Bold Earning Season Predictions

0:04Get excited. Today is the first day of earnings season. Motley Fool Money starts now.

0:20I'm Anand Chokkavelu and I'm joined by two of my favorite fools, Emily Flippen and Jason Hall, to kick off earnings season with some big banks giving us a feel for the economy. We'll also give you the skinny on crypto week, and we'll have bold predictions on earnings season. Plus, we're bringing on a bonus fool. Also one of my favorites, semiconductor expert Jose Najaro to talk about some hot NVIDIA news. But first, we had a fresh inflation reading this morning. June's consumer price index ticked up to an annual rate of 2.7%, up from May's 2.4%. Emily, what were your takeaways? Well, if you thought you could have a peaceful Tuesday with no bad news, think again.

1:04Obviously, inflation is heating up here a little bit. And I think we're just starting to see some of the impacts from tariffs as those price increases and core goods start to become more tangible as opposed to theoretical. We had this really big front-loading of inventory that happened at the beginning of the year as businesses stockpiled in anticipation of tariffs. And those are beginning to diminish, which I think is making it harder to protect products from rising costs. And we saw that in core goods inflation. Those include things like basic necessities, like apparel and household products that accelerated last month.

1:36But the good thing is, and the silver lining to our Tuesday here, is that this is a gradual acceleration. You know, we're not talking about anything that's incredibly dramatic. Those numbers at 2.7%, that's an annualized rate. So we're not talking month over month here. No need to immediately panic. But I do think this could have some overarching implications for what we're likely to see at future earnings season, both coming up in the next couple of weeks, as well as towards the end of the year. And it just makes me want to pay attention to what leadership is going to be commenting on, because how this trickles down for consumer spending and how much prices are able to be passed along versus the impact to companies' bottom lines, that's really going to have a wide-reaching impact in the later half of 2025.

2:18Yeah, I think wide-reaching is a good way to put it. And just looking at what the markets are doing today, the S &P 500, which that's, I mean, let's be honest, that's indexed to gigantic companies, is down about a quarter of a percent. But if you look at the Russell 2000, that's small caps, it's down like 1.3%. So, you kind of see where investors are seeing the potential impacts of inflation on the companies that are most directly affected by it. And what they're looking forward and seeing, if we're being honest, is really going to be driven by the tariff story. That's still the big story in the background.

2:51If we look at May, we saw a massive increase in imports as companies tried to pull forward inventory as much as they could. Back in April, I should say. And then in May, it came down quarter over quarter, but May imports were still well up from where they were year over year. So, maybe some of the concerns about empty store shelves later in the year maybe aren't as likely to come to fruition as a lot of investors have been thinking. because that would be a big thing that would certainly drive a lot of inflation. By the way, all the data hasn't been reported yet, but June traffic at the Port of LA, it was a record level for that month.

3:31So, I think the market broadly is looking out and saying, hey, I don't really know if what we're seeing with the inflation that could be driven by the potential of the tariffs is going to be as bad as we think. But at the end of the day, what's the investor takeaway, guys? Peter Lynch probably had it right when he said, if you spend 13 minutes on economics in a year, you wasted 10 minutes. These things affect us in the real world. But as investors, I think our time is still just better spent looking for strong, durable businesses with those great long-term tailwinds. We start focusing on macro.

4:04What happens? We're reacting based on what our own biases and inclinations are. If we give our emotions control of our portfolios, that's never the right decision. If you do the math on Peter Lynch, You spent three minutes on macro. That's about what we did, give or take. We'll be back with some news about NVIDIA and China after the break.

4:45interests. No sifting to find exactly what you need so you can spend your time learning to trade brilliantly. Learn more at schwab.com slash trading. Jose, you've covered semiconductors before. It was cool to cover semiconductors. Today, we've got some news on NVIDIA in China. What's going on? Yeah, so pretty exciting news for the overall semiconductor industry. Today, the stocks in the semiconductor space are up roughly 3%, 4%, 5%, depending on what stock you're looking at. But the CEO of NVIDIA recently made a trip to Beijing and met with a few government and industry officials there. While he was there, he did provide an update to customers, noting that NVIDIA is going to be filing applications to sell the NVIDIA H20 GPU again to that market.

