Results season will be a 'bit of a head fake', says strategist

Investors banking on strong corporate results to lift stocks need to watch out for the "canary in the coal mine" says Ben Laidler, eToro global markets strategist. He tells Yahoo Finance’s Rachelle Akuffo to expect a “down earnings season” in the first quarter as he laid out his roadmap for how he thinks corporate results will shakeout in the wake of March's banking turmoil. Laidler says reported numbers are “going to look good,” with the strongest earnings to come from “small caps, the cyclicals, consumer discretionary names.” However he suggests looking under the hood, as those companies could suffer the most in an economic slowdown. That's “inevitably coming” he adds, labelling this results season as a “little bit of a head fake.”

Laidler says his fear is “what comes next”, anticipating “downbeat” guidance in earnings reports. Specifically in focus for Laidler is the tightening of lending conditions by banks. This has been the topic of some debate in recent weeks, with the likes of Treasury Secretary Janet Yellen and the IMF seemingly on different pages. He clarifies he wouldn’t consider the turmoil following SVB and Signature Bank’s collapses a “crisis,” but instead a “banking scare.” More an issue of individual banks “rather than the system,” but still with real macroeconomic consequences. Commodities in particular are “particularly sensitive” to the slowdown of growth. We have yet to see the final fallout from the banking turmoil, and Laidler encourages all to monitor earnings as they're reported this week.

Key Video Moments:

00:00:25 - Commodities are the "canary in the coal mine" for slowdown in growth

00:00:56 - Tech, healthcare remain defensive

00:01:24 - Reported numbers will look "good" for earnings season

00:01:48 - Guidance will be more downbeat, looking ahead

00:02:00 - Best earnings will come from companies that will suffer the most from economic slowdown

For more of Rachelle’s conversation with Ben Laidler, click here.

Video Transcript

RACHELLE AKUFFO: And we mentioned some of that hangover from, as you call it, a banking scare, the IMF looking at it as a banking crisis. But really, as you look at tighter lending conditions really feeding into this slower global growth story as well, are there some signs that we should be watching for? You mentioned small caps there. How it's going to play out for them.

BEN LAIDLER: Yeah, absolutely. The stock market's not the economy. There are some segments of the market which are the canary in the coal mine, which are particularly sensitive to this tightening of lending standards, to the slowing of the economy. Commodities, I don't think it's any surprise that that's the worst performing asset class this year, particularly sensitive to the slowdown in growth.

Small caps, they're still up for the year but they've absolutely lagged. Again, that's no surprise, very domestic, carry a bit more debt, less diversified. Industrials, I mean, these are the bits that I think are particularly sensitive to this slowdown.

And on the flip side, there are things like tech, things like health care, which are pretty defensive, are very big in the stock market, but somewhat less big in the overall economy.

RACHELLE AKUFFO: So then when you add up some of this tightening that we're going to see, the banking scare, how are you seeing that, or how are you expecting that to show up in some of this earnings commentary as we get into the thick of earnings season?

BEN LAIDLER: So I think this is going to be another less bad earnings season. I think the reported numbers are going to look pretty good and we're all going to breathe a sigh of relief. I mean, GDP growth in the first quarter was something like 2 and 1/2%. It was pretty good. Expectations were cut a lot into earnings season. And 40% of US earnings come from the rest of the world, which has seen a particularly good sort of rebound here off very low levels.

So I think the reported numbers are going to look very good. My fear is what comes next. And I think the guidance is going to be a little bit more downbeat. In some ways, I actually think this reporting season is going to be a little bit of a head fake. I think the best results are going to come from the small caps, the cyclicals, the consumer discretionary names, the ones that are maybe going to suffer the most in the economic slowdown which I think is inevitably coming.