there are a couple of things, if we look a little bit further out, that we really want to focus on. One of them is regardless of what happens to economic growth in the very near-term, companies are going to continue to focus on digital transformation in their business. If you don't have the right tools, and software, and platform, you're just not going to be competitive with your peer group.

And so we expect that investment to continue. The second, and this goes back to some of the commodity comments, is that, especially over the medium-term, the supply-demand balance really favors industrial metals and, in fact, many resources. So we want to use some opportunities, some of the weakness that we've seen in metals prices and energy to kind of add for the medium-term.

And then the last theme is really around figuring out the right consumer business models that will succeed. More in the services side, we're already starting to see the rotation from goods back into services, the regular type of consumption we saw pre-pandemic, although I do think it's a little too early to add to consumer names this summer.

BRIAN SOZZI: Kate, I hear you on the earnings warnings. I very much agree with you. It could be a very challenging earnings season. What I'm trying to figure out is if companies come out in droves and warn, do you think that has been priced into the market here?

KATE MOORE: Yeah, Brian, I don't think it's priced in at this point. And I don't even know that we're going to get companies warning. I think it's more likely that people will come out and say, hey, we had an OK second quarter, or here are the tools we use to manage higher input costs, and this is what we're doing on the labor side, and this is how we're renegotiating with suppliers-- and we'll get some constructive messages about the plans for the next couple of quarters.

But I think the greater risk is that we'll have companies expressing a huge amount of uncertainty, frankly, both into the top line and then, potentially, into the bottom line over future quarters. And that uncertainty will erode what is already pretty weak investor confidence. I think also if we get one company in a specific industry-- we certainly saw this in the first quarter, by the way-- one company in a specific industry say, we don't have a lot of visibility, we're concerned, we see risks-- it gets extrapolated out to the rest of that industry, in some cases to the rest of the market. So there are some story stocks that could have an outsized influence on the overall risk appetite for equities.

BRAD SMITH: How should investors be thinking about this earnings season? Is it worse if you see companies coming out, being transparent, and saying, hey, we're going to guide lower? Or is it worse if you see companies just pull guidance because of that uncertainty?

KATE MOORE: Yeah. It's a good question, because guidance in general has been, or at least the number of companies that have been offering guidance, has been declining for many quarters now. And the first quarter was definitely a weak period in terms of the number of companies offering guidance. That's just a reflection of the macro uncertainty, and the policy uncertainty, and the geopolitical uncertainty.

I think, like, a bigger fail, in my view, would be if companies came out with a tremendous amount of certainty and said, without question, we're going to see these sales. Without questions, we're going to be able to control these costs. This is the direction of travel. I think investors are really looking for management teams to thread the needle-- to express the uncertainty, while also affirming what they do know about their business. In short, I think this is going to be a pretty noisy reporting season.

BRIAN SOZZI: Kate, don't laugh at me on this question, or at least not on camera-- is there a recession-proof investing theme that one should be looking to right now?

KATE MOORE: OK, Brian, I'm trying not to laugh. I don't think--

BRIAN SOZZI: OK, fine. All right, fine. Fine.

KATE MOORE: I don't think there's specifically a recession group. But one theme that I really liked as being less sensitive, frankly, in terms of spending cuts has been around security software. This is something we've been talking about for a while. This is, like, protection against cyber threats.

No company, regardless of industry, can afford to have their systems hacked. It is, like, the number one business concern as we talk to chief technology officers, chief information officers. So I expect spend in that area to remain very resilient.

Some of that is being reflected in outperformance of some of the cybersecurity stocks so far this year. But I would say this is an area, as maybe not perfectly recession-proof, but is less subject to cutting in spend, because no business can afford this risk.

BRIAN SOZZI: OK, now I will let you go. You can go laugh at me and make fun of me to your colleagues. Kate Moore, BlackRock Global Allocation Head of Thematic Strategy, always good to see you. We'll talk to you soon.

KATE MOORE: Thanks so much.