5:33And they did assure, Jensen assured that the U.S. government has assured NVIDIA that the licenses will be granted, and NVIDIA hopes to start deliveries there pretty, pretty soon. So just a quick kind of backlog of what happened. On April 9th of 2025, during this was still part of NVIDIA's quarter one earnings, the U.S. government issued a new export restrictions on the H20, which is an AI chip meant for the Chinese market, and that they could no longer ship to that region. For that one quarter and those few weeks that the export restriction affected, the company lost roughly$2.5 billion in revenue.

6:08And then when they gave guidance of quarter two, they mentioned due to these restrictions, they were losing about$8 billion in revenue per quarter for a full quarter. So now that you have this new entrance of this market, you can at least potentially see at least$30 billion added on revenue, not seeing any growth rates per year for the overall AI GPU space in China. So a lot of companies are excited. This also did trickle down to a little of some other companies. AMD also had similar export restrictions, and they did respond to similar comments that they will also be looking for these license approvals for their chips as well.

6:46I mean, this is not exactly the same thing as Richard Nixon going to China in 72, but Jensen Wang going there in person. It's a reminder of how important China is for the semiconductor industry writ large. Very important. And it also showcases how we want to have this AI technology being run on American technology. We don't want it run on any other from from other countries. It's coming from NVIDIA, which is a U.S.-based company. This is all very clearly positive news. Is the four trillion dollars in market cap for NVIDIA a buy, a sell or an index for you at this point, Jose? The index means you just stick with whatever allocations in a broad-based index fund, which with a$4 trillion market cap is pretty sizable at this point.

7:35Yeah, for me, it's definitely more in that index position. I'm not looking to add any more to my portfolio. Obviously, there's a lot of growth opportunities, and that's why I'm willing to hold. But obviously, you could see plenty and plenty of short-term tailwinds that could create volatility. So for me, it's a perfect index play, as you mentioned. Pretty much just hold and ride this AI wave. It's a jam-packed day. Let's move on to the story I thought we'd lead with. We had three of the major banks report earnings this morning. That's JPMorgan Chase, Wells Fargo, and Citigroup. As bank lending goes, so goes the economy.

8:09So, Jason, what are the banks telling us about the economy? I know Jamie Dimon must have some thoughts. He always has thoughts, the godfather of the U.S. banking industry, and a little bit of a perma bear at times. When things are going very well, he's very bearish. He does get a little more optimistic when things are a little bit questionable. But what I really saw this quarter was there's less of what management says, and then there's what the businesses did, and then what management is doing, thinking about the businesses. And overall, again, JPMorgan, Wells, and Citi, the results were fine.

8:43Again, that's looking backwards, though. The one thing that we can look at that gives us some indication of what management is acting on going forward is provisions for credit losses. Frankly, there were no major changes here for any of them. This is what they're doing on their books to bolster their balance sheets for expected future loan losses. And so Wells and Citi reported increased allowances, but they were both commensurate to things within the mix. So Wells had some changes in its portfolio mix, a little bit less asset-backed stuff like mortgages and a little bit more credit cards. And Citi's went up mainly because its loan portfolio just got larger.

9:22I don't think we really learned a lot broadly that we didn't already know. Now, you look at these three, WellStock is down, call it 5 % today. Management lowered guidance for net interest income. That's the most important source of profit for Wells Fargo because it's a big Main Street lender. So maybe there's a little bit of an indication there. I found it really interesting that, to your point, Jason, Diamond is considered such a bear when things are good and such a bull when things are bad. But the J.P. Morgan CFO said during the call that the consumer seems to be fine. I mean, that is an exact quote, which feels to me like a bit of a reach, because to your point, a lot of the data that these banks are working off of is lagging.

