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Market Recap: Wednesday, February 3

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Stocks pushed higher Wednesday as investors digested a series of corporate earnings results and incrementally more positive news on both the vaccine and stimulus fronts out of Washington. U.S. Bank Wealth Management Head of Traditional Investments Lisa Erickson and Head of Cross-Asset Thematic Strategy at J.P. Morgan Private Bank Anastasia Amoroso.

Video Transcript

SEANA SMITH: Four minutes till the closing bell. Dow, S&P, and NASDAQ all holding on to gains. We want to bring in Lisa Erickson. She's US Bank Wealth Management's head of traditional investments. We're also joined by Anastasia Amoroso, head of cross-asset thematic strategy at JP Morgan Private Bank. Anastasia, I'll throw it to you first. I guess, when we start with the broader market here taking a step back, today we're looking at gains once again. We're not too far from those recent record highs. What do you think of the market at these current levels?

ANASTASIA AMOROSO: Yes, Seana, that is the key question that we've been getting for the past few days, or maybe the past few weeks, is, what's happening with market valuations, and what's happening with all these speculative bubbles, whether it's the stocks like GameStop or SPACs or something else. And so I think really the question that, frankly, investors are asking is, are we in this bubble, and do we want to get out?

And very resoundingly, I would say that we are not in a broad market bubble. The reason I say that is because if you look at the definition of a bubble, it's when something is stretched above and beyond fundamentals. And when I look at the market right now, we are expecting $178 on S&P 500 earnings. And you apply a 21 times multiple to that, we get to roughly where we are today. And we do think there is upside to the earnings numbers that we're looking at. So just by that definition alone, I don't think the valuations are stretched.

Then the other big thing that really separates us from being in a bubble that's about to burst is, what is the catalyst? We know what the catalyst was back in 1999. Part of the catalyst was 6 and 1/2% Fed funds rate. Rates are at zero today. So if we're wondering why is it that money keeps on going into the equity markets any chance it gets, is because there's just no other alternative. You look at the earnings yield on the S&P, you compare that to the bond yield, it is 3.6% above the average. And it was actually negative back in 1999. So we just don't have those conditions. And I think it's about fairly valued.

ADAM SHAPIRO: Lisa, very quickly, though, you would tell investors if you're going to go into equities, you know, midcap's probably the place you should be looking.

LISA ERICKSON: Absolutely. We really see it as an interesting sector. And to the point about market levels, while we would agree with Anastasia that we don't see the market in a bubble right now and that there still is room to run, the midcaps really haven't had that same gain. And so, we still see some more valuation potential, rather than just investing in the larger cap stocks, like the S&P.

And the other nice thing about the midcap sector is it really is a broader play. So if you look at the underlying sector composition of midcaps, what you see is a nice blend of some growth names, but also more cyclical exposure. And so, as we continue to have this reopening, you really have that opportunity for the midcaps to be able to pick on some of that momentum.

SEANA SMITH: All right, Lisa and Anastasia, hold on one sec. We want to bring in our markets reporter, Jared Blikre, as we get closer and closer to the bell. Jared, what are you watching here into the close?

JARED BLIKRE: Well, I'm watching the energy sector, but let's recap the indices first. We got the Dow up 2/10 of a percent, along with the S&P 500. NASDAQ not doing much. Russell 2000 up about 3/10 of a percent. I'm just going to skip the NASDAQ 100 heat map here and go straight to the energy sector. That is-- there we go. Here's energy right now. We've got crude oil trading at the highest levels since January. We got ExxonMobil up almost 4%, Chevron up over 2%, Royal Dutch Shell even up about 2% ahead of its earnings.

And also taking a look at our heavily shorted index, we see a lot of green here, the flip from yesterday. Naked Brands is up 32%, Koss up 26%, and new entry, very small stock, Tyme Technologies up 92% today. And then just checking in on the sector action, let's take a look here. We've got energy up over 4%, followed by communications services, thanks to Alphabet. That's up nearly 1 and 1/2%. Financials, materials, and staples all outperforming. Here is the closing bell.

[BELL]

ADAM SHAPIRO: All right, the goose is cooked, and that's a good thing, as we have a closing bell with the market settling. The NASDAQ is going to be slightly down, just barely, probably still down about two points. But we got the Dow up about 40 points. And the S&P 500 is going to settle up about 5 points. On the Dow, by the way, some of the big gainers today, Boeing was up more than 3%. Chevron-- we've been talking about oil and energy-- up about 2%. And then Microsoft-- forget Amazon, right? Microsoft was up about 1%, almost 2%.

