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Easing Fed rate hikes could have ‘huge implications’ for security markets, consumers: Strategist

Scott Krisiloff, the Transcript Editor and Avondale Asset Management Founder, joins Yahoo Finance Live to discuss what to expect from this season's earnings call.

Video transcript

RACHELLE AKUFFO: Earnings season officially kicks off this Friday with the big banks. And analysts have pretty low expectations. Joining us now is Scott Krisiloff, "The Transcript" Editor and Avondale Asset Management Founder, and he keeps a close eye on earnings calls. Scott, now you said First Republic Bank is the earnings call that you're anticipating the most. Why is that?

SCOTT KRISILOFF: Yeah, I mean, I think it was at the center of the storm around the whole banking industry a few weeks ago that seems a far way away now, but at least at the end of the quarter was still under attack. And so really looking to see how deposits were affected at First Republic. We know that there were outflows, but how great were those outflows?

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And what does that-- what does the resulting balance sheet look like relative to its capital? I think it's really important to watch that. If there's a negative supply-- surprise there, it could reignite some of those banking concerns that we dealt with a few weeks back.

DAVID BRIGGS: And one of the themes you told us you'll be watching for is the state of the consumer. You pulled a quote from Tuesday's CarMax earnings. Let's take a listen.

WILLIAM NASH: We see the traffic top of funnel, so it's not top of funnel. The degradation really happens at the conversion point and-- which can make sense. As you find a car that you like, you start working through, and all of a sudden you realize, wow, that monthly payment is more than I can afford. And then you see where they fall out, which is the reason why we've been talking about vehicle affordability is one of the biggest factors that impact our sales. So it's all about conversion, not necessarily top of funnel.

DAVID BRIGGS: So what does that signal to you about what's coming this earnings season?

SCOTT KRISILOFF: Yeah, I mean, I think the consumer is the biggest thing to watch right now. Obviously, we've seen a very strong consumer for the last several years. There was so much stimulus that was put into the economy through COVID that hit the consumer, and consumers have a bunch of excess savings and excess deposits that they've been working through and consuming with.

And some of those are starting to dwindle. JPMorgan said last quarter that by the middle of this year, they expect some of that excess savings to go away. And so how is that impacting the consumer? CarMax was a really good indicator of, on a big-ticket purchase, people still feeling like they want to make that purchase, go into the showrooms and see the cars.

But really, when you do the math on it and look at higher interest rates, et cetera, maybe that car purchase isn't something that we actually want to do right now or it's not really the right time. That's a sign of some deterioration in the consumer that we'll be looking for, other commentary around things like that this quarter.

RACHELLE AKUFFO: And, Scott, we know that Jamie Dimon also mentioned the strength of the consumer being at least one of the things that might offset some of the headwinds as we see some of these rumblings of a recession. But what about some of the other repercussions, some of the companies where you do see that spilling over from the labor market as well as real estate?

SCOTT KRISILOFF: Yeah, in terms of the strength of the consumer, obviously consumer spending has been a driver of inflation for the last couple of years, this inflationary period that the Fed is trying to fight with higher interest rates. And so if the consumer is starting to weaken, the big implication is really on interest rates and Fed policy. And maybe the Fed can let up on some of the tightening that they've been pursuing for the last year and a half or so. And that obviously would have huge implications for security markets and the ability to get out of this bear cycle that we've been in.

DAVID BRIGGS: Scott, how do you expect work-from-home, remote work versus return to office to play out this earnings season?

SCOTT KRISILOFF: Yeah, this is a really interesting question. I think this is one of the last vestiges of COVID that we've still been working with. But the rest of the economy has kind of returned to normal. And two years later, it feels like COVID is just an afterthought at this point, it's hard to remember how all of us were working from home for a full year.

But as we're getting farther away from it, I think a lot of companies are talking about being more productive in the office, expecting people to come back into the office more frequently, three days a week, four days a week, maybe even five days a week. We'll see here. And in this quarter, we may get some more commentary around some of those trends.

RACHELLE AKUFFO: And obviously, ever since OpenAI, all we talk about is generative AI and a lot of these companies trying to jump at the forefront. But as we look at some of the nuances and how these companies are using AI, what are some of the ones that you're going to be looking at this earnings season?

SCOTT KRISILOFF: Yeah, I mean, I think that the AI adoption is definitely going to be broad within the economy over time. And there's some companies that are at the forefront of that. I was listening to you all talk about Chegg in the last segment. And so companies like that, that are on the front end of AI adoption, are ones that you'll really watch closely in terms of the way that they're adopting AI into their own companies.

But we saw this in bank quarters. I'm sure we'll see it-- I think we'll probably see it throughout the economy. Fortune 500 companies generally will probably be talking in some way about how they're adopting large language models. But it will affect some more quickly than others.

DAVID BRIGGS: All right. Scott Krisiloff, check back with us after this earnings season. Appreciate you being here.