10:04They're basing off theories about credit and consumer spending based off of their own consumer credit portfolios. And to their point, that is led by labor markets. And with unemployment, it's still less than 5%. I mean, it seems to be fine. But that lagging indicator, I worry, could just be something that sneaks up on these types of businesses because we've seen unemployment tick up continuously for over two years now. More than half of all American consumers say they expect to be worse off financially next year in comparison to this year. And consumer spending is declining. The Federal Reserve is looking to manage inflation, not unemployment.

10:41So with less rate cuts this year, I feel like that could further are worse than unemployment rates. And that lag in between, I think, what some of these banks are experiencing in terms of the quality of their credit portfolio versus what the average American is experiencing right now is incredibly clear to me when I listen to these earnings calls. And no way our listeners want to hear the nitty gritty details on three different banks. They're probably zoning out already, Jason. We don't want to talk about return on tangible common equity for all three of these? Come on, that's fun stuff. Hey, we'll get to the stress tests, all that stuff, right?

11:18No, no. You get to talk about one and only one, Jason, of JPMorgan Chase, Wells Fargo, and Citigroup, which had the most noteworthy earnings for stock pickers out there. Honestly, I don't think we had really any outliers here. Just a couple of really quick points about each of them, I think, probably serves our listeners better. JPMorgan continues to be that gold standard. You look at their return metrics, Nobody fall asleep on me here, but they're extraordinarily high. Directionally, we're talking twice as good as a city, which is struggling with years of issue. Morgan also had pretty decent loan growth.

11:51Jane Fraser is doing a really good job of dragging city forward. But again, they're bragging about 8 % return on equity versus 17 % over at J.P. Morgan. So, that's the difference you see there. Now, looking at Wells, it may be the one that really signaled to the market that consumers, to Emily's point, are feeling more of a pinch than anyone else. Again, looking at that bringing down their expected net interest income, this is the one of all of these that's most concentrated on traditional Main Street USA banking and lending. Maybe that's the biggest takeaway for me is that. And the million-dollar question, buy, sell, or index on these banks, Jason?

12:35You know how I do this. I can't give you any of those three. I'm going to say none of the above. If I'm buying bank stocks today, valuation really matters with these giant mature businesses. Yeah, there are some positive things. Less regulation, lower corporate taxes is compelling. But there's just much better values to be found if you look at some of the larger regional and a handful of more specialized banks out there. That's who I'm looking to hear from this week, like Truist Financial, for example. It's really in the sweet spot of the demographics, like the Southeast migration trends. I won't steal Emily's thunder, but there's a big regional bank with national reach that just made a really interesting acquisition that has that one on my radar.

13:16But I'll let Emily talk about that one. Yeah, I completely agree here with Jason. I think there's a fair point that a reduction in regulation across the board with the new administration could just be a boon for the industry. But that doesn't make me want to go out and be like, I'm going to start indexing these banks. Because if I'm index, I mean, index is a total market of which you get exposure to a lot of these high-quality companies. But if you're going to want additional exposure in my book, pick the high-quality ones, right? The JP Morgans. And to Jason's earlier point, a company that should be on everybody's radar, which is Capital One Financial.

13:46They just closed their Discover merger, and that makes a behemoth in this space. But skip the bad ones. And I was going to say that I think quality is more important than price here, and I think that is true. But I was thinking of that in the context of those small regional banks that can sometimes get really attractive on a price basis, but you're losing out on quality. I think Jason's point about understanding the price you're paying for even the larger banks is incredibly important because these are mature businesses. And the market can have pretty stark reactions for factors outside of their control when it comes to the broader economy.

14:21So focus on quality here, but don't ignore price. Let's move on to crypto week. I've heard about Shark Week for years, but this is my first crypto week. I've seen Bitcoin touch new highs at over 120 ,000 per Bitcoin this week. What's going on, Jason? Yeah, unlike Infrastructure Week, which has been playing out for 20 years now, crypto week is actually kind of happening. So, this week, there are several pieces of legislation that it looks like Congress is going to be taking up that could really clarify the regulatory framework more in the U.S. And that's a big positive thing. There's more going on, too, really.

