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Investors need to be aware of valuations in the tech space: Fort Pitt Capital Group

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Dan Eye, Fort Pitt Capital Group CFA Head of Asset Allocation and Equity Research joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ZACK GUZMAN: But for more on where we go from here as earnings season rolls on, I want to bring on one market expert to walk through what he's seeing play out and what he has predicted here for the weeks ahead. For more on that, let's welcome Dan Eye, Fort Pitt Capital Group CFA Head of Asset Allocation and Equity Research. He joins us now.

Dan, I mean, when we look at this, it's interesting, because the banks performed very well when you look at their earnings. Of course, we're rolling on here in earnings season. But where do you put us right now when you pair the recovery, the economic underlying recovery there with what we're seeing on the earnings front?

DAN EYE: Yeah. Well, thanks for having me. I think we're seeing the start of another quarter where earnings are just moving much higher than expectations. You mentioned the big banks, which were generally very, very positive. Although, a lot of those results were driven by more transactional revenue, loan loss releases, and things like that. I do think the market had some concern about the loan loss reserve releases being a main driver.

But you know, earnings look like they're in really good shape. The economic data has been very strong. We think that it's indicative that we're entering the lift-off phase of the economic recovery, where excess savings is starting to be deployed into the real economy.

But I would say from here, a bit more bullish on the overall economy than the broad equity market. A booming economy may not be all good news for equity investors. It could translate into a headwind for stocks if we see significantly higher interest rates and elevated inflation levels that last for a significant period of time. If that, that forces the Fed to reverse course from ultra-accommodative policies. So we don't think we're at that inflection point yet, but probably closer than we were three or six months ago.

AKIKO FUJITA: Dan, we got the big banks last week. To your point, certainly much better than expected. But now we're starting to get into some of the growth names this earnings season. We've got Netflix on tap tomorrow.

There seems to be some skepticism around how much of that growth we've seen during the pandemic can likely stick with the growth names. Not just a Netflix, but especially the mega cap tech names. What do you see on that front? Are those some of those names that you would actually put money behind at current valuations?

DAN EYE: Yeah, good question. I think throughout this tech sell-off that we've seen recently-- or at least, technology underperforming value-- we've certainly stuck with our technology plays. But you know, I think investors do need to be aware of valuations in a lot of those spaces and the pretty optimistic assumptions that we're seeing with a lot of these high-growth technology stocks, some of which are new to the market.

So we think that there's a lot of interesting opportunities in kind of some of the old-school technology stocks that are posting very solid earnings growth, very solid top line growth, but where there aren't the same valuation concerns that there are with, you know, some of the high flyers.

ZACK GUZMAN: Yeah. And when you look at where you have us hitting at the end of the year, I mean, we're talking your expectations here-- high single-digit return for full year. It's sitting at 12 and 1/2% right now, so we'll see where we go over the ensuing months. But one of the other names we don't really talk about too much on this show that you have on your list, Raytheon Technologies-- talk to me about what you expect to see from them for the rest of the year.

DAN EYE: So Raytheon, their revenue is pretty evenly split between defense and commercial aerospace. Obviously, it goes without saying that 2020 was more than a challenging year for commercial aerospace. But you know, we're seeing their defense revenue continue to grow at mid single digits and already starting to see some improvement on the commercial aerospace side as airlines really ramp up maintenance schedules given the pickup in air travel.

It's definitely going to be a slower process to see demand for new planes and engines, where Raytheon tends to focus. But we think that sets up for more of an elongated and sustainable recovery from Raytheon. And looking out to next year, their stock's really cheap, trading at about 16 times 2022 earnings estimates. That's a big discount to the broader industrial sector given the run that has taken place there over the last six months or so. So we really like Raytheon, not just in 2021, but beyond as well.