Keeping up with the market: Morning Brief

Julie Hyman and Brian Sozzi discuss Tuesday’s market action and a theme that’s emerged over the past couple of months: Wall Street trying to keep up with the market.

Video Transcript

JULIE HYMAN: But we begin today as we always do at 10:00 AM with the Yahoo Finance Morning Brief. And in the Morning Brief, even though Myles is not with us physically today, he's with us in spirit and in writing because we have the Morning Brief to talk about. And he pointed out the increase to the forecast from Credit Suisse's Jonathan Golub, who raised his price target for the S&P year end to 4,600 from 4,300. And among other things, he's talking about a theme that we've talked about, which is the idea of operating leverage and margins.

Now, we've talked about it frequently because other strategists have talked about the fact that margins might have peaked and might be getting a little bit squeezed as the year goes on. Golub thinks that companies still will have room to increase their margins, expand their margins, as the year goes on. So Brian, it's interesting here. I mean, that's what makes the market, as they say. But it is interesting here, this view that we're either at the peak, at or near the peak here, or we still have some room to go.

BRIAN SOZZI: Julie, I'm waiting for someone on the Street to step up with the S&P 500 5,000 call. It's coming. We know it's coming. Perhaps it will come soon. But nonetheless, very interesting here. And Golub is not alone. RBC is out this morning, raising its S&P 500 target to-- this year to 4,325 from 4,100.

And the themes are simple. Earnings are crushing it here in the first quarter. Earnings growth, according to B of A, is tracking up about first-- in the first quarter, up 41% year over year. A lot of these companies are beating big. And a lot of folks on the Street are stepping back and realizing they probably underpriced the recovery. These earnings, the earnings momentum for many companies and even sales has continued into the second quarter. So by extent, you have to raise your forecasts up.

Now the bigger question is what growth looks like in the back half of the year. I don't think Wall Street, or, at least, the market, cares about that just yet. But it's going to have to be because the growth in the second half of this year is not going to look the same as it's looking right now.

JULIE HYMAN: Well, I guess it depends on where we're talking about, right, to your point just a few moments ago about travel and leisure. But, you know, you have to think about growth on the one side. What is demand going to look like? But also, very much tied up with that, a theme that we've been discussing all earnings season long, what are the costs going to be looking like, right? And will that growth in sales and growth in demand, will it be enough to more than make up for growth in cost?

We've already had a number of companies that we've been talking to. They've already raised their prices. So if costs continue to go up at the same pace, are they going to be able to continue to raise their prices, and/or is there going to be such a surge in demand continuing that it's going to help make up for that increase in cost? I think that's also a really big question going in the second half, Brian.

BRIAN SOZZI: Yeah, and it's a worrying question. I have a story right now on the Yahoo Finance home page calling out some new data from Bank of America, looking at inflation mentions on earnings conference calls. So far, out of the 303 companies in the S&P 500 that have reported first quarter earnings, the number of inflation mentions is up 800% year over year.

So in terms of inflation, it seems to have boosted first quarter earnings, likely to boost second quarter earnings. But at what point, Julie, do you see sales starting to slow down a little bit, and these costs remain at these high levels? That is a potential bone crushing event for the bottom line of corporate America.

JULIE HYMAN: Yeah, that's really the question for me, as we head into the second half of the year.