15:02This really started over a year ago when the Supreme Court basically forced this Securities and Exchange Commission to actually regulate crypto instead of just suing crypto companies. And that's what led to the approval of Bitcoin and Ethereum ETFs. And they've been around for about a year at this point. So, there's a massive amount of institutional investment into crypto that's increased over the past year. The things that are happening right now in the regulatory framework, they don't guarantee the crypto future that bulls have predicted, but it should result in continued increase in investment into the DeFi and fintech tools that are being built on blockchain.

15:38The other thing, too, recently, all of the things with Stablecoin, there's been a massive amount of news, companies like Shopify partnering with stablecoin creators like Circle and Coinbase, which is in the middle of it, and Stripe as a payments processor to start building transactional mechanisms using stablecoin. The tide is definitely favorable right now for everything crypto. One free bold prediction. I think we'll probably be talking about crypto on this show later this week again. But after this break, we'll have some bold predictions on individual companies this earnings season. Get a concise daily market preview from Charles Schwab, including stock updates, U.S.

16:21and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Schwab Market Update is an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less. Listen today at schwab.com slash market update podcast or wherever you get your podcasts. That's schwab.com slash market update podcast. Time for a segment we call Bold Predictions, this time with an earnings season flavor. Emily, start us off. What's your bold prediction on a company who will surprise us this earnings season, either on the good side or the bad side?

17:01Unfortunately for me, it's going to be on the bad side, and that is actually Etsy. And this is a fine business. Let me be very clear about that. They're cash flow positive, and leadership has done a great job, admittedly, over the course of the past decade of growing this company. But they have made a lot of really questionable acquisitions. And I worry that with the increasing narrative around the type of purchaser that is coming to their platform, there is a disconnect between what management is seeing versus what their customer is seeing. And I see that right now around tariffs. And the reason why I think they could surprise to the downside here for earnings season is because management has come out and said, look, very, very little of our product is shipped from China.

17:42In fact, if anything, tariffs are going to be a boon for Etsy because we have all these wonderful handmade products right here from the United States. I think any of the consumers who have used Etsy listening to this show are probably aware of the fact that there's a lot more Chinese made and foreign made goods on Etsy's platform than leadership is probably willing to admit. And many of those companies and people claiming to ship from the United States actually get their products and raw goods from foreign countries, including China. So, I actually worry a bit here as we head into earnings season that the tariff picture for Etsy could be a lot worse than what management thinks.

18:16And the reason that could position investors poorly is because management has communicated the exact opposite. So, I'll be really interested to see what they say here when they report earnings at the end of the month. I've got an optimistic one. I've got a bullish one for us here, Anand. A company called Confluent, ticker CFLT, that I've followed really closely. I'm going to make a bold prediction that they beat their guidance. Companies set an expectation that subscription revenue was going to grow about 19%. They report close to the end of July. Revenue was up about 26 % in the prior quarter, in the first quarter.

18:51And I think that they're sandbagging, but I think they set a really conservative guidance. I think they're going to do better and they're going to surprise the market because more and more companies need to be able to take on these data streaming products, especially is AI and being able to make decisions with data in real time becomes more important. The AI tools demand real-time data, and I think Confluent is going to surprise everybody. I'm going with Warner Brothers Discovery myself. Last night, I took my eight-year-old to see Superman. I've got good news for comic book fans. They fixed the, no spoilers, they fixed all the problems that are inherent in the Superman narratives, and they've built the DC Universe, the Justice League, for future films.

19:35I'll be very interested to hear the earnings call from Warner Brothers Discovery this quarter. Here at The Motley Fool, we live on feedback and cinematic universes. To be part of that feedback or to ask a question, email us at podcasts at fool.com. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy yourself based solely on what you hear. All personal finance content follows Motley Fool editorial standards, is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only.

20:09See our full advertising disclosure. Please check out our show notes. Emily Flippen, Jason Hall, Jose Najaro, and the entire Motley Fool Money team. I'm on Enchocabaloo. We'll see you tomorrow.