Stock market: 'Unlikely' S&P 500 will make money in 10 years strategist says - Yahoo Finance

The earnings recession is here, so what does it mean for the full-year market outlook? Smead Capital Management CEO Cole Smead and ProShares Global Investment Strategist Simeon Hyman join Yahoo Finance Live to discuss investors' sentiments on earnings and mega cap and small cap stocks.

Video Transcript

- Because corporate profits have retracted for two quarters in a row and analysts are forecasting the same for Q2. Now according to FactSet, analysts expect a 6.4% earnings decline for the S&P 500 in the second quarter. If this happens, it will be the largest drop that we've seen since 2020. If an economic recession follows this earnings recession, where should investors be putting their money? We want to bring back in Simeon Hyman, ProShares Global investment strategist and Cole Smead, Smead Capital Management CEO. Cole let me start with you on this one. With earnings profits here contracting two straight quarters, in terms of how investors should be reading this, how they should be preparing for the second half of the year. What do you think?

COLE SMEAD: Yeah. I mean, I think businesses are dealing with like a vastly different environment. I mean, I just mentioned labor costs a second ago. That is coming up and interest costs are coming up and those are hurting corporate earnings, no question about it. And you have to remember, we're coming off the highest corporate profits as percentage of GDP we've ever had in US history. So it is not shocking to see a contraction in margins in the aggregate, and that therefore it's going to affect earnings. Now the question again is, will people pay the same multiple for lower earnings? We will see.

- Simeon, that's a good question actually. Will people pay the same for lower earnings? I mean, are you expecting first of all, to see lower profits in this quarter ahead or weaker revenue growth? What are your expectations?

SIMEON HYMAN: They'll pay the same for low earnings, but then of course, if earnings did shrink 5% then the market's down 5%. So and that's I think in sort of the ballpark of where we think things may end up in the near term. One bright spot is that sometimes you colloquially hear people say, well, there's so much leverage in the system. Actually net debt to EBITDA, which is the classic measure of leverage is that all-time lows for the S&P 500, which again points to the math. But I come back to those dividend growers, you have to find somebody who's going to grow earnings.

And here's the interesting thing. If you look at those consensus estimates, the consensus estimates are for actually more of an earnings decline for the dividend growers who've actually been showing up with margin expansion in this environment. So they're a little cheap and expectations are a little low. There are other ways to get there, that's our favorite, but you've got to find some folks who are going to be able to fend off this margin contraction.

- And who are some of those dividend growers?

SIMEON HYMAN: You've got some classic names. You've got Coke, you've got Procter & Gamble, and then you have some other names that might surprise you like Nordson. But they are the folks who've been weathering economic storms for 25, 30, or 40 or 50 years.

- Cole, what about outside of US equities. When it comes to the underperformance that we've seen recently in international plays, are you seeing any opportunity there?

COLE SMEAD: Yeah. I mean, think of the tumult we saw here in the banking sector, that was a US problem. People have asked us why was it such a US problem? Well, because we had a euphoria here, we were the center point of that and therefore a lot of stupid things went on in banking too. If you look at Europe who was really the basket case of banking over the last 20 years, there was no issues at all. It was merely a flesh wound to quote the Monty Python.

So the reality is that the European banks come out of this being the whipping boy, very cheap, and yet at the same time their return on equity is climbing because even the ECB is being hawkish, even the BOE is being hawkish. And therefore their net interest margins are growing. And so we see it as-- not to say that the US banks aren't-- you can't make money in regional banking. We've been doing a lot of work in that space. But I just pointed out because it's just where no one wanted to be and therefore there was just far less risk. I think that's a very good guide for people as they go forward. We're the former darlings. How long does it take them to get their souls crushed, before people give up and therefore you should go sniffing around if the same thing happened in energy a little over two years ago.

- Simeon I want to ask you. So this week we saw a little bit of a risk-off play, but it wasn't completely risk-off. You know, you saw some conversion into the bond market. What are you advising clients right now? Is it a cool your heels, how are you advising them on asset allocation?

SIMEON HYMAN: Oh, I do think that there's an opportunity to go places you may haven't gone in a while. And we would suggest a little bit of a preference perhaps not to additional diversification outside the US but within the US. Mid and small-cap stocks have been entirely left behind for over a decade, they're trading at $0.50 on $1 on a price to book basis. If you were out of them for a decade, congratulations you won, but you should really consider having them back appropriately in a well-diversified asset allocation.

- And within that, within small caps or the medium sized caps, what more specifically are you looking for just in order to determine the most attractive names that are positioned at this point?

SIMEON HYMAN: Yeah, we kind of win out folks sometimes because we think dividend growth actually works really well as you go down in capitalization. Because if you go, let's say, to the Russell 2000, to small caps, and you want to take advantage of this valuation discount, you're faced with higher leverage, 2/3 of the companies don't make any money, and that can be a risk even in a mild recession. But you can find smaller companies that have those same attributes of the large cap dividend growers and that can give you a prudent way to access that discount.

- Cole, how are you feeling about small caps right now?

COLE SMEAD: Well, I mean, I would agree with Simeon that as soon as you get out of mega caps everything just looks relatively more attractive. I think the interest cost this point on the leverage will be plausibly more biting. But I mean, how we look at the US equity markets from an aggregate perspective, I mean, to touch back on the S&P, I think it's unlikely the S&P will make money in 10 years, including dividends reinvested. Even if we're wrong, we think it'll lose money in real terms unequivocally. So I just point that out because while I can say that, there are some incredibly cheap stocks out there in the US stock market to Simeon's point, it's just not at an aggregate level, it's not a diversified level, it's not a broad level. I would say that the cheapest 10% to 20% of stocks rarely ever get cheaper, and that could be across capitalization in some cases.

- Cole, what do you think is going to be the catalyst here for the markets to move higher? Is it all about the Fed, is it all about the messaging, or is it something else that maybe investors don't have on their radar right now?

COLE SMEAD: Yeah. The investors need to pray what they've been hoping for a while, which is that the Fed cuts. And I just don't see that happening. That's really the only thing. They need liquidity and the liquidity is just disappearing as we speak. Use the regional banking crisis an example, does that help or hurt liquidity? It hurts liquidity. So time and time again, whether it be the Fed, the regional banking, et cetera, I mean, go look at the IPO or the SPAC windows. They've kind of got a little better but they're nowhere near where they were. That's what you need for ebullient equity markets and really a bull market, and that's just not present. So the psychology is we're just cleaning up the froth from the prior era which is terrible to say, but it's what happens over 10 and 20 years periods in stock markets.

Adblock test (Why?)

from "market" - Google News https://ift.tt/O519Fnd
via IFTTT