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'Markets have been keying off of 2021 earnings estimates since May': J.P. Morgan Private Bank's Patrick Schaffer

Patrick Schaffer, global investment specialist at J.P. Morgan Private Bank, joined The Final Round to discuss his outlook for the market as the election and earnings season approaches, and how those events will impact investors.

Video Transcript

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. Myles Udland with you in New York. Right. Let's talk a bit more about what's going on in the market, not just today, but over the last couple of weeks and, of course, the big event just four weeks from today. That would be the presidential election.

Joining us now for that conversation is Patrick Schaefer. He is a global investment specialist with JP Morgan Private Bank. So, Patrick, let's start with the election in the context of maybe this-- we've heard from so many folks in the investment business that all their clients want to talk about is politics over the last couple of months. Is that what you have found? And how have you gone through those conversations with your clients who care a lot about politics but probably don't need to make any drastic portfolio changes based on that?

PATRICK SCHAEFER: Yeah, Myles, that's exactly right. I think they're from-- what clients want to talk about right now can kind of be distilled into, like, four big buckets of news flow-- the election, COVID, stimulus, and the Fed. On the election, as you just laid out, there is clearly a lot of near-term anxiety about what that could potentially look like. But if you take a step back and you look at the data longer term, who's in power in the White House and the Senate, generally speaking, has from a statistical perspective at least, little to do with what equity market returns look like.

And if you think about where the anxiety sits, the anxiety sits within the equity markets. When we focus on fundamentals and we look at the fact that the economy, certainly since May, has just been growing faster than people had anticipated in March and in April and the earnings outlook for next year and into 2022 looks so bright, I think we can make a fundamental case, certainly, to stay the course in equities or to move some of that cash off of the sidelines back into the equity market.

MYLES UDLAND: Now, certainly the news we've seen just within the last hour, that there likely won't be a stimulus bill before the election, has dented the markets a bit. I mean, we're off a percent and a half in the S&P.

But that positive fundamental backdrop that you talk about-- second quarter earnings were so strong. Revisions to the upside from analysts have been quite strong. Does that still remain in play, I guess, in your view? Were you assuming that there wouldn't be stimulus until next year?

PATRICK SCHAEFER: Now, we are-- we're assuming on stimulus it's a matter of size and when, not if. And so the fact that there is gonna be some choppiness around the negotiation, that's not really all that surprising. And if we think about this like absolutely from a very near-term perspective, there's an issue on it.

You look back over the last three trading days, and there has been this rotation out of some of the growth momentum areas into some of the more value-cyclical areas. That started on Friday. It occurred yesterday. It occurred certainly today into this announcement that the negotiations broke down.

But we actually think that markets have been teeing off of 2021 earnings estimates since May. And if we fast-forward the tape into next year, we can envision an environment where, in the middle of next year, we start to think about what 2022 earnings look like. And from what we can tell today, that looks fine.

MYLES UDLAND: And thinking about corporate earnings, I mean, really the consensus now has been there's a K-shaped recovery. I mean, Joe Biden is talking about a K-shaped recovery. And on the top of the K is really corporate America. And so I guess our investors still may be doubting the way and that the skill of corporate managements to maximize earnings per share and to deliver the kinds of returns that equity investors tend to expect.

PATRICK SCHAEFER: Myles, you got it right there. Corporate America has adjusted. You look at the S&P 500, specifically-- the S-- particularly the companies at the top of the S&P 500-- they have adjusted. They are doing business differently. They are monetizing growth trends and durable growth trends that are evident in a COVID or post-COVID world.

When we look at S&P 500 earnings next year, we can envision a scenario where we actually see S&P 500 earnings in 2021 at 170. To put that into context, last year we did about $163 in S&P 500 earnings. And so we actually think at this point in time next year, we're going to have higher earnings than we had last year before the pandemic. And if we look out to 2022, we can probably see a scenario where we get north of 180. It's through that lens that we can see the S&P 500 eclipsing where we were in the first week of September and getting back to-- or getting to new levels of 3,700, 3,800, in about a year from now.

MYLES UDLAND: And then, we know, we've talked a lot about the equity market more broadly across asset classes. What are the conversations like regarding fixed income? We've seen-- obviously, we know rates are going to be low from the Fed for some time. We've seen a little bit of steepening in the yield curve.

But what are opportunities there for the kind of portfolios that need that kind of income generation? They've struggled for a decade, and it's really not getting any easier.

PATRICK SCHAEFER: You have fixed-income investing in a zero interest rate environment, or a ZIRP forever, as some people like to think about it right now. That can be a little bit challenging. I would not be afraid of taking a moderate amount of duration, so, i.e., owning some bonds with a little bit longer maturity and taking some appropriate credit risk-- I think appropriate credit risk with credit oversight, as opposed to just taking broad-based ETF sort of bond market investments is probably the right way to go there.

MYLES UDLAND: All right, Patrick Schaefer, global investment specialist with JP Morgan Private Bank. Patrick, always great to get your thoughts. Thanks so much for joining the show today.

PATRICK SCHAEFER: Thanks, Myles.