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Investors need to ‘start selectively moving into the recovery trade,’ strategist says

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RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina joins Yahoo Finance Live to discuss where the market is headed, earnings season, and how investors should position their portfolios amid economic turbulence.

Video Transcript

- Well, recession concerns abound. But stocks are doing pretty well. Maybe they're treating bad news as good news. They're heading for their best monthly performance, at least as measured by the S&P and the NASDAQ, since November 2020. On both sides of the Atlantic. That's happening for European stocks too.

For more on the markets, we welcome in Lori Calvasina, RBC Capital Markets head of US equity strategy. She's here with us in the studio, which is very exciting for all concerned. Lori, you recently cut your S&P 500 forecast for year's end. But it's still above where we are right now. 4,200. So how should we be thinking about where we are right now? How do we contextualize it?

LORI CALVASINA: So the phrase I like to use is that I think we're in a bottoming process. I think the mid-June low, there's a pretty good chance that's going to turn out to be the bottom. But there's a decent chance it might not. But either way, I think that even if we go back and retest that, the dip below will probably be somewhat limited. I would look to maybe 3,500, which is a median recession drawdown of 27%. But we already did 24%. So if this turns out to be a short, shallow, mild technical recession that doesn't linger too deep into next year, then I think there's a good chance that we've seen or been pretty close to the lows already.

- How would you grade earnings season so far? There's a lot going on. So Amazon's quarter is being embraced because they're pulling back on spending. Intel's quarter was just a bad whiff. Walmart warned. Best Buy warned. What's the state of corporate America?

LORI CALVASINA: So we're going to really not know that till the end because it's very lumpy by sector. So it started out very good when we got all the financials at the beginning. And, frankly, it was a little bit too good because investors kept saying let's just rip off the Band-Aid, get the downgrades out of the way, and that didn't happen. So with some of these companies that are whiffing and missing and you're seeing these really negative stock price reactions, I think you have to ask, did we rip the Band-Aid off enough? Have we gotten through the last cut? I'm not so sure that we entirely know that with some of these retailers.

But that's the key question you want to ask. With some of the more resilient ones, I think markets are just exhaling and say, OK, there is an underlying resilience to corporate America, to the consumer. And that bodes well for things to come down the road in terms of the ability to keep this short, shallow, and limited in terms of the economic damage we're going through. But it's very messy so far. It's very mixed.

- So in the near term, how likely is it that we'll just continue to see some of these rallies to the upside by-- I think the NASDAQ is up what 10% during July. How likely is it that we'll continue to see that either to the upside and then, because volatility can work both ways, also back to the downside?

LORI CALVASINA: Look, I think that you have to try to be a long-term investor in here. And I know that's very hard when we're seeing some of these stocks still moving 11% on an earnings report. But I think at the end of the day, the question is, what do you want to be leaning into right now? So most investors I talked to have plenty of defensive positioning already. They got plenty of staples. They got plenty of high quality. They got plenty of nice free cash flow generation stories.

So I'm telling those investors start selectively moving into the recovery trade. So we like things like small cap. Tech is a very good example of a sector that underperforms on the way down in a recession and is a good recession consistent outperformer in the recession rebounds. Financials are another one. So I think that you really want to look through that recession playbook history, figure out where the rebound opportunities typically are. I wouldn't say buy all of them. I'm not really pushing people into low quality. But start really focusing on that and think about the longer term.

- I want to dig into that tech question a little bit because-- and you sort of answered it in part by saying don't buy all of them because we are definitely seeing some differentiation within tech. But within tech where there are a lot of margin questions-- and it's also tough to find a tech that's pure play tech. I mean, we were just talking about Amazon, which obviously has a lot of different business lines. So the margin question in particular, how closely when investors are making these decisions should they be looking at that metric?

LORI CALVASINA: Well, we do know that they are. I mean, one of the fascinating conversations I've had with some tech investors recently has been about layoffs. And I find that some of the tech investors I speak with actually really do want to see their companies cut staff because they want them to defend the margins. And they're worried that because labor has been so tight, they might not cut enough and the margins might get hit a little bit more than they would otherwise like.

So I do think margins matter. I think the outlook for margins matter. I do think investors are looking more to 2023 than 2022 in that sector at this point, though. And look, I would say on tech, I still have a pretty narrow focus. I like corporate tech. I'm a little bit more wary of technology companies that are feeding into consumers because I think on the corporate side, all the challenges, whether it was the China trade war, supply chains, inflation, labor shortages, software companies are a great way and a great tool to combat those challenges going forward. So I would really still be very-- I love software companies, probably more than some of the consumer-oriented internet-type names.

- You think tech is taking this downturn seriously enough? Because to your point on hiring, a lot of folks in the industry are telling us they're still hiring. And they're not saying, hey, we're launching hiring freezes.

- They're slowing hiring.

- Slowing. But that means they're still adding human beings.

LORI CALVASINA: Well, look, I think that-- and, look, one of the reasons why we hedged our call on the bottom a little bit and say it might not happen till later in the year is because I think we have full visibility into the duration of this economic challenging period, whatever we want to call it. My sense is that as long as companies think this is going to be a short, shallow recession, you don't want to cut too many people. I mean, look at what the airlines are going through right now. Too many retirements. Too many buyouts.

Anybody who's been on a plane is living and breathing the negative implications of that decision making. So I think a lot of companies are trying to ride this out and really just kind of cut who they want, cut where it makes sense, but not cut into the bone. But we're not really going to see if they're going to be able to get away with that for a few more months when we get a better sense of how deep this damage is going to be.

- I think I'm still waiting for luggage for my last trip. Just kidding. Lori Calvasina, RBC Capital Markets head of US equity strategy. Always good to see you. Thanks for coming in. Appreciate it.

LORI CALVASINA: Thanks for having me.