As investors eagerly await February's Consumer Price Index (CPI) print on Tuesday, Rockland Trust Chief Investment Officer Dave Smith joins Yahoo Finance Live to share his outlook on equity markets in light of the anticipated inflation data.
Smith acknowledges that the last two CPI prints came in higher than expected. However, he notes last week's jobs data showed lower-than-expected wage growth, making him optimistic: "That was a precursor of what we might see tomorrow." He believes that if the results align with the 3.1% expectation, it would be "a good thing" for the economy. Nonetheless, Smith cautions, "there's always a risk that you don't see."
Despite economic uncertainties, Smith notes that the S&P 500 (^GSPC) is "trading at a fair valuation," with risks already priced in. However, with the Federal Reserve's potential rate cuts looming, Smith suggests that markets should have "a higher-priced multiple."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Angel Smith
Video Transcript
RACHELLE AKUFFO: Well, stocks moving lower to start the week after the equal weighted S&P 500 logged its seventh straight week of gains. Investors are shifting focus to Tuesday's inflation print for any hints of what to expect from the Fed's March meeting.
For more on this, I'm joined by Dave Smith, Rockland Trust chief investment officer. Good to see you on this Monday morning. So you note that the primary drivers for some of the volatility that we're seeing, the Fed, and AI.
So starting with the Fed, obviously, some key inflation prints this week, starting with CPI Tuesday, PPI on Thursday. What are the expectations there?
DAVE SMITH: Well, 3.1 is the expectation-- good morning, Rachelle-- for the CPI number tomorrow. And we'll be looking at that very closely. Obviously, last week, we got the jobs data. And in that data, there is a measure of wage growth. And wage growth actually came in lower than expected, which is a good sign.
The last two prints on CPI in the previous two months, actually, came in higher than expectation. So I'm hoping that last week results was a precursor of what we might see tomorrow. And the expectations will come in-- the actual results will come in very close to expectations. And I think that would be a good thing, if that's the case.
RACHELLE AKUFFO: And Dave, you still see the odds of a soft landing as reasonably high. But you also know that the biggest risk to the soft landing narrative might be the risks that we aren't considering yet. How do you invest with that in mind?
DAVE SMITH: Well, that's a great question. There's always the risk that you don't see. It's the known unknown that is the thing that comes up and bite you. The last example we had of that was the pandemic. I don't think anybody was predicting the pandemic that we had back in 2020.
And you just don't know what's coming down the pipe. There's things that are out in the marketplace. I've been investing for clients for 34 years now. And there's never been a time, where I could sit across the table from a client and say, there's nothing to worry about. There's always something. And the things that we know about today are real.
But you always have to also be concerned about the thing that's going to come up that no one's expecting. The black swan, if you will.
RACHELLE AKUFFO: It's true, because a lot of the considerations, some of the risks that are outside of the Fed's control, geopolitical concerns with China, with Ukraine, and in the Middle East as well.
But in terms of some of the risks that are being priced in at the moment, do you think the market has a good gauge in terms of how things are priced at the moment?
DAVE SMITH: I do. So the S&P 500 is trading at about 20 times forward earnings. And that's inside a one-standard deviation range around the long-term average. So I would argue it's on the high side of fair. But, certainly, not egregiously so, particularly, in light of the fact that the Fed has targeted that they will be cutting interest rates at some point in the future.
Lower interest rates would imply that we should have a higher price to earnings multiple, all else equal. So I think you can argue that the S&P 500 is trading at a fair valuation. And if the multiple would have stayed constant, the expectation going forward for earnings estimates for the S&P 500 are in the low double digit percentages for calendar year 2024 and '25.
And that's a very solid backdrop for stock market returns.
