Earnings to bring ‘a lot of volatility at the stock-specific level,’ strategist says

BNY Mellon Wealth Management CIO Leo Grohowski joins Yahoo Finance Live to discuss stock swings, SNAP earnings, investing amid market uncertainty, volatility, recessionary risks, and the outlook for Fed policy.

Video Transcript

BRAD SMITH: To continue this conversation, joining us now for more on the markets, we've got Leo Grohowski, who is the BNY Mellon Wealth Management CIO. Great to have you here with us this morning. First and foremost, as we kind of digest the earnings that have been coming at us like we're sticking our head in front of a fire hose this week, most notably here, it's come down to what companies are continuing to maintain their guidance and where we're actually seeing some poor guidance. What are your expectations as we move throughout the rest of the season?

LEO GROHOWSKI: Yeah, if we thought this week was busy, hold on to your hats for next week when we have 175 out of the 500 companies in the S&P reporting. And I think, Brad, it will be much the same. It's going to be a lot of volatility at the stock-specific level, driven as much or more by future guidance.

And we're certainly seeing that with the likes of Tesla on the one hand. And as you've been reporting well all morning, Snap and now Twitter on the other hand. So I expect to see a lot more cautiousness as we work our way through the earnings season reflecting an economy that is most definitely slowing down.

JULIE HYMAN: And on that front, Leo-- it's Julie here. It's good to see you. On that front, we just got PMIs out a few moments ago from S&P Global. The manufacturing number actually coming in a little ahead of estimates, 52.3 versus the 52 that was estimated. A big slowdown in services, which is really interesting. These are July preliminary numbers, slowing down to 47 from 52.7 the prior month, which was also the estimate.

That's really interesting to me, given that we keep talking about how everybody's flying and taking vacations this summer. And yet you see that slowdown in services. What does that tell you? A contraction in services below 50, what does that tell you about what's going on in the economy right now?

LEO GROHOWSKI: Yeah, listen, S&P called it a worrisome deterioration was the quote that I saw out of S&P when those numbers were reported just a short time ago. And I think when you look at the overall PMI number, except for that nasty retraction during COVID, you've got to go back to 2009 to see numbers this weak. I think what you're seeing, Julie, is a lot of consumers were set on taking a summer vacation as an example, come heck or high water, regardless of what airfares might be, regardless of what hotel costs might be, and regardless of what restaurant prices might be.

And I think there's now a realization that with inflation high, real incomes are actually down. And that, combined with the consumer sentiment readings that we've been digesting from the Conference Board and, more notably, the University of Michigan, I think that combination spells a much more cautious consumer spending outlook going forward.

So think of this as sort of, I think, the last hurrah from the sort of post-COVID bounce that we're seeing. And I do think the future of services is going to be more muted.

BRIAN SOZZI: Leo, are there any surprises you think investors should be prepared for looking into the fall?

LEO GROHOWSKI: Yeah, that's a really important, big picture question. We can't extrapolate out, unfortunately, weeks like this, which feels so good. Thank you for having me on today, right? NASDAQ up 5% on the week, S&P up 3 and 1/2 percent.

The warning is going to be volatility, right? We have to go back to '08, '09 to see the number of 2% intraday trading moves that we've seen so far this year. Just over 40% of the days have seen 40% moves. And 90% of the days, we're seeing 1% moves up or down. So the VIX really doesn't give us an accurate picture of intraday volatility.

And we're just explaining to investors that that's likely to be the case. And unfortunately, we may not have seen the lows. I know that's the big debate right now. But volume, we've only had two days in the last four weeks where volume is in excess of the average year to date. So all of this is happening with really low volume. And I expect, despite the summer season, that might change next week, as we get a slew of earnings reports, the Fed meeting, and also a GDP report, which I think there's a 50/50 chance that we could be reading about the back-of-the-envelope recession calculation two down quarters in a row.

BRAD SMITH: Does that matter to the Fed when we get their decision next week? I mean, they're already going to be and having discussed all of the economic data that we've been reading into to this point in time.

LEO GROHOWSKI: It does not matter for July, no. And I think there could be a sort of relief rally. But at this point, 75 basis points is pretty much baked in the cake when you look at probability. So I don't think any of this matters for July. But after taking August off, I think the jury's still out on September. And I think there's a good likelihood that we'll see 50 rather than 75 in September.

But look, the last CPI print was over 9%. So it is a rear-view mirror look. And we just have to make sure that the Fed really doesn't make a huge policy error here because there's no doubt the economy is cooling. And so it's the degree to which we tighten and the length of that tightening that's going to determine whether or not we have a recession and, if so, how deep and long it is.

JULIE HYMAN: So Leo, if you put it all together here, I'm looking at your note from the sort of middle of a year here and trying to find what you're underweight and overweight. And there's not much on those sides of the equation. Most of it is clustered in sort of small underweight, small overweight, or neutral. In other words, is it hard to sort of find conviction to the up and the down-side when we've got this all this volatility out there?

LEO GROHOWSKI: Yeah, that's a good observation, Julie. I think, along with that volatility and that policy uncertainty, I've been in the business for over 40 years. This is a time to be humble with respect to forecasting.

We've got a very wide range for our year end S&P, as you properly noted. And we think the S&P is likely to close the year right around where we are today. We're using a range of 3,600 to 4,400, which is almost embarrassingly wide, but I think it speaks to our view that volatility is in. And uncertainty is in. And so it's not a time to be making, in our view, huge bets.

It is a time, within asset classes, to be making changes. But at the asset class level, I think we just need to be really cautious. We're still underweight in Europe and emerging markets. We still think the dollar is going to be stronger. So for dollar-based US investors running unhedged portfolios, we're underweight non-US versus US.

But our year-end forecast for the 10-year Treasury note is a 250. So the worst may be behind us with respect to the bond weakness that we saw the first two quarters of this year.

BRIAN SOZZI: Leo Grohowski, BNY Mellon Wealth Management CIO, have a great weekend. Appreciate the time.

LEO GROHOWSKI: OK, you too. Thanks, all.