The soft landing is still alive for the economy, but so is inflation

Published Tue, Feb 21 20237:45 AM EST

Just back from a week in the Yucatan in Mexico, and I can attest what Marriott and Hilton said last week: travel is really strong. The Yucatan is sometimes referred to as the "anti-Cancun" — much more remote and laid back, though its main attractions are less than four hours from Cancun. Still, even in remote outposts like Uxmal, Sisal Beach, and Celestún Beach, there were plenty of tourists, and not just Americans — lots of French and German travelers as well. The soft landing is still alive, but so is inflation Watching the stock market from Yucatan last week, it was pretty clear that firmer inflation numbers from the consumer price index and producer price index meant the glidepath to lower inflation will likely be bumpier than the bulls have been hoping for. The problem is clear: We have to figure out the glidepath of the inflation decline. As long as it is taking longer than expected , it's harder to get things (like growth stocks) working. However, we heard last week from a number of restaurant chains, and prices are indeed coming down for key products, including avocados (Chipotle), Tyson (beef), Shake Shack (also beef), and Bloomin' Brands (lobster, chicken and pork). Some of these declines were not trivial: Tyson reported beef prices down 9% year-over-year, though chicken prices did rise. Home Depot acknowledged lower lumber prices played a role in its lower than expected revenues. The company beat on earnings but was light on revenues, due largely to a decline in lumber prices. Company officials gave a muted outlook due to expectations of flat consumer spending. "We know that our market has seen a gradual shift that reflects the broader shift in the economy, in consumer spending from goods to services," CFO Richard McPhail told CNBC. We'll get more inflation data this week with the personal consumption expenditures price index on Friday. The good news is that other economic data indicates that the economy is very strong, particularly on the jobs front . That may be why, despite a notable rise in Treasury yields this month, the S & P 500 is flat for the month. Earnings are continuing to decline, but not dramatically Several themes have emerging for 2023 earnings: the extent of pricing power to offset inflation, but also cost cutting, and for goods manufacturers, inventory reduction. We will hear a lot about that this week as retailers report, starting with Walmart on Tuesday reporting earnings that beat expectations, though the company gave a disappointing outlook. TJX reports Wednesday, with the bulk of retailers the following week: Target on Feb. 28, Lowe's, Kohl's, American Eagle and Abercrombie on March 1, and Best Buy, Macy's and Nordstrom on March 2. Robert Hum, CNBC's earnings expert, pointed out last week that several retailers that have already reported, including Hanesbrands, Capri, and Newell, talked about how they were hurt by retailers canceling orders to manage inventories. Macy's and Nordstrom have already warned. Overall earnings have trended down, but not dramatically Going into the year, earnings were expected to be up just 4.4% for the S & P 500. They are now expected to be up only 1.6%; a decline but hardly precipitous. The problem is a lack of bounce in growth stocks: Technology is expected to be flat in 2023, with only a modest 8.7% bounce in communication services earnings expected. Energy, health care, and materials are expected to see declines. Only consumer discretionary is really adding to the plus column with an expected 23.7% increase due largely to an expected bounce-back in Amazon profits. You can see the soft-landing scenario in the earnings numbers. The front-month quarters have seen the biggest declines, while the back end, particularly the fourth quarter, has barely budged. 2023 earnings estimates: trending down Q1: down 3.9% (Jan. 1: up 1.4%) Q2: down 3.0% (Jan. 1: down 0.3%) Q3: up 3.6% (Jan. 1: up 5.5%) Q4: up 10.1% (Jan. 1: up 10.6%) Source: Refinitiv