Episode summary
Rising oil prices haven't hit the broader market yet, says DCLA's Sarat Sethi
Summary
Sarat Sethi said rising oil prices have not yet fully hit the broader market, but he expects the impact to show up in earnings and valuations as companies confront higher input costs. He pointed to Delta as an early warning and argued that manufacturers, industrials, and global transport firms are especially vulnerable because they rely on energy and other dollar-priced commodities.
He also said this earnings season will be less about a single trade and more about whether investors can balance the concentrated AI-led market against other opportunities. Sethi emphasized cash flow and return on invested capital as the key questions for the Mag-7, while suggesting a barbell approach that includes health care, staples, and commodity-linked businesses with secular growth.
On the market’s reaction to $108 oil, Sethi argued the damage may come gradually through valuation compression rather than an immediate shock. He said the “K-shaped” economy could make lower-end consumers and more cyclical companies feel the strain first, while staples and health care could benefit if the rotation broadens.
Key takeaways
- Sarat Sethi expects higher oil prices to bleed into earnings first at companies with heavy energy and commodity inputs, especially industrials and transport.
- Sethi says the market has not yet fully priced in $108 oil, but valuations could compress gradually across vulnerable sectors.
- Sethi argues the Mag-7 still dominate on cash flow, but investors should focus on return on invested capital rather than just momentum.
- Sethi recommends a barbell approach that includes health care, staples, and commodity names with secular growth, not only AI-linked stocks.
- Sethi says the AI trade has its own demand and pricing issues, so oil is not the main driver of that segment.
Notable quotes
“I THINK YOU'RE GOING TO SEE THAT COMING THROUGH. I MEAN WE SAW EARNINGS ALREADY COME THROUGH FROM DELTA”
“COMPANIES ARE GOING TO HAVE TO BE CAUTIOUS, ESPECIALLY THOSE THAT ARE USING INPUTS LIKE ENERGY COMMODITIES THAT ARE ALL PRICED IN DOLLARS”
“THE SAFETY TRADE HAS BEEN THE MAX SEVEN BECAUSE THEY HAVE THE BIG CASH FLOW”
“I DO THINK YOU DO HAVE A SECOND MARKET THERE THAT IS BASED ON CASH FLOWS”
“I THINK IT'S GOING TO COME INTO VALUATION. YOU'RE ALREADY GOING TO SEE VALUATION COMPRESSION START”
How the episode opens
Estimates right now at 2898. Maybe that's one of the most important things they said, because it does have the stock up about 2%.
Meantime, I want to talk to you this morning as we look at the futures right now. Dow up about 105 points. Nasdaq off about 123 points.
S&p 500. We'll call it unch for now. Sarat of course is the portfolio manager at dcla as well as a cnbc contributor.
We've got a slew of earnings coming in. Before we even touch on that. I want to show you energy right now sarat.
Because we've been talking you're looking at wti crude up above $108 has not really impacted the equity market at least yet. And wanted to get your take on that.
I think you're going to see that coming through. I mean we saw earnings already come through from delta. And I think they're going to come down.
And companies are going to have to be cautious, especially those that are using inputs like energy commodities that are all priced in dollars. Andrew. So I think, you know, this is something that's already been discounted a lot of stock prices, but you might see some companies, you know, especially those in manufacturing, industrial, global transport, kind of talk down earnings probably a little bit more just because we haven't had any safety in kind of the oil price yet.
It hasn't broken below 100 and doesn't look like it's going to go there unless you get something really drastic.
So as you are thinking about this week's earnings, which stocks are you focused on? What do you think matters. Obviously folks are going to be, I think, obsessed with the space x, tesla and the like. — Well, I think you got to break it in a couple categories, right?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- oil prices impact
- market trends
- earnings season outlook
- broader market
- portfolio management
Watch the episode
Watch “Rising oil prices haven't hit the broader market yet, says DCLA's Sarat Sethi” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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