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'The market’s doing something really funky': strategist on the market shrugging off large earnings beats

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Jonathan Golub, Credit Suisse Securities Chief U.S. Equity Strategist joined Yahoo Finance Live to break down why the market is shrugging off large earnings beats and what this means long-term.

Video Transcript

ADAM SHAPIRO: Because as we get ready to wrap up another earnings season another quarter of beating expectations, you talk about the rally that's been going on. And there are some, perhaps, disappointing economics out there. But investors seem to be brushing it all aside. Do you think they're, perhaps, missing a canary in the coal mine?

JONATHAN GOLUB: You know, it's almost as if the market is reading two different scripts. Earnings this quarter-- and these numbers are going to seem ridiculous-- 86% above where they were a year ago, surprising by something in the ballpark of 16%. I mean, these are just enormous numbers. For all of the concerns about profit margins-- of that 16%, 4% coming from revenues, 12% coming from better profit margins.

And yet at the same time, GDP data missed expectations in a meaningful way. We had some jobs data coming out today weaker. The Citi Economic Surprise index dipped into negative territory. And interest rates, which are really important as a signal of economic health, are falling, which is a sign of weakness. So you have great earnings and yet some of these signals are kind of contradicting it.

SEANA SMITH: John, when you look at the outperformance of the market, I mean, it is rather remarkable going off of what you were saying-- the S&P today just pulling back from yesterday's record close. I guess, why do you think-- when you look at why the market, I guess, has been able to be so resilient, are you confident though that momentum will be able to continue here in the future?

JONATHAN GOLUB: Yes with an asterisk. I mean, the first thing is, if you look at, let's say, the month of July or, for that matter, even for the last 11 months, you have the market up, but the earnings are actually going up substantially faster than the stock prices are, which means the valuations-- the PE of the market is falling. We were at a PE a 23 on the market last August, and we're at a PE of about 21 today.

So the market's getting cheaper. But to your point about these signs of weakness, they are driving things underneath the hood within the market. So in the month of July, for example, you had noncyclical stocks-- things like consumer staples and health care-- that led the market. That's not normally a sign of health.

Tech is doing well, but some of these more cyclical areas like financials, and industrials, and materials, and energy are lagging a little bit-- not great signs of health. So there's a lot of these countervailing winds. We have a call for 4,600 on the market. That's about 4% upside between now and the year. The earnings are going to take us there without a problem. But what stocks in particular lead I think is much more questionable.

ADAM SHAPIRO: You know, I mean, if we could all figure that out, we'd be billionaires and we wouldn't be doing these jobs. But for the investors who are watching right now-- you know, when you hear the market-- the S&P 500 around 4,600 at year-end, there's still upside. And because of the Fed's policies, you have no choice. You've got to be in equities somewhere.

JONATHAN GOLUB: Yeah, I mean, unless you think there's something broken here. And there's some signs of caution, again, against this backdrop of rip-roaring earnings. But we have the news on the COVID vaccine-- not vaccine, but COVID is an issue. We have these programs which allow for people to defer their payments on rent, and student loans, and mortgages. Those are some of those things are rolling off which could create some pressure.

So the near-term power behind the market is these insanely strong earnings. There's very little sign that they're not going to continue to be strong through the end of the year and into next year. But you are starting to see maybe cracks on the edge, if you will, that are making this a little more difficult. And where it's showing up is not in the market overall, but in the sectors, and kind of groups of stocks, and that leadership. And there's a bit more rotation going on there, which is causing some people who trade their individual accounts or hedge fund managers like a little bit more heartache. But if you're looking at the overall market, it's just extremely solid on great earnings.

SEANA SMITH: John, the one thing that stuck out to me in your most recent note on earnings, you were talking about the companies that are beating on both the top and bottom lines, but the outperformance that we're seeing relative to what we've seen previously-- I guess underperformance is a better way to say it, because we're seeing those stocks jump about 8/10 of a percent versus 1.8% historically. I guess what do you attribute this to? And is this something that makes sense in this current environment?

JONATHAN GOLUB: So let me give you the positive story-- it's better than it was last quarter. But yeah, the market's doing something really funky, which is you're having these really, really large beats, and the market's kind of shrugging their shoulders. I do think that it's helping the market overall and the tone of the market. What is happening, though, is the individual stocks that the news is coming out on, when they beat on an individual stock basis, the market is not treating them uniquely.

So I do think that the earnings are helping the broad market. But if an individual security delivers a good earnings number, the market's kind of treating it as if it's kind of like a big pool of good news rather than something that's specific. And I will tell you, you're confused by it, I'm confused by it. The biggest portfolio managers and hedge fund guys are confused by it as well. But like I said, it was worse last quarter. This quarter is still a little bit below normal in terms of the market price response. I'd love to see it healthier.

ADAM SHAPIRO: Jonathan, good to see you. Jonathan Golub is Credit Suisse Securities Chief US Equity Strategist. Thank you for joining us.