Why the stock market is ‘as dull as you’re ever going to see’ it

Ryan Detrick, chief market strategist at LPL Financial, joins Yahoo Finance to discuss outlook on the market and upcoming earnings season.

Video transcript

MYLES UDLAND: We are right on the precipice of first quarter earnings season. What should investors be on the lookout for? Joining us now to discuss is Ryan Detrick, friend of the program. He's the chief market strategist over at LPL Financial. Ryan, great to talk with you this morning. Let's just start with some of the headline expectations that you guys have, as it relates to broad S&P 500 earnings growth in the first quarter of 2021.

RYAN DETRICK: Yeah Myles, thanks for having me. And let's take a different route just for a second here. The last 10 days, the S&P 500 only once has moved in intraday range of 1%. You got to go back like years the last time we saw two weeks this boring.

So let's put that in context here. We're slow and steady higher. Remember the old saying, don't short a dull market. This is about as dull as you're ever going to see. So just kind of remember that as we talk about earnings. But now the door opens to earnings season.

I mean, we think-- actually Myles, we could see upwards of 30% year over year earnings growth in the first quarter. That would be the most we've seen since coming out of the financial crisis. Expectations are for about a 25% earnings growth in the first quarter.

And let's not forget the previous two quarters, what happened. Massive, massive beats. Now let's be honest, everybody's bullish. Everybody thinks the economy is opening up, and it is. So that bar is a little bit higher. But we think, once again, corporate America will step up and justify a lot of the valuations that we see here.

MYLES UDLAND: Ryan, I just want to circle back to that idea of how boring the market has become. And this relates to another conversation we've had, which is around volume kind of falling off a cliff. We've seen a number of different data sources, looking at call option volume coming down, that was really-- seemed to be tied to some of that retail energy.

When you go back and look at market environment, let's think like 2017, the VIX was in the low teens the whole year. Everything was hunky dory. Is that the kind of environment that it feels the market might be trending back towards? I mean, that's kind of how we got here in the first place.

RYAN DETRICK: Yeah, you're right. We had years, right, of the VIX mini 20, and then obviously last year that didn't happen. But things like we're going back there-- and you hear this argument, like oh, it happened on low volume. Oh, the rally happened on low volume, like it doesn't count. Like it doesn't matter.

You look back at history, the last 10 years at least, we've had rallies on low volume, right? And you mentioned the option market, the meme stocks. I mean, that's kind of coming back in, which I think is a good thing, a little more normalcy happening here.

But let's not get spoiled. I mean, sell in May, the scary. Sell in May go away period-- I say scary in quotes here, but it is the worst six months of the year. We've had almost, what, over an 80% rally.

If you overlay this rally, Myles, with the one that started in 2009-2010, they're almost identical to what happened in 2010, right about now. A peak, and then a 16% correction into the summer months, and then an eventual move higher. We're not saying we're going to a 16% correction.

We are saying, let's not get spoiled by how great this rally has been, how calm things are. We might have a little upset the apple cart. And who knows what it is. Could it be COVID? Could it be earnings season? Could have just be people are getting a little too excited after those strong ISM numbers we saw last week? It could be a combination of those, things to be honest.

BRIAN SOZZI: Ryan, hang tight. We're just getting a statement from Johnson & Johnson following the FDA pausing that vaccine here from them. J&J saying the safety and well-being of the people who use our products is our number one priority.

We are aware of an extremely rare disorder involving people with blood clots in combination with low platelets, and a small number of individuals who have received our COVID-19 vaccine. In the United States, CDC and FDA are reviewing data involving six reported use cases that are more than 6.8 million doses administered. Out of an abundance of caution, the CDC and FDA have recommended a pause in the use of our vaccine.

Ryan, which brings me to my question here. The market has priced for perfection, what 23 times forward earnings on the S&P 500? But you see news like this, does the market deserve to be priced for perfection?

RYAN DETRICK: Yeah, I mean it could upset the apple cart a little bit, like I said. I love what Mike Darda said before me, six people have gotten sick. And that's nothing to ignore, but almost seven million people have had the shot. So it's all kind of relative. We do think it's kind of a near-term issue.

There's obviously other vaccines people are-- people are still getting. So you know, you look at AAII, the sentiment. People are awfully optimistic. [INAUDIBLE] there's a lot of excitement. Maybe that could be the time for the market to consolidate, at the very least after 80% rally over the past, we'll call it a year over-- over the past year.

MYLES UDLAND: All right. There we see the opening bell here on this Tuesday morning down on the floor of the New York Stock Exchange. Ryan, before we let you go, Bank of America's fund managers survey, out today. We talked about this a little bit in the last segment. 2/3 of investors think that we're in a late stage bull market.

But yourself and many others have said, look, 2020 was year one. Now how it goes, we don't know. But everything about the market last year acted like year one of a bull market. And you've got a lot of data around what tends to happen in year two of those kinds of runs coming off those strong returns we saw in 2020. Outline for us some of the historical tailwinds the market really has through the rest of this year?

RYAN DETRICK: I love that report. I'm anxious to dig in as soon as we sign off here. But here 2/3 people saying this is a late cycle. We would totally-- we'd be the other third, right? We don't see that. I mean, this is a new cycle of growth.

This is a new bull market. This is the-- we just started, obviously on March 23, so last month, the second year of a bull market, Myles. And you look back in history, the second year of a bull market's been higher every single time, at least going back to World War II, when you had six new bull markets.

Up about 17% on average. Now the catch, and there's always a catch to this stuff. Yeah, you usually have a double-digit return. The returns are not nearly as straight up like we see in year one, right? It can be a little rocky, a little hesitation here and there.

But the truth of the matter is stocks tend to do well in year two of a bull market. We think this is year two of the bull market. The economy is strong. The Fed is still there. Fiscal policy still there. Yes, valuations are high.

That's a little bit of a worry. But overall, we would be a buyer of dips, as year two of a bull market tends to resolve higher when all is said and done. And we expect that to happen once again.

MYLES UDLAND: All right, markets that stay in motion up and to the right tend to remain in motion up and to the right. Ryan Detrick with LPL Financial. Ryan, always great to get your thoughts. Thanks for jumping on this morning.