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Expert on earnings season: 'Expensive stocks can get a lot more expensive'

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Keith Fitz-Gerald, Fitz-Gerald Group Chief Investment Officer, joins Yahoo Finance's Kristin Myers to break down the latest market action, and discuss what he's expecting from earnings season.

Video Transcript

- I want to bring on Keith Fitz-Gerald, Chief Investment Officer at Fitz-Gerald Group, to talk about today's market moves. And Keith, it's always great chatting with you. I want to start first on stimulus, because we got some bad news there.

Stimulus hopes have been keeping markets in the green, actually even pushing it to record highs this week. I want to ask you about today's retreat. How long do you think that this stimulus news, or the negative stimulus news that we've been getting, are going to continue to weigh on the markets?

KEITH FITZ-GERALD: You know, that's a great question. It's very hard to determine that, because we simply don't know what that looks like. What we do know is there's been a lot of in-fighting, some disturbing vitriol.

I mean, frankly, I wish people could just grow up and move beyond that. The more important narrative is that it gets out and it helps millions of people. Congress needs to just take a chill and help the American people not tear each other apart.

- We need to have you go testify in front of Congress to tell them all to grow up and stop with the in-fighting.

KEITH FITZ-GERALD: If I got an invitation, I'd be there. I really would. I mean because, you know, millions of people need help, and the markets can deal with this for a couple of weeks at hand to really get to the meat of the matter here.

You know, it's a highly computerized market. We're looking forward. There's still some great earnings on tap, but you know, this kind of selling right now is absolutely par for the course. People are simply taking some money off the table, and they're looking, to your point, to utilities, to real estate, to other areas where there's perhaps a little bit of value up for grabs.

- All right, so let's talk about bubbles now, because I've asked this question a few times over the last couple of weeks, and your note actually had it right at the top. Evidence of a bubble forming this year? Where do you see them forming?

KEITH FITZ-GERALD: Well, you know, a bubble is a relative discussion, right? Because on days like today, you get permabears who have called 10 out of the last two actual corrections surfacing, and they sound intelligent because they're looking around the corner and all these kinds of things. But you know, bubbles really are defined by the rearview mirror.

I actually am looking forward. If you talk about companies like Microsoft and Apple and some of the other big ones out there, you've got to value these things based on what they will create, not what they've already created. So expensive stocks can get a lot more expensive, is the key point here.

- OK. I'm glad you mentioned Apple. I'm glad you mentioned Microsoft. Both of those companies right now, in the green.

Microsoft up over 1%. Apple up about 8/10 of a percentage point right now. We had seen investors piling a little bit into Apple in anticipation of their earnings. I'm wondering what you're expecting from both of those companies for their earnings results.

KEITH FITZ-GERALD: I think they're going to knock the leather off the proverbial ball. I mean, I see Apple coming in at, not only just north of $100 billion, but probably maybe even one $108, $110 billion, which is a monster quarter by any stretch of the imagination. I think Microsoft, we're going to see cloud-related data, we're going to see legacy contracts-- again, also numbers just absolutely over the top. Both companies will probably sell off, because that's the game lately-- bid them up into earnings. But from an investing standpoint, again, if you're talking three, five, 10 years down the line, I think it'd be hard to argue that both of these companies are overpriced today.

- All right, so even looking beyond that, and let's broaden that out a little bit more to the tech sector more broadly. I'm looking at the XLK right now, down about 3/10 of a percentage point. Where do you see that sector going in 2021, especially as we talked about 2020 really pulling forth, pulling forward a lot of growth in these companies? You're mentioning monster quarters. Do you think they're going to be able to keep them up throughout this year?

KEITH FITZ-GERALD: I do. I think they're not only going to keep it up, but they're going to continue to move forward. Digitalization is the largest single trend in mankind's recorded history. We're going to see more wealth created over the next three to five years than we've seen in the last 50 combined-- but it's not all going to be equal, that's the interesting part.

