PIMCO Portfolio Manager Erin Browne joins Yahoo Finance Live to discuss GDP growth amid volatility and inflation.

Video Transcript

BRIAN SOZZI: While recession risk over the next year is low, it is fragile and remains prone to exogenous shocks, points out our next guest. Erin Browne is a portfolio manager at PIMCO. Erin, always good to see you here.

Earnings season, it's days away from starting. It's just a long blob that never seems to end. Do you think the growth slowdown we are seeing here in the US from a GDP standpoint, how do you think that's going to show up in corporate earnings?

ERIN BROWNE: So I think it's going to be really the key to watch for in corporate earnings. To date actually on a year-to-date basis, we've seen upward analyst revisions meaningfully throughout 2022. And so the market really isn't yet focused on a slowdown or any translation of the volatility that we're seeing in some of the economic data, particularly the inflation data translate over into earnings expectations.

So I think that's going to be the key to watch. And really what the market's going to be focused on is margins. How are corporates being able to manage the increased inflation and cost input inflation that they're seeing coming through? And that, I think, is going to be the key differentiator for stocks.

JULIE HYMAN: And what are we hearing-- hey, Erin, it's Julie-- what are we hearing in these sort of in-between companies that are reporting in the never-ending earnings season, as Soz pointed out? Are we getting sort of any early indications here as to what margins could look like?

ERIN BROWNE: There have been a couple of pre-announcements, although there haven't been a lot, so the data is quite limited. What we're seeing, though, is it really comes down to the end market and who the corporate is really serving. Those that are more exposed to the low-end consumer that's been hit with the double whammy of the child tax credit coming away as well as other stimulus measures sort of fading away have been having a more difficult time passing through pricing and some of that cost inflation onto their consumer.

Those corporates that are still exposed to the higher end consumer are a little bit more immune to the cost inflation pressures. Or they're not immune to the cost inflation pressures, but they're able to pass that pricing on. And so I think that's what the key differentiator has been thus far. And it will be important to see if that continues to translate through as we move through the next couple of weeks of earnings.

BRIAN SOZZI: Erin, the earnings report out of Conagra this week, frozen food giant-- they make Slim Jim's-- really bothered me because they missed on earnings or was disappointing on the quarter on the bottom line in large part because of inflation. And they're seeing more inflation or just seeing inflation accelerate, and that's now factored into their outlook, disappointing quarter overall. Is that type of report the new norm of what people should be expecting over the next few weeks?

ERIN BROWNE: You know, unfortunately, I think it is. Those corporates that are most exposed to both energy as well as food cost inflation are the ones that I think are really in the firing line right now. That's because, if you look at energy inflation, it's obviously gone up meaningfully. Anyone can look at their gas bills that they're paying at the pump to see that.

At the same time, when you look at the cost for food inputs, that also has meaningfully risen, in part driven to supply chain disruption; in part due to some weather effects, which has created weaker planting seasons; and then also in large part due to the fact that the Ukraine-Russia crisis has also exacerbated the problems of food inflation, given that they're some of the main exporters of wheat, in particular, as well as other commodities related to food. So I think that those companies that are most geared towards food inflation and energy inflation as their inputs are going to be hit hard over this earnings season. And it's going to be important to watch whether or not they've been able to successfully hedge out their sort of forward inflation food costs inputs, as well as how they're able to pass that onto the consumer.

Those that don't have strong brand loyalty are going to have a much more difficult time passing it onto the consumer. One thing to watch-- certainly watch in earnings season is talk about shrinkage. I think we'll see a lot of corporates trying to shrink the box sizes, shrink the serving sizes, to try to keep the consumer, but at the same time offer less for the same amount.

JULIE HYMAN: Yeah, that is definitely something we've been starting to see rumblings of, right? So I want to expand lastly upon the demand side as well. You said, we're watching margins. We also-- in your notes, you said you were watching demand.

Are we starting to see that erosion? We've seen a couple of little signs. RH is an example that we talked a lot about when that company came out with its earnings.

ERIN BROWNE: So on the margin, we are starting to see some cracks. But I will say, by and large, the economic data has been pretty resilient, despite the fact that we've seen increased inflation. I would say surprisingly so. But, yes, on the margin, we are starting to see some cracks.

We've seen it highlighted by a couple of corporates, both in the fourth quarter earnings season as well as some of the early pre-announcements in the first quarter. And what you're seeing is that the consumer is starting to finally push back, particularly in the lower end consumer segment on increased inflation costs. They're just not able to pay, given the fact that they're paying so much at the pump and they have the child tax credit that's been removed. You're starting to see it on the margin, and that's what's I think going to be important and key to look for.

BRIAN SOZZI: Erin, if General Mills shrinks my Honey Nut Cheerios box, I'm not going to be happy about it. And they will hear it from me. I need all those Cheerios to go in my bowl with my $12 oat milk. Erin Browne, always good to see you, portfolio manager at PIMCO. Have a great weekend.