Earnings: 'We're still seeing a contraction compared to last year,' strategist explains

Wells Fargo Investment Institute Global Investment Strategist Veronica Willis joins Yahoo Finance Live to discuss the current earnings season and the outlook for the stock market.

Video Transcript

DAVE BRIGGS: All right, it is a big week for tech. Check out the calendar-- Amazon, Alphabet, Microsoft, Meta all in focus this earnings season. It's off to a better than expected start so far in 2023. Tech has seen their shares rebound after a down year in 2022.

Tech heavy NASDAQ up over 15% since the start of the year. So what can we expect from these heavy hitters? Let's bring in Veronica Willis, Global Investment Strategist at Wells Fargo Investment Institute. Nice to see you, Veronica. So broadly speaking, what is your expectations for those tech heavyweights if, thus far, has been better than expected as far as earnings go?

VERONICA WILLIS: I think there's the potential that those earnings could come in a little bit better than expected. But I think what's also important to keep in mind is that, even with some of these earnings coming in better than expected so far this earnings season, we're still seeing a contraction compared to last year. And so that's something that we've got to watch out for looking forward at this quarter and next quarter's earnings-- that potential that we might see that earning contraction for two quarters in a row.

SEANA SMITH: So, Veronica, what does that mean for the gains that we have seen since the start of the year? Are we going to start to see that momentum fade quickly?

VERONICA WILLIS: There's definitely the potential that markets could falter, volatility could pick back up, and the market could start to test the lows. I think what we've seen so far this year fits well within kind of a bear market rally. I'm not very convinced that we've seen the bottom of markets yet.

There's a lot of uncertainty to come ahead in terms of global economic growth, economic growth here in the US, and Fed policy.

DAVE BRIGGS: So we lop them together, but let's take them separately. Amazon's largely going to be an AWS story, Alphabet probably the digital ad environment, Microsoft perhaps ChatGPT, and Meta probably the year of efficiencies. What one story are you watching that will give you the best sense of where the economy is?

VERONICA WILLIS: I think the big picture for the economy is looking at these bigger companies and seeing kind of where the quality is and what might be able to better withstand an economic slowdown. So we're looking for areas that will be a little bit more resilient than others throughout a lot of turbulence.

SEANA SMITH: Veronica, what are some of those areas?

VERONICA WILLIS: Right now, sector wise, we do like the tech sector. We like the health care sector. And we like the energy sector. We think these three sectors are best positioned to withstand some uncertainty with the economic situation.

DAVE BRIGGS: Big tech's bounceback would imply to some that the Fed tightening is over. You think not so fast. What do you see coming in the next two Fed meetings?

VERONICA WILLIS: We think that the next meeting in May, there's probably going to be a 25 basis point rate hike, and the probability is pretty high that there will be another 25 basis point rate hike in June. The Fed is watching inflation really closely. And inflation is still not where they want to see it. And that's their primary-- objective to get that inflation down.

The economy has so far still been able to withstand what the Fed has done. And I think we're not going to see that slowdown in economic growth until the second half of the year. And so the Fed is going to do what it can in the first half of the year before we start to see that decline in economic growth.

SEANA SMITH: Veronica, what do you think that slowdown is going to look like? Is a recession a sure thing?

VERONICA WILLIS: I do think that there will be a recession later this year-- not expecting it to be a very severe one-- a moderate recession toward the second half of this year with a recovery in 2024.

SEANA SMITH: All right, Veronica Willis, thanks so much. Great to have you here. Certainly a huge week ahead for the markets.