You've got to have the big companies that have the size, the leverage, and the executive management needed to move forward. A lot of these companies are at the margins, on the fringes-- the smaller players simply aren't going to make it. So I think rather than trying to hunt for small, cheap, beaten down stuff, you've got to stick with the big names that can really make a difference.

- All right, stick with the big names. Pretty smart advice right there. I want to ask about something else that you have in your note. You mentioned that a pullback would be great, and this first quarter already is off to a pretty interesting start, especially when you have so much political chaos and news really creating a lot of noise.

You mentioned that this first quarter is all about transition. I'm wondering if you're anticipating a pullback soon. Is what we're seeing right now, all three major indices in the red, the start of that?

KEITH FITZ-GERALD: You know, it doesn't feel like that to me. This feels more just like spur of the moment profit-taking, you know, adjusting to the headlines. I don't think it's anything more serious than that. Of course, now that I've said that the markets are really going to take a header.

But really, it doesn't feel like that to me today. I think this is just simple rotation, it's the computers gaming it out. Again, but from an investing standpoint, buy low sell high is how the game is played, so any pullback I'd welcome, because that's an opportunity to put more money to work.

- Now, beyond, you know, Q1, what are you liking for the rest of the year? I know that you mentioned that tech is still going to do well, particularly some of those big names. But we have heard a lot of folks say, listen, you might want to start looking outside of tech in terms of sectors that are going to lead the market this year. I'm wondering what your thoughts are on that, what you think is going to outperform in 2021.

KEITH FITZ-GERALD: Oh boy, I've got a long list of stocks that I'm very excited about. So, and full disclosure, I own every single one of the names I'm about to mention. So I think in the banking sector it's going to be Visa and JPMorgan, because those are critical to staying out.

In the medical sector, I'm following what I call "virus plus plays," because every one of these companies-- Johnson & Johnson, Pfizer, Gilead-- is going to take what they're learning about fighting the virus and apply it to all manner of oncology treatments, HIV treatments. There's new stuff that their scientists are working on that's not even priced in yet. And then from a technological standpoint, I see big data itself in companies like Palantir, which is very controversial, continue to rocket higher. It's on the move today as well.

But again, I'm playing a longer-term game here. I think 2021 is about setting up the next 10 years of profits, not just the next 12 months. So I expect the S&P to come in at 4,100, 4,200 at the end of the year. First quarter is going to be a little bumpy, but after we get through the transition to President Biden's administration, everything settles down. We get out, we get the virus under control, boy, I think the market is just going to go.

- So speaking, you know, kind of looking out over the next four years, I asked this question on Inauguration Day, and of course, we had seen record highs that day, especially as we heard President Biden talking a lot about stimulus, just to bring this back to where we started. I'm wondering how optimistic you think markets are going to be-- I know we have some negative news around stimulus right now-- but there is still very much hope that some sort of economic aid package is going to be passed. I'm wondering, however, looking even beyond that, looking beyond the pandemic, how markets are going to respond to this Democratic trifecta when we now have increased possibility of regulation coming down the pike, when we have increased possibility of corporate tax hikes coming down the pike. Do you think that the markets are going to start responding far more negatively to that Democratic leadership?

KEITH FITZ-GERALD: You know, I don't think they're going to respond necessarily in terms of Democratic or Republican. I think what they're going to respond to is uncertainty, right? So my job is not to play the politics. I don't have the luxury of, of being right or wrong in that regard.

What I have to do is chart a path through this. I think it's a monetary issue, not necessarily a political issue. So I think there's going to be a hiccup before the ink dries if President Biden gets as far as tax reform. I don't know that he will. But I also see markets beginning to adjust, because CEOs have to find their way through this stuff, whereas politicians simply have to deal with this stuff. It's a very different calculus.

- All right, Keith Fitz-Gerald, Chief Investment Officer at the Fitz-Gerald Group. Always a pleasure chatting with you, Keith. Thanks so much for giving us some of your insights today.