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Kelly Evans: Where the strength is in this market

Scott Mlyn | CNBC

Let's talk about three data points since that nerve-wracking Fed meeting yesterday that help explain why the central bank is doing what it's doing.  

(1) GDP. It just surged nearly 7% last quarter, versus the 5.5% estimate. For the year, the economy grew at 5.7%. And that's in "real," ex-inflation terms. Add in the price gains, which were 4% for the year the way Commerce calculates it, and it means nominal GDP surged nearly 10% last year. That's way higher than the 4% pace it was meagerly advancing last decade, when the Fed had to keep reversing course on its tightening plans. And keep in mind, as of this moment, the Fed is still doing quantitative easing! For an economy booming 10%, and a prime-age employment-to-population ratio that has recovered in just two years to 79% as of December--something it took seven years to reach last decade, despite a higher starting point, as MKM's Michael Darda keeps pointing out. "In short, the Fed is behind the curve," he writes. 

(2) Tech earnings. First it was Microsoft, up yesterday on strong earnings despite the ugly post-Fed market action. Its cloud business grew "only" 46% year-on-year, but the CFO said the segment will see growth "acceleration" this quarter. And today, we've got ServiceNow surging 13% after posting 40% billings growth, its strongest year-on-year growth since 2018. "The overarching concern/anxiety about 'deceleration' in software has been DEBUNKED," wrote Bank of America's tech traders this morning. Which is a big deal--it means the fundamentals for a key part of the tech sector are looking firm precisely when other "pandemic winners" like Netflix and Peloton have hit a post-Covid demand gap. 

 (3) Tesla. Its recent run-up to the trillion-dollar mark only made people more nervous about what should happen to the market if its growth story fizzled out. But earnings last night did more to show why its premium has been justified--not from all the stuff about autonomous driving and the "humanoid" bot, but from the nuts and bolts of its auto business. Tesla's automotive gross profit margin last year was a stunning 30.6%, up from 24% the previous year during a historic supply-chain squeeze and a chip shortage that is keeping it running below full capacity. Compare with General Motors and Ford, running at 14% and 12% respectively in their latest quarters, according to Reuters. Its revenue surged 65% last year--before its massive new Texas and Berlin factories have even come online. The shares are actually down 5% this morning--and who knows where they will eventually shake out--but its success is no mirage.  

In short, the U.S. economy is showing strong growth even during the outbreak of Omicron; a persistent shift towards software and digitization that Goldman says should help boost productivity in the long run; and continued success at the forefront of innovation. It may not be a recipe for all stocks to do well, but it's certainly no recipe for failure.  

See you at 1 p.m! 

Kelly

Twitter: @KellyCNBC

Instagram: @realkellyevans