Stocks are 'reasonably priced' despite record highs: Economist

Trillium Asset Management Economist & Portfolio Manager Cheryl Smith joins Yahoo Finance Live to discuss the latest market action.

Video Transcript

- Let's now turn to markets with Cheryl Smith. She's Trillium Asset Management economist and portfolio manager. And Cheryl, it's great to have you on this afternoon. Just want to kick things off by talking about earnings. What's been interesting to watch is P/E ratios, obviously, through the blockbuster earnings that we've gotten in this season. So I guess, from your vantage point, we've seen the S&P 500 at new highs. What are the earnings that we've gotten so far telling you about the pricing in equities at least in this market?

CHERYL SMITH: We think that, even though we're hitting new highs in the major indices, it is still reasonably priced. We did not expect to see as much increase in the stock market index this year because we had anticipated it was going to be a year where earnings were going to catch up to those prices. But in fact, it's been blockbuster for earnings. The growth of the economy has been very, very strong. And so we have seen companies with earnings that are way beyond expectations for the first quarter and the second quarter. And as a result of that, prices have gone up. And yet, the price/earnings ratio, or sort of the rate at which you can get them, has moderated and become more attractive as the year has gone on.

- Cheryl, how have you changed up your allocation as a result of some of those strong numbers that we have seen so far? Is there a particular sector or name that you're especially bullish on right now?

CHERYL SMITH: I would say that we are really looking at great earnings across the board. It's a little bit more not things that we're moving into, but maybe taking a little bit of profits. Some of our industrial allocation we've cut back, just as the more cyclical companies have done very, very well. We've continued to feel that the consumer discretionary stocks are good. The interest rate changes we have not been looking as favorably at the financial services, as some of the banks have been expensive and the interest rate changes that we were looking for there still seem to be quite a ways into the distance. So we're still very, very positive on the market, but really making only very minor changes from place to place.

- Cheryl, next week is going to be a big event with the Fed's Jackson Hole symposium. Now, it seems like there's going to be a lot of bird watching, no pun intended, but there's going to be doves and hawks, those arguing for earlier interest rate hikes or tapering than others. What do you think is the market risk, especially as we look at longer duration US bonds with regards to how they're reading and interpreting Fedspeak?

CHERYL SMITH: I actually thought three months ago that the risk for Jackson Hole was higher. As it is-- as we've come closer and closer to it, we had a lot of movement after the July Federal Reserve meeting, and so as we're coming into the Jackson Hole meeting, it seems that we've already had a sort of a shakeout in position, and the more-- we've had a little bit of a more movement toward saying that the hawks have been a little more vocal, the doves have been a little bit quieter.

But I don't really think that we're going to see a lot of movement further on here. The people that are saying that this is a transitory inflation are still very, very committed to that position, and the economic data has been-- well, in the beginning of the year, looked a lot stronger than we were expecting, and it's really come back into very, very close to expectations. So I don't think that we're going to see any major action out of Jackson Hole this year.

- Cheryl, what is the upside risk to bond yields right now? We had people in the spring that were calling for 200 basis points on the 10-year, and here we are at, what, 125. It was even lower than that not long ago. So do you see kind of 10-year Treasury bonds staying at the levels this depressed, or do you expect maybe a run-up sometime soon?

CHERYL SMITH: I think that we've seen a little bit of overreaction in both directions. The run-up that happened earlier was too far. And at this point, at 125 on the 10-year, I would say that somewhere in the 1.4 range is probably a more reasonable range going forward. But not a lot of risk in it. We still think that the time before the Fed really starts trying to raise those interest rates is at least a year and a half in the future. So still quite a bit of room to go. Not a lot of upside risk at this point.

- And finally, Cheryl, from a strategy standpoint, what are you seeing outside of the US right now? Are you still overweight US equities, or do you see some opportunities, potentially, in places like Europe, given the recovery there?

CHERYL SMITH: We are still overweight US equities, although Europe is looking more attractive as the US, those geopolitical risks that you mentioned earlier in the hour will weigh on the United States more than, I think, than on Europe, as well as the US seems to be a little bit further behind on where the Delta variant is taking us. So economic activity in the US is probably moderating a little bit more. We're looking for it to increase in Europe.