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Here's why the 'hall-pass' on earnings report will end closer to 2021, post-election: expert

Eric Freedman, US Bank Wealth Management CIO, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets following Monday's opening bell.

Video Transcript

BRIAN SOZZI: Eric, good to see you this morning. So you just heard Brian previewing the banks for us. What will you be looking for in some of these big bank earnings results to say, you know what, maybe this market rally the past few weeks is justified.

ERIC FREEDMAN: So unfortunately, I can't comment about the financials just because we are one, but I can tell you about broader earnings trends. I think the biggest is just going to be outliers that we hear from companies. Number one would be outliers on the positive side, companies that are seeing either resurgence in demand or looking to make acquisitions. And the second would be outliers on the negative side, so those companies that, again, just are not seeing a push through of demand.

So it is still this hall pass type of environment for earnings. There are a number of companies that can really still cite the pandemic, as well as election uncertainty, as being real challenges, and markets are OK with that, but as we get closer to 2021 and through the election season, that hall pass may in fact expire.

ALEXIS CHRISTOFOROUS: Eric, what are you hearing from clients? Are they looking to move things around in the portfolio ahead of the election? Are they choosing to just sit on cash and wait it out? What are you hearing?

ERIC FREEDMAN: Yeah, the biggest thing that we're hearing from clients is number one, what may happen with taxes? Will we see a change in long term capital gains? That's something that, again, we think that any time you make a big bet on future government policy, usually it's the wrong bet, but that is certainly a key issue in people's minds, particularly those that have low base of stock that they're thinking of selling or even diversifying. That's number one.

Number two would be just in terms of their bond portfolios in general, just given how low interest rates are, as well as how muted inflation expectations are, clients are saying, should I still own bonds, and we think they still should, but again, our bias has been to move a little bit further on the risk curve and a little more high quality corporate credit. That's been our viewpoint, and those are two really significant client questions we're hearing quite often.

BRIAN SOZZI: Eric, what defines success for you this earnings season with regards to individual companies? Let's say a company comes out, beats on earnings by a few cents, but provides no guidance and blames the pandemic. Is that a success?

ERIC FREEDMAN: I don't think it's a success. I think would it really be more, what is their plan? And so what are some of the key metrics they're thinking about, what do they need to see to get business improving? And I think that all of us are guilty of looking at the stock market, not this panel, of course, but just in general, I think the market is used to looking at the stock market and saying, hey look, things are OK. But when you look at the stock market, clearly those are companies that have really strong generally balanced sheets, they have diversified revenue streams, they have diversified revenue exposures, but if you look at Main Street, that's where we've seen a real disparity.

So I think that companies that are providing us guidance as to what they're looking to see for Main Street type of improvements, that would be success for us. Failure would be those that just don't have a plan. And that's been improving, but again, those that are using the pandemic, as well as election challenges, to be almost at that crutch, we think that, that time is dwindling right now.

ALEXIS CHRISTOFOROUS: You know, we've been talking the past few trading sessions about investors having baked into the pie here a blue wave win where Democrats retake the Senate, Joe Biden takes the White House-- are you seeing that? Do you believe that that is what the market is right now betting on?

ERIC FREEDMAN: We think the market is getting closer to that bet, if you will, but we do think this election is a lot closer than prediction markets or some of the polls that you see may suggest. And you can look at some specific baskets of securities, whether that's health care, whether that's in energy, and try to draw some conclusions, but we do think there's a lot of real estate over the next 3 and 1/2 weeks, and investors are going to have to be very mindful that, again, the US political economy does not change that often.

A sharp shift, either left or right, doesn't happen for a prolonged period of time, and when it happens, midterm elections tend to swing things back. So we do think if there is a shift, it may likely be short lived, and really, markets do like that inaction, if you will. And that's probably what we'll see at least at one point over the next couple of years, if not in this very election.

BRIAN SOZZI: Why would the market like a President Joe Biden? We've heard for months on how his higher corporate taxes would impact S&P 500 earnings and the stock market down 10% to 15%, but right now, on the short term, why would the market like him?

ERIC FREEDMAN: The biggest reason is because of more fiscal buoyancy or more desire to spend. If you look at the challenges that we've had in terms of stimulus, if you look at some of the inaction around infrastructure, those are two areas that the market is saying, you know what, a more left leaning administration may be a bit more open to more fiscal spending. And I also think that in terms of the immediacy of stimulus, that's something that people would, if we don't see something before election day, the viewpoint from the market is that with a strong left lean, that could be something we see more sooner than later. So those are really the two variables that are more pro-Biden if you will, in terms of the market's viewpoint.

ALEXIS CHRISTOFOROUS: If you want to stay invested in this market, is there a good place to hide out while you wait out this election and figure out who wins the White House?

ERIC FREEDMAN: We'd say the biggest place is to stay invested, number one. Number two, I think a spot that's maybe in between some of the-- and I think you did a great job of covering it in the last segment, the resurgence in small caps, is the mid-cap market. It's often unloved. It also tends to be less followed, and so domestic mid-caps would be our, would be our first choice.

Second would be Asia, and part of our proprietary research suggests that Asian recovery-- not Japan, so not Japan Asia, is really surging. [? Again, ?] it's [? not ?] a great place to be, and we really would use that at the expense of developed international markets, particularly Europe and Japan, where we're just not seeing the follow through, nor are we really seeing the capital formation in this environment to get us more excited. So we'd really go domestically mid-cap, Asian equities, and really at the expense of Europe and Japan right now.