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Earnings: ‘We’ll hear some pretty good news about the global profit picture,’ strategist says

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Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop joins Yahoo Finance Live to discuss how markets are digesting inflation and globalization, earnings season, consumer price index data, and the Fed's interest rate hikes.

Video Transcript

DAVE BRIGGS: So there's a lot of red on the board. Is there blood in the water? Let's talk about it with Jeffrey Kleintop, Charles Schwab chief global investment strategist. Jeffrey, good to see you. We started the week the way we left off, in particular, with the NASDAQ leading the down, 2% and now down 13% year to date. Is it going to get worse before it gets better?

JEFFREY KLEINTOP: I don't think so. I think we're heading into an earnings season here that may be surprising as to how good it is. Since the war in Ukraine, we've actually seen earnings estimates rise. We've seen it in the US. We've seen it in Japan. We've even seen it in Europe, which may be surprising to many who believe that the risk of a recession was most intense in Europe in the aftermath of that conflict.

I think what we're going to hear from businesses is that they not only exceeded targets, but they feel relatively confident in their forecasts for the remainder of the year. And that could be just the kind of bolster for confidence that the market needs.

RACHELLE AKUFFO: And you raised an interesting point in your notes, talking about that distinction between the political versus the economic impact when we think about globalization. How do you see that then really affecting how the markets are reacting there? Obviously, sort of every little thing that happens, they seem to be turning on it. But what should they be deciphering from this?

JEFFREY KLEINTOP: Yes, the end of globalization is something we've heard, I guess, really, since the Brexit referendum in 2016, and again and again, whether it was the trade policy or nationalism or the pandemic or now the war in Ukraine. The fact is, we've not seen any deglobalization of corporate profits or corporate sales. In fact, they remain as high as they've ever been. And so I think this political deglobalization, even between the US and China, there's been a decoupling politically, but not economically. And I think that's important for businesses to continue to see this global scope to their profits.

And what we're seeing is an environment where consumer spending still remains strong, even in Europe. Look at moviegoing traffic, dining out, retail sales. They're all holding up quite well, even in the face of this war and concerns about rising interest rates. So I think, again, we'll hear some pretty good news about the global profit picture from companies over the next few weeks.

BRAD SMITH: Jeff, it's interesting. Last year, we had started to look through earnings and really added some of these year over two comparisons. The companies, for many of them, were supplying that themselves. What is the most accurate way to look at year over year comparisons versus year over two comparisons to really get a gauge of where companies are seeing some type of return to normalcy right now?

JEFFREY KLEINTOP: Yeah, it's a great question. One of the things I've been focusing on is maybe even less about their profits. I know, obviously, that's important. I think the guidance is probably more important than what they've done. But take a look at where their inventories are. You were just talking about semiconductors and some of the other stocks that have been lagging lately. And I'm a bit concerned about a movement from shortages now to gluts in the second half of this year.

I think investors may begin to catch on to that in a number of different industries. So I'm really watching for where inventories are beginning to build in the supply chain. I know we're not overwhelmed with them right now, but we are starting to see some builds, which could lead to some price cuts and concerns by investors in a number of these areas that-- think of Peloton. Think of so many of these companies. It's a huge boom of shortages, and then dealt with the aftermath of all of that. And I think that could be more of an issue as we move to the second half of the year.

DAVE BRIGGS: First things first, tomorrow, the CPI number comes out. What are you expecting? And how do you think the markets will react?

JEFFREY KLEINTOP: Ooh, a four decade high in inflation, but that's probably not too surprising. I think the Fed's already committed to an aggressive rate hike outlook. So a surprise tomorrow may not have as much impact as it might have, say, a few months ago, when investors were looking for a downturn in inflation. Now, I think a hot number is pretty well baked in.

RACHELLE AKUFFO: And so then as we consider that and, obviously, what the consideration means for the Fed and how aggressive they'll be, based on the data, I think some estimates put it at perhaps, I think, close to 8%, perhaps even 8.4% year over year for a CPI data, at least some of these early estimates. With that in mind versus the factors that the Fed doesn't control, how should people be positioning their portfolios?

JEFFREY KLEINTOP: Well, we expect interest rates may continue to rise here, I actually think for the first time in a long time. I'll just mention bonds. It's not a bad time to begin to adding some duration in the fixed income portion of your portfolio. A lot more volatility on the equity side can be buffered maybe by some of what we're seeing in the bond world. And now you're actually getting paid. You're getting a little bit of income in the income portion of your portfolio. So that's one way to think about it.

The other way is to focus on international equities. They tend to be more inflation sensitive. As we get into higher periods of inflation, international stocks tend to outperform the US markets. They're more inflation sensitive in the sectors and even in the individual companies within those sectors. So those are a couple of ways to think about hedging some of this high inflation environment we're in right now.

BRAD SMITH: The Fed has previously said that the probability of a recession within the next year is not particularly elevated. Then they're also believing the economy is strong and able to withstand tighter monetary policy, particularly citing the labor environment within that after the last meeting. All of those things considered, if we were to see some of the data or a recession show up in some of the data, where are the first instances where we, as well as the Fed, would have to really evaluate where the pathway of their tightening is actually having a much more adverse impact than intended?

JEFFREY KLEINTOP: Well, you know, I think that it's going to first come in terms of consumer and business borrowing. And we're just not seeing that roll over yet. But obviously, in housing, we are, right? So that's the first edge of this. And if it started to penetrate more into other aspects of consumer and business borrowing, it's those tightening financial conditions, and in part, just the willingness to borrow by investors that's a problem.

And so if we really started to see that ramp up in a material way, many US consumers are tapped out. They've spent their stimulus checks. They've already tapped into their newfound wealth and the equity markets and spent much of their newfound income. And they're beginning to borrow to do that. I think if we start to see it becoming harder to borrow and more expensive to borrow, that could be a problem. So watching those areas, I think, is important.

BRAD SMITH: Great to have you here and your insights with us, Jeffrey Kleintop, who is the Charles Schwab chief global investment strategist. Appreciate the time and the insights this afternoon. Good to have you back once again. And everyone, coming up on the other side of this short break, Elon Musk steps away from the opportunity to join the board of directors at Twitter after amassing a 9.2% stake in the microblogging company.