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Growth earnings expected to overtake value earnings by mid-next year: Citi U.S. Wealth Mngt.

Shawn Snyder, Citi U.S. Wealth Management Head of Investment Strategy, joins Yahoo Finance Live to discuss the outlook on inflation, sectors to watch amid higher interest rates, and the Fed’s Beige Book.

Video Transcript

KARINA MITCHELL: For more on this and reaction on the day's market news, let's bring in Shawn Snyder, Citi US Wealth Management head of investment strategy. Thank you so much for being here, sir. Your reaction to what we heard out of the Beige Book just now. Any big takeaways or big surprises for you there?

SHAWN SNYDER: No, I don't find it surprising. I do think it's interesting that they mentioned that growth is growing at a modest to moderate pace. I think we are seeing that with the Atlanta Fed GDP now past track for third quarter, actually coming down to 0.5%, that seems too low. And the consensus forecast among economists is something closer to 3 and 1/2%. But that's kind of in consensus with what the Fed just released in their Beige Book.

So I think we are seeing a slowing from the second quarter, but it's also part of a normalization process. We knew that the economy was not going to experience such wild ups and downs. You're not going to see a 33% GDP print and then a 12% GDP print. It's eventually going to moderate back down to something closer to three or four or five or something in those ranges. So I think that's what we're seeing here. And, you know, a lot of this is kind of aftershocks of the earthquake that was COVID, these labor constraints, supply chain issues, all those things.

JARED BLIKRE: Well, I want to talk about inflation here, and you touch on that a little bit. But we're coming off of numbers, especially in the CPI, just about 30-year highs. And this factors into what the Fed is-- what the calculus at the Fed is going to be as well.

But also, I'm reading some of your notes here. You're saying that inflation is going to be more persistent than originally thought, as energy prices and shelter prices have been climbing. We know about crude oil and the story there, Brent at about 85. What about shelter? This is something that, well, all of us actually need along with energy. But what is that component saying?

SHAWN SNYDER: So it's a very interesting component of the CPI. It makes up about a third of the CPI. So it carries a heavy weight. But it's a sticky price. It doesn't move up and down very quickly. It moves over time in lengthy periods of time. So if you think of what happened to national home prices, for example, they're up about 21% year on year. So they found a tremendous climb.

Now that doesn't directly translate to the way it's measured in the CPI through shelter prices. Shelter prices are up 3.2% year on year, but they are correlated. And what happens is the national home prices actually lead the shelter prices in the CPI by about a year. So we're starting to see these shelter prices firm and start to rise. So that's keeping inflation a bit more elevated than we originally thought. And then, of course, energy prices tacking onto that.

So we think that inflation is kind of here to stay, but it will eventually moderate next year. It's going to take some time to kind of shelter prices to sort of level off and then also energy prices maybe come down in the first quarter. We are seeing some signs that inflation is moderating when you exclude all the things we buy day-to-day, right?

So if you exclude food prices, energy prices, and shelter prices, which are things that are being impacted by the pandemic, well, then inflation has actually been falling since about mid-June. It's come down a full percentage point, closer to 4% or so.

KARINA MITCHELL: And as we sort of try to weather inflation and get through all of these supply chain issues, are there sectors or particular stocks that you're looking at that you encourage people to invest in right now?

SHAWN SNYDER: Well, I think it's been a popular trade all year. And I'm not sure it's going to change anytime soon. But it's been energy and financials. Both two of those sectors are the top performing this year. And one of the reasons is, one, we're seeing surging energy prices, but two, we're seeing higher interest rates.

And when you see higher interest rates, those two sectors are the ones that tend to perform better because they're highly correlated with the level of interest rates. Banks can charge higher interest on their loans and those types of things. So their net interest margins go up. And then the energy sector also trades pretty closely with the 10-year Treasury yield.

So those are two great kind of offsets if you're expecting higher interest rates, which is what we've been seeing all year. It looks like, you know, we've kind of stabilized on the 10-year. It's between 1.5 and 1.6. You kind of get this push and pull. That's why one day, tech does better, and the other day, cyclicals do better. You know, I think the narrative is that rates continue to climb higher, but it's kind of been a push and pull over the last few weeks or so.

JARED BLIKRE: Well, can we brought in that discussion out, then, maybe with the timetable of a year, a year and a half? Because-- and this all gets back to earnings season as well. You know, you mentioned as we have an expanding yield curve with higher longer term rates, you expect to see the value trade perform well. But how long is that going to last with expectations now that the Fed is going to increase rates as soon as September of next year?

SHAWN SNYDER: Well, so I think the value trade is still alive. And I actually think this earnings season is a good example of that. You know, just a few weeks ago, earnings expectations for the value companies in the S&P 500 was that earnings per share would rise about 28%. They're actually tracking at about 37% higher year on year right now. So they're beating expectations.

So I think it has a ways to go. And I think we'll continue to see that for a while, but when you look at earnings forecasts, particularly when you get into 2022, those, you know, lofty beats by the value companies start to kind of fade. And we expect growth earnings to actually overtake value earnings by maybe mid next year.

So I do think that, you know, value will maybe kind of fall out of favor as this reopening kind of fades a bit and we go back to more of a traditional mid-cycle kind of economic conditions. So I think there's a decent runway here for value still, but I don't think growth has completely fallen out of favor.

KARINA MITCHELL: All right, Shawn Snyder, we will have to leave it there, Citi US Wealth Management head of investment strategy. Thank you so much for being with us today.