Earnings expectations are ‘everything’ right now for the market: Strategist

Rebecca Felton, RiverFront Senior Market Strategist, joins Yahoo Finance’s Brian Cheung and Kristin Myers to discuss market outlook and the economic recovery.

Video transcript

KRISTIN MYERS: I want to continue this conversation about what we have going on in the markets right now. Let's bring in Rebecca Felton, senior market strategist at RiverFront. So Rebecca, you know, we're seeing some record highs today. How optimistic are you when you're looking at the back half of 2021 and even into 2022?

REBECCA FELTON: Hi, Kristin, it's nice to be with you today. We are very constructive as we look out into 2021 and 2022 because the fundamentals are in place in terms of-- for a sustainable recovery. Unemployment has come way down from where we were at the height of the pandemic last year. We're still up at 6%, we know that's still too high. But it's still a huge improvement.

And of course, the numbers last week, particularly coming out of the service sector, were very strong. Consumer, business sentiment, both have improved. And of course, the housing market's strong. So there's a lot to be positive about. But in the near term, we think that you could see some skepticism as we navigate through earnings period.

BRIAN CHEUNG: Hey, Rebecca, Brian Cheung here. So having said that, does that mean that we might be overdue for some sort of correction? Because I've heard a lot of commentary that the jobs report that we saw on Friday should be expected in the months to come. And you've kind of already seen bond yields pricing on the optimism over the reopening.

So are we already fully priced in for the post-pandemic economy? Or are there still places to load up on more equities?

REBECCA FELTON: Well, we're still [? overweight, ?] equities, in our asset allocation strategies. And coming into this year, our forecast were about an 8% to 10% base case for the S&P 500. And we are at 7%, 8% right now. But obviously, we could still see, in our bull case, a double-digit gain.

What we have concern about in the near term centers around our process. Our tactical rule is don't fight the Fed. Obviously, the Fed's still accommodative. But the trend, we believe the trend on the S&P 500 as defined by the 200-day moving average, while rising is probably getting a little toppy. And also, the sentiment numbers are in the overly optimistic range, which can be problematic.

Again, particularly, we know, to your point, a lot is priced in in terms of the earnings growth that we're expecting for Q1. So what management teams say as we navigate through this period, particularly as it relates to if taxes are going up, you know, will that impact CapEx, hiring plans, expansion plans, that sort of thing? So there's going to be a lot riding on what these management teams say as we navigate through this period with the market priced where it is.

KRISTIN MYERS: So then, Rebecca, how should folks really deal with that growth versus value debate in their portfolios going forward this year?

REBECCA FELTON: Well, you know, you hear so much about the word rotate. And what we have been trying to encourage folks to remember is tilting is a better [? dynamic ?] for us in terms of just leaning in to some of those sectors that are more cyclical. So we have boosted exposures to infrastructure or industrials, you know, vis a vis into infrastructure.

We have increased financials. We have even increased energy, which we're still not positive on the prospects there enough to go overweight. But we've also kept our healthy allocation to technology. We've boosted consumer discretionary. So we're trying to be balanced with this and really lean into some of these cyclical sectors rather than do a full rotation.

BRIAN CHEUNG: And Rebecca, we're getting into earnings season with the banks set to kick off next week. So is there the possibility that earnings expectations could be what ultimately make some sort of come down to earth moment? Because it seems like expectations, at least on the earnings front, have come up over the past few quarters.

REBECCA FELTON: Absolutely. And you hit the nail on the head with the financials. Because that was one of the strongest sectors in terms of revisions, higher during Q1, owing to better loan growth and improving net interest margin. So we've already seen some pretty significant revisions, even as we've moved through the last month of the first quarter.

So expectations are everything right now in terms of where the market has priced at 22 times forward earnings. So you're going to have to have a lot of comfort that that is, in fact, a floor in terms of the growth rates, and that they can go higher. So again, we're cautious in the near term, we haven't changed our positioning. But we have sort of some lines in the sand where we could take some risk out.

KRISTIN MYERS: We've talked a little bit about the Fed lately and essentially about the pivot that they're going to have to make. Before, from dealing with an economy that was struggling and really needed to support, essentially to an economy that is very quickly heating, as we see this recovery continuing. How do you think markets are going to handle that kind of pivot from the Fed?

REBECCA FELTON: Well, what we believe is the Fed is adamant that they are going to do a good job of communication. And communication is key in terms of the messaging that they're going to be sending out. And they have continued to sort of stay on message in terms of not raising rates for the foreseeable future and doing whatever it takes to keep the economy on track.

So we believe that that is what will occur, that the inflation numbers that we'll likely see as we navigate through comps year over year versus some of the worst of last year's declines. That inflationary pressure will likely be transitory. And as we move through the rest of 2021, things should normal out. And we don't expect the Fed to change their messaging any time soon.

BRIAN CHEUNG: What's the specific playbook then for right now, given that accommodation? Where are the pockets or industries, specifically, that you're watching over at RiverFront in terms of allocating equity right now?

REBECCA FELTON: Well, we had come into this period again, or we had come into 2021 underweight, the more cyclical areas, the financials, the materials, the energy and that sort of thing. And we have, at least, neutralized energy. We are specifically diving into industrials vis a vis infrastructure types of [? place. ?]

And also, we have added back to the consumer areas of the portfolios, again, sticking with software and services instead of technology, but trying to sort of have a mix of those stable earnings growers along with things that are levered to a reopened economy. Trying to get not too far either side of the fence, if you will, as we navigate through the next few months.

KRISTIN MYERS: All right, Rebecca Felton, RiverFront senior market strategist, thanks so much for all of those insights.