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Earnings: ‘Margins are going to be under attack’ in Q1, strategist says

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John Hancock Investment Management Co-Chief Investment Strategist Matt Miskin joins Yahoo Finance Live’s Zack Guzman and Akiko Fujita to discuss inflation, supply chain disruptions, and the earnings growth outlook for 2022.

Video Transcript

ZACK GUZMAN: I want to turn back to the markets, though. Of course, as we're seeing it play out here today, attacked once again, suffering a bit of the worst in terms of what we're seeing, although kind of a muted session. And the Dow, again, still holding in the green. Of course yesterday, we had a deeper conversation around some of these inflationary pressures and the disconnect between maybe the optimism the White House has, the Biden administration has for things to improve, or maybe already have improved, in relieving some of those supply issues and where the Fed's at in how long this could continue.

And for more on that, I want to bring on Matt Miskin, John Hancock Investment Management co-chief investment strategist here with us. And Matt, good to be chatting with you again. Obviously, you heard Brian walking through some of what we're hearing from the Lael Brainard hearing and testimony confirmation. But when you assess kind of where we're at in this recovery, how long do you see some of those inflationary headwinds continuing?

MATT MISKIN: Yeah, well, as Brian said, I mean, two of the biggest things have been the supply chain disruptions and the fiscal stimulus. And as the pandemic comes more under control over this year, as the Omicron wave hopefully dissipates, we likely see the supply chain disruptions come off. And then we're not going to get more fiscal stimulus. At least, it's very highly unlikely. So that, in our view, does cause inflation to come down over the course of the year.

But the recent development, which I think is rippling through markets even today, is the commodity complex has got another bid. So oil prices are rising, copper prices are rising. And so this is lifting that inflationary kind of theme through all markets. You're seeing value do a bit better today, cyclicals do better. But we would look at earnings season as the next big catalyst. And that's coming up here just tomorrow.

AKIKO FUJITA: And what are your expectations on that front? I mean, you know, we got Delta kicking things off today, but obviously, the big banks reporting tomorrow. No question all the executives are going to get questions about how they view the price pressures building, whether, in fact, they are starting to moderate. And what specifically are you going to be looking for on that front?

MATT MISKIN: Yeah, it's going to be all about margins. I mean, to your point, it's going to be how-- are you able to raise prices, but then also keep costs under control. And a lot of costs are going up across the board. Input costs, labor costs are going up. So margins are going to be under attack into 2022. And so, you know, I think in Q4, things are still pretty good. I think the earnings are still going to be pretty lofty. You know, analysts' estimates are looking for about 20%.

But as we go into Q1 into Q2, we're seeing a real deceleration in earnings. So we're talking low to mid to maybe even high single digit earnings growth across sectors. Earnings growth is going to be much harder to come by into 2022. And so you really want to find select pockets of opportunity, those either companies that have organic earnings growth or ability to raise prices and keep costs under control. We're looking for operating leverage as one of the key components to find good earnings growth in 2022.

ZACK GUZMAN: Yeah, I guess the difficult position now that we find ourselves in kind of having seen what played out last year in terms of the up, downs of tech and value, you know, as a strategist as you kind of see it, it's tough to kind of consider where the market might be in terms of-- I mean, we know expectations on the earnings front and rate hike front. But I guess the animal spirits, if you will, of some of the enthusiasm for some of those tech names to get hit again as we move forward or maybe enjoy some of the upside if the Fed does, indeed, take its foot off of the brakes. So I mean, how do you kind of weigh that piece of the puzzle as investors look ahead to, all right, how should I be allocating?

MATT MISKIN: Yeah, so non-profitable tech is something we're not going to like into this year. And we think there's technology companies that have great balance sheets, good return on equity, good margins. Those are the tech companies we like. And those are typically higher in the market cap spectrum. So larger cap, we like high quality parts of the growth space. But as you move down in cap, we find less and less opportunity. So mid-cap growth, small cap growth, we really would diminish that as a part of a portfolio. If you're going to use mid-cap or small cap, we go to the value side.

And we're seeing good earnings. We're seeing cheaper valuations, more cyclicality. They like inflation. So they're well situated. But we do like the quality part of the market in the growth space, the tech space. And those businesses we think will actually get more love as the year goes on. Right now, as the year has started, it's been a cyclical risk-on market. Globally, it's been about, you know, reflation and positioning. We think that dissipates as the year goes on. And we would pick up profitable companies, even in the tech space that have not done well, to start the year for, as the year goes on, the economy slowing down a bit.

ZACK GUZMAN: Yeah, and obviously a lot to keep a lot of our viewers and ourselves occupied here in 2022. But appreciate you chatting. Matt Miskin, John Hancock Investment Management co-chief investment strategist, there with us. Appreciate it.