Let's go back to our guests to break down what happens next. And I want to go back to Lisa. Because the economy maintaining a steady pace of activity despite what we've experienced in the coronavirus-- what happens? We're now in the first quarter. What are you expecting from earnings this quarter? Because there's been a slight slowdown.

LISA ERICKSON: Absolutely. So we do see a little bit of difficulty as we work off the difficulty of the winter months and some of the spike in COVID cases. But really, as we continue to move out another month or two, we're optimistic on earnings. What you've seen so far with the reports from fourth quarter is companies really have been able to hold their own.

Even though we had a very difficult economic environment last year, they were really able to manage their bottom lines well and beat expectations. And we're seeing that continue to come through in fourth quarter. And we expect that momentum again to continue where they're going to be able to continue to manage well.

Plus, the other big factor that you have is, if you look at last year's earnings around this time, it was obviously a very difficult period. And so, there's a low bar in terms of comparisons that allows them to beat year over year numbers.

SEANA SMITH: Hey, Anastasia, where are you see seeing opportunity in the market? You were talking about the fact that we are not necessarily in a bubble right now. So where are you finding some of those pockets of opportunity?

ANASTASIA AMOROSO: Yeah, that's right, Seana. Not everything in the market is expensive. And so there's a few places that we look at. And most of them are in the cyclical parts of the market. So you mentioned energy. Energy is actually one of the spaces that we're looking at right now. It's had a good solid run year to date. And I think there's a lot more to that potentially to come this year.

The reason for that, the biggest change that we're going to have this year as we recover from the virus is the return of mobility, the return of travel, the return of transportation. So with that, the fuel that is most sensitive to that, of course, is going to be oil. And the extension of that is the energy stocks. So we're expecting that oil can finish up the year at $65 a barrel. We're at $55 today. So that means that with that, we're pricing higher in oil. You could see the energy shares respond to that as well.

Now, the other place I will point out as well is the financials part of the market. Speaking of sectors that are not expensive, financial is just the cheapest sector in the S&P 500. And yet, you have a number of catalysts lining up-- higher rates, steeper yield curve, lower unemployment rate, higher GDP, all of which we expect this year. So if you look at the financials sector, they are provisioned for a much higher unemployment rate than we expect, which is a good thing. Because we think some of the loan loss reserves that have been set aside will come back and help boost earnings this year.

ADAM SHAPIRO: Anastasia, when you talk about a return to normal and pent-up demand, a lot of people talk about airlines, travel stocks. But is it too soon to make that call? We had on Ed Bastian yesterday, and we still don't know if there's going to be a mandatory requirement for everyone to have a COVID test just to fly. That could hinder the airline industry recovery.

ANASTASIA AMOROSO: You know, I don't think it is too soon to make that call. And we've been making the call on the return to mobility, a return to travel. If you look at the vaccination pace, maybe we're not happy with how it started, but it is picking up. And so by the end of April, we'll likely have a third of the US population vaccinated. By sometime this summer, we'll get to 50%. By September, we suspect that we're going to get to 70%, or herd immunity.

So I do think that as that happens, it's going to be easier and easier. And the pent-up demand is absolutely there for individuals to travel. So we're certainly not going to get back to 2019 levels of air travel this year. But as you know, markets are forward-looking. These stocks are forward-looking. And to the extent that we're going to go from being down 80%, 90%, to maybe down 30%, that's going to reflect positively on some of those shares.

SEANA SMITH: Lisa, how about you? Where are you seeing opportunity?

LISA ERICKSON: So our opportunity we see actually is a nice balance between more of the secular growth stories and the cyclical. And while we certainly would agree there's an opportunity for some of the scene of accident stocks, like the airlines, to bounce back, we see really more of a barbell position in terms of economic sectors as the most sensible right now.

You continue to have some pull forward of demand in the work from home sectors, where Google and others have been able to, as an example, just benefit from these trends to online and continued digital behavior in the economy. And then yet, balance that with, really, the cyclical sectors, which, again, have the benefit to continue to pick up as we reopen. So we think that nice balance, really, between the two sectors really make a lot of sense.

ADAM SHAPIRO: I wanted to talk to you, if I could, too, about what we're watching with the 10-year yield. I want to zero in on this because it's up above 1.1% right now. And there are some predictions we could see it by year end at 1.3. Would that have a great impact on the flow into equities, do you think? It's not really sufficient to slow it down. Lisa.

LISA ERICKSON: We are really watching the interest rates very carefully, to your point, because a lot of the valuations support, again, comes from a very accommodative monetary environment, where you have low interest rates to continue to help spur on the economic recovery. Again, what we've seen so far, though, is a nice, natural progression. And we've also seen a restraint on inflation. And so, that gives us confidence that for right now, our base case scenario is, we're going to be able to continue that accommodative environment in terms of interest rates.