Federal Reserve officials have indicated they intend to continue to raise interest rates in order to combat inflation. Truist Chief Market Strategist Keith Lerner discusses the Fed's next move and his outlook for earnings on Yahoo Finance Live.
Let's kick things off with Keith Lerner. He is the Co-chief Investment Officer at Truist. Keith, so let's talk about that big economic data we're expecting tomorrow. What are you looking for in terms of how significant that cool down could look like?
So listen, the headline consensus is around 3%. If you think about a year ago, we were close to 9%. So we've come a long way.
I think it will be favorable overall for the market. But I will say, we're kind of front running that number a bit in this rally that we've seen over the last few days.
If you listen to some of the Fed officials over the last several weeks, some of them have been talking about two rate hikes. So I think July is most likely.
I think, as we move past that, I think there's a big question whether we'll actually get another one after that if we see some of these disinflationary trends.
And the last point I will say, some of these base effects that really helped during the summer, they become more challenging in the fall. So we'll have to see how that plays out as well.
But in the near term, you know, market's focused on this month and next. And right now, those disinflationary trends seem to be intact.
But you could argue that last mile, if you will, to get to that Fed's 2% target is potentially the stickiest one. I mean, how are you looking at that marker there amid a debate about whether, in fact, 2% should be the target for the Fed?
KEITH LERNER: Yeah, listen, I agree with what you said. I think the big picture is moving from 9% down to 3% is probably not easy, but it moved rates over 500 basis points.
I think getting here is the easier part, getting down to 2% and sustaining that based on the labor force that's still tight. Think about all the onshoring that we have as well.
And then some of these fiscal stimulus bills which are still going to trickle in as far as infrastructure bills. So I think it's going to be a challenge.
As far as changing the marker, you know, I don't know. There's a lot of back and forth on that. I don't think they're going to change it.
I think there's-- in their view and especially, Chairman Powell, he's going to continue to talk tough until it's very evident well after the fact that things have come to a level they feel comfortable with.
But yeah, I think it would kind of be somewhat of wait and see mode to get to that, I think, really a 2% sustained level. Our view is, we're likely going to stay at a higher level for longer, somewhere closer to that 3% level.
- Well, Keith, the other big thing that investors are going to be watching this week is the start of earnings season. We're going to start hearing from the bigger banks.
And Morgan Stanley's Mike Wilson taking a bearish tone heading into the earnings season, saying that results for the second quarter, that they can't match up to the stock rally that we've seen.
The bar though, has been set very low. Consensus is for a 9% decline in earnings. If companies are able to beat, is that enough for this market to continue to the upside or do you share Mike Wilson in saying that it's not going to be enough?
KEITH LERNER: Yeah. Our point of view is that we're more likely to lead into more of a consolidation. I do share the view that, as you think about coming into this earnings season, stocks are closer to a 52-week high. We had a great first half. We've seen tech or the NASDAQ have its best run since 1983 as far as for the first half.
So I think the way I'm looking at this earnings season is it's going to need to validate the gains that we've seen. I think the earnings season will be fine. I think the economy's been stronger than expectations. I think that will translate into a solid earnings season.
But I think more likely is that you're going to see a lot of bifurcation within the market. But the overall headline market, the S&P 500, probably just chop around.
If you look back at April during that earnings season, you ran into that as well and then you chopped around. So I think some backing and filling, some digestion actually would be a positive. But we're not looking for necessarily a big move down either. We just think it's time to take a little bit of a pause.
AKIKO FUJITA: To what extent though are we likely to see-- I mean, if you're expecting more moves to the upside, how are we likely to see these moves broadened out?
And we've been talking so much about AI and tech in the run up in that front. But what else are you looking to in terms of sectors that could potentially see more moves to the upside?
KEITH LERNER: Yeah, no. It's a really good question. And it looks to me like big cap tech, which were still overweight, and we think is leadership longer term because even if the economy slows down, we think that companies will need to invest in technology or fear of being left behind.
But on a shorter term basis, what we did in early July is we actually boosted our view on the S&P Equal Weighted Index where every stock in there has the same weighting. And what we've really seen is on a relative basis, we're starting to see improvement even today.
It was notable back in June when we upgraded our view of that area, is that on a three-month basis, it had this the biggest underperformance relative to the S&P market cap that we've seen over the last 30 years. And that's because of that big cap tech. So everyone was talking about breadth.
We are seeing things broadening out as well. So we think that mean reversion towards the equal weighted or the average stock will likely continue. It has some more juice.
And then outside of that, we also are fans of the Industrial sector. You know, normally if you still think the economy is going to slow down, you would say, hey, the industrial sector isn't the place to be.
But they also have those tailwinds from what I mentioned earlier, that infrastructure spending, that onshoring. And look at the industrials today. They're close to breaking to an all-time high. And we think that leadership continues.
- So Keith, it sounds like you're seeing some opportunity within individual sectors. But overall, I believe you're still neutral here on this market.
What is it going to take in order for you to be on the defensive? Are you going to be more in this wait and see mode until the Fed pauses its rate hikes for the foreseeable future?
KEITH LERNER: Yeah. I know. We're strongly neutral, which, the strategists, a lot of times, you're going to have a big call either way. But we're also realistic that this post-pandemic cycle has just been unique in so many different ways. Think about the S&P valuation actually expanded this year even though the Fed's still raising rates.
So you know, I think the bar for us to go on offense is relatively high just because we're trading at a 19 multiple at this point for the S&P 500. Sentiment was depressed and that helped this market as people started to add to positions but less of a support today.
And I think the one thing that's holding us back is that we think the policy, as far as fiscal monetary policy, is going to be constrained.
So if you think about these big bull markets that we have, 2009 or coming out of the pandemic, you had a huge amount of liquidity coming in because of fiscal and monetary support. We just don't see that today.
So at this point, we're looking at below the surface for relative opportunities. But I think the bar is pretty high for us to move to offense at this point.
And conversely, if we had a big move up, we'd potentially move back to defense. Or if we had a pullback, maybe we'd be more aggressive to the long side.
AKIKO FUJITA: Yeah. And while we're talking about equities, I wonder how you're looking at the fixed income space? I mean, certainly an argument to be made that if you're getting yields of 4% to 5%, there's more money to be had there. Have you increased your exposure on that front?
KEITH LERNER: Yeah, we're positive. We haven't increased our exposure recently. But I will say one thing that we're more interested now we're back to 4% is, we're more comfortable going a little bit longer term in the maturity of the bonds.
So you look at short-term bonds, you're earning 5% or 6%. But if you look at a 10-year, you're earning 4%. So someone might say, why would I go longer term when the short term yields are higher?
Well, if the economy eventually slows down, then eventually the Fed will have to move lower and the total return aspect of a 10-year Treasury is attractive and it also provides diversification.
So at these level, close to 4% with some of these disinflationary pressures, with still in our view, all these Fed rate hikes are likely to weigh on the economy somewhat later this year.
We think the fixed income market looks more attractive. But we would really focus on high quality, keeping it simple. We don't see much value in the credit sector today.
AKIKO FUJITA: Hey, some good takeaways there. Truist Chief Market Strategist, Keith Lerner, it's good to talk to you today. Appreciate the time.
KEITH LERNER: Great to be with you. Thank you.
