BMO Capital Markets Chief Investment Strategist Brian Belski joins Yahoo Finance to discuss the outlook for the stock market, inflation, and Fed policy.
BRIAN SOZZI: Soft earnings report in Outlook from Facebook is weighing on a market that has seen its share of nervousness in recent weeks, but is it time to get in there and buy that dip? Brian Belski is BMO Capital Markets chief investment strategist. Brian, always nice to get some time with you. This week, look what we have seen. Meta share is getting absolutely obliterated. You had PayPal earlier in the week get crushed. You know, as a strategist, do these reports suggest that the broader market is still overvalued?
BRIAN BELSKI: Great question, Sozz. Nice to see you. Thank you so much for having us. You know, the market is a market of stocks. It seems to us that people are missing the fact that-- the stock market's done a pretty good job discriminating and indiscriminating with respect to how it's looking at things. For instance, at the beginning of this pullback in January, it was very discriminating, taking out a lot of the high multiple stocks, whether or not it's double digit price to sales or whatever, on tech stocks in particular.
And then it became indiscriminate. When the market becomes indiscriminate, taking out stocks behind the woodshed, as we used to say in the old days, that's when you buy. And I think that's why the market has reversed because the market became too indiscriminate. Now with respect to what's happening with Facebook and some of these other names, it really speaks to why you have to be a stock picker and not be making decisions at the index level, Brian, but especially at the sector and industry level.
So for instance, we have the very good fortune of running nine equity portfolios, real live money, $7 billion. We sold all of our Facebook in December-- November, December of 2019. And the reason we did it is we run concentrated portfolios of 35 to 40 stocks, and we think that with respect to our work, that in the communication services sector, Facebook is traditionally very correlated from a price performance standpoint to Google. So we made our bets with Google.
And now you're seeing this week that the market obviously is paying and being discriminant with respect to earnings. And I think that's going to continue as the overall market, which has been our call for 2022, is transitioning more to a fundamentally/earnings driven market, which creates more volatility, Brian, because of the stock by stock type of trading.
But ultimately, we still think the S&P 500 closes at 5,300, $245 earnings. And obviously, with the month of January, we were quite humbled with the market being down, and we never like to lose clients' money. But as you know, we're much more fundamentally disciplined and longer term. And we're not going to be shook out by a lot of the fear and rhetoric that's been going on out there.
JULIE HYMAN: So Brian, given that 5,300 target that you guys are sticking with and given the volatility between here and then, if you don't mind, reiterate and sort of walk me through how we get there, what-- you know, the rocky road between here and then that eventually gets the S&P to 5,300.
BRIAN BELSKI: I know, Julie, you love it when I get quanty and analytical, so I'm going to put up some numbers at you. So our theme for 2022 is the year of the second derivative, meaning less positive across the board, meaning price isn't going to be up as much, earnings aren't going to be up as much, valuations aren't going to be up as much. And here's the shocker-- drop the mic-- inflation is not going to be up as much.
We actually think that inflation is in the process of peaking right now. If you take a look at monthly and quarterly statistics, it's already begun. But we're so fascinated with this year over year number, which we should be from an analytical perspective, that we actually think the second half of the year, we're going to see a massive drop-off in inflation and a potential supply glut that's really going to drive earnings.
You're already hearing the supply chain blame game with respect to earnings across the board. Apple did a great job coming out and saying, meh, not really, we're managing it. And I think that's a leadership position in the biggest and one of the best companies in the world. That's why we own Apple across five different portfolio-- six portfolios, I'm sorry.
And so I think the way that the year is going to follow through is, we've reared an entire generation of investors that all they believe is that as stocks go up, interest rates go down. We published a note last week calling the generation QE correction. We do not think we're going to see five interest rate increases. Our great economics department is saying four at BMO. We actually think it could be three, especially given the fact that Mr. Powell-- I think he's doing a great job. If anybody can thread the needle, it's going to be him.
I think he's probably going to move in March and a couple more times, and then wait and see what happens. I think that's more common sense. I think we're too stuck in books and too analytical, looking at history. Those people talking about inflation, Julie, weren't alive in the '70s. I was alive in the '70s. This was in the 1970s. This was the 1980s. And oh, by the way, today's tech sector has nothing to do, no comparisons, to the 2000s. So those are some of the hot button issues that we talk to clients about every day. And we'd like to clear up some of that rhetoric and fear that's going on out there.
BRIAN SOZZI: Brian, I like your confidence. I can appreciate it. How come you don't fear the Fed?
BRIAN BELSKI: Well, I mean, we know the Fed is going to make a mistake. So let's embrace that. Let's have faith. And in this business, faith is fundamentals. And fundamentals of the US market look great, I mean, in terms of cash flow and balance sheet. The Fed's going to do what the Fed is going to do. And so we can be expressly critical that they're too late. I go back and read what I was writing in 1998 or even 2010, '11. We were expressly critical of the Fed. We thought they should have stopped QE a lot sooner, but again, they didn't stop QE till 2014.
I think this is going to take longer than everybody thinks because we like to say in Canada, it's a process and a discipline in terms of normalizing. I think this normalization process is going to take a lot longer than everybody thinks. And so we know the Fed's going to make a mistake. They probably already have made a mistake. So now let's have faith in the Fed. Let's have faith in that they're doing the right thing.
I think Powell is a great Fed head. And I think he's going to do a wonderful job in terms of communicating. We in society, we need to know information right away. And I think he's done a great job in terms of kind of toeing the line with respect to the questions and how he's handling a lot of the press conferences. And he's going to stick with what his discipline is.
BRIAN SOZZI: All right, we'll leave it there. Brian Belski, chief investment strategist at BMO Capital Markets, always good to see you. We'll talk to you soon. All right, coming up--