Volatility Rises as Earnings Strength Clashes With Sector Rotation

Remy: Let's get to the big story breakdown. While we are in the thick of earnings season, and the numbers do look strong. The S&P 500 eyeing its 10th straight quarter of growth. But the so-called vibe under the hood is changing. We're also eyeing a disconnect. Big tech is beating earnings. Yet the market is reacting with sharp volatility. And we've also seen gold hit record highs only to face flash pullbacks. Although spot gold this morning is back above $5,000 and Bitcoin sold off sharply only to recover $70,000 and is currently trading right below that level. Well to help us separate the signal from the noise. We're joined by Eric Criscuolo, market strategist for the NYSE. Eric, happy Monday. We're here after the Super Bowl and it's fairly quiet on our respective commutes. But in terms of the market, we saw a Dow clear 50,000 for the first time ever. So what's really going on.

Eric: Yeah Friday was a big I guess kind of a bounce or a relief rally. You saw a lot of the really oversold tech names, especially in software, the ones that have got really hit hard on all that, that AI news that was coming out about AI taking over software. And you don't need to buy software anymore. Now you could just, you know, use AI to create whatever you need. That narrative got really long in the tooth, very quickly. So you just saw on Friday a lot of a lot of snapback with those depressed levels. Some of those stocks really bounced hard, taking us to a pretty solid green day all around across the market. And like you said, the Dow hitting 50,000 for the first time was a was a big milestone.

Remy: Yeah. And we're going to continue to monitor these levels on the Dow and the S&P 500 this week. But it's also important to note the outperformance of the Russell 2000 as well. So we're keeping an eye on all those factors. But last week that term "SaaS apocalypse" right, that was added to our vocabulary. But as we head into this week we have a lot of earnings data points, especially the jobs report. So what are you watching?

Eric: Yeah, exactly. So earnings are still rolling in. That's still going to be a focal point for investors. Just trying to gauge especially the commentary right. For some of these companies about what management is saying about what's happened over the past couple of weeks with that whole AI narrative, you know, eating software. So the commentary is going to be really important. Obviously the results, but definitely the commentary as well. And then, you know, just the jobs data, the economic data, you know, it's all kind of leading into a new regime for the fed in a, in a couple of months, assuming Warsh gets past the Senate confirmation and everything. Investors are trying to figure out, you know, what the playbook is going to be. Is it going to be cutting rates, and is it going to be working closely with the Treasury, or is it going to be something different? So, you know, there's just a lot of kind of uncertainty right now as far as the macro backdrop. And I think that's another thing that investors, you know, are just really looking into. And we haven't even touched upon the commodities yet. So..

Remy: Yeah. And absolutely, you mentioned commentary. And of course, we're paying close attention to what the C-suite is saying when we're listening to these earnings calls. But we do get Fed speak this week. And as you mentioned, commodity that has been a volatile sector. So what do you think is the key takeaway as we head into a new week?

Eric: Yeah I think just expect more volatility. And I think investors they've got hit hard in a lot of ways. Whether it's the software, the big software stocks selling off, whether it's commodities ripping higher and then and then coming and then pulling back quickly. So I think just being nimble and just, you know, not panicking, but also, you know, kind of preparing for those really those tail events on the left and the right side, where things can just whip around really fast. Investors are just they're kind of hunkering down and making sure that they know exactly what they're invested in. Right? They know the company. They know the thesis. They know that if volatility ramps. Do I still like this name? You know, am I still here for the long term? So just kind of re-going back over like why they are in the name and what to do if markets gyrate again, right? Do they buy more? Do the say you know what, It's too much risk I'm out? You know, all those like rebalancing or the reanalysis of the portfolios is probably taking place right now.

Remy: Yeah. And speaking of which, what does diversification look like at a time like this, especially when we're looking at all this whipsaw volatility across the alternative asset classes?

Eric: Well, so I think you kind of saw what happens when, you know, everyone was piled into the S&P 500 especially the biggest stocks right. That's been a narrative for several years now. Right. The top 10/20 stocks in the S&P 500 just driving everything higher. And you know, over the past several years you saw things like commodities, like gold exposure really, you know, start to tick lower and lower at very low levels historically. And then gold started to, to pull off to, to pull up a little bit.

It started to move higher and everyone realized I'm short. I'm not long gold at all. I'm underexposed. It's moving. Let me get in there now. So you saw this violent move into gold. And gold is not a big market in general. So all these investors coming into gold just ripped it higher. And so, you know, balance is not just through the stocks that you own, although that's certainly important having a, you know, an allocation of big, small, and medium-cap stocks. But also looking at is it all growth? Is it all value names? Is it all tech? Am I too levered to finance? Right. And then also asset classes. Right. If you're just the S&P 500 and you want bitcoin those can be pretty volatile asset classes right. Especially now. So do you want to get exposure into different commodities. But now those are volatile right. So you know treasuries, yields, you know, all these kind of cross asset correlations you really have to pay attention to right now because things are moving in different directions. Andso, you know, having a balanced portfolio. You're going to try to, you know, compress that that that volatility across your entire portfolio.

Remy: Yeah. And finally, I do want to leave that by looking at both the short end and long end when it comes to the Treasury curve. So what are you looking out for here in the U.S.?

Eric: Yeah. So I mean it seems like the next move for the fed is going to be a cut, maybe two, this year. You know that certainly how things are kind of lined up as far as the market pricing goes. So I think you know I think we're kind of on that path when that happens?TBD...but it seems like the next move is going to be 1 or 2 cuts for the for the rest of the year. But now you kind of have to pay attention to the long end, like you were saying. Right. And especially over the weekend, Beijing, China officials said that they warn their banks to lower their exposure to U.S. treasuries. China is a big holder of the U.S. treasuries, so rates didn't move that much on it. But it's all kind of playing into that whole macro geopolitical, you know, trade war, you know, soft war type of thing that's going on throughout the market.So, you know, the long end is where things like mortgages get priced and a lot of the credit moves happen. So, you know, the fed can do a lot of stuff on the short end. But if a lot of investors aren't believing the fed or they think that the policies are wrong, the long end is going to go higher. And that's just going to make financial conditions really, really more compressed and strict. So that could put a hurt on companies overall and also balance sheets like mortgages and, and you know, the personal spending that consumers are doing right now. So the long end is definitely something to pay attention to.

Remy: Well Eric, always great having you on the show. Thank you so much for sharing all of your insights and perspective, and for helping us make sense of all of the moving parts here.

Eric: Always a pleasure.

Remy: Thank you. Eric.