Markets open higher on COVID-19 vaccine hopes
Yahoo Finance’s Brian Sozzi breaks down the latest market action with with Gabriela Santos, JP Morgan Asset Management Global Market Strategist.
Video Transcript
BRIAN SOZZI: Let's get back on the markets here with Gabriela Santos, global market strategist at JP Morgan Asset Management. Gabriela, always good to see you here. Market is coming out of the gate hot. What's your take on stock valuations? Are they getting a little frothy?
GABRIELA SANTOS: Hi, Brian. Nice to be here with you. If we take a look at valuations, just on a classical, next 12-month basis, they are quite high at 22 times. But for us, it's important to think about three things with valuations.
The first thing is I think we should kind of write off 2020 earnings and start to think about valuations on top of more normalized 2021 earnings. That brings it down a bit to around 18 times. Less lofty.
The second thing is also to think about it as a relative experiment. With interest rates, the 10-year below 0.7%, that makes the appeal of the earnings yield you can get on stocks that much more interesting.
And the third thing is just looking beneath the surface, right? We do have certain sectors that have recovered quite a lot, like tech, like the NASDAQ, making all-time highs. But you also have a bunch of other sectors that are still actually in bear market territory. So there's a lot of dislocation beneath the surface. So for us, it's about trying to find a better balance here between tech and growth as well as value and cyclicality.
BRIAN SOZZI: Gabriela, when I see the market come out hot like this, in continued trade I think with an upward bias, anytime you get news on a potential COVID vaccine, today more news on that front out of Moderna, you get the sense that maybe the market is undervalued. What, is it up close to nearly 50% from the March-- March lows? Do you think the market's undervalued, if we do get that vaccine before year-end?
GABRIELA SANTOS: So I think this idea around the vaccine, it's so far progressing as expected. There is this underlying assumption behind any sort of economic or analyst projection that we will get a vaccine that's discovered by the end of the year, and then manufactured and distributed early next year. And it would actually be a big downside risk if we were not proceeding according to that timeline.
What I do think is actually fueling this improvement in cyclical stocks is actually much more earnings season. We're in the thick of it. Well, we're starting it and about to be in the thick of it. And actually, expectations are so incredibly low. They've been revised down by 37 percentage points over the past three months. That's the largest downward revision since the history began in 2002.
So right now, there is the potential for positive surprises, unlike in the first quarter, especially in those more cyclical sectors. Remember, we've had an improvement in activity and economic data in May and June, but earnings expectations did not reflect that. So I do think that's what's happening is this focus on earnings season allowing cyclical sectors to play a little bit of catch up.
- Hey, Gabriela. I just wanted to ask you about interest rates and currencies, namely the US dollar broadly weaker. I think you had almost multi-month lows right now, if you look at the DXY. But also interest rates, the longer n has been under pressure in terms of yields, seeing this flight into bonds. Any concern there? What do you make of this macro situation?
GABRIELA SANTOS: So I think actually when we look at the dollar, the fact that the dollar has been able to stop rising is actually a good thing, because when we have these periods of dollar strength, it signals a lot of risk aversion, investors in the US coming back to the safety of US assets, investors overseas looking for protection in the US. So the fact that we've finally been able to reach a ceiling in the dollar and have started to see it depreciate, it actually means that there is some confidence, some improvement in risk appetite happening.
Think another thing that's happening with the dollar is investors starting to think about having a better balance between exposure to the US and exposure globally. And it actually goes back to this idea of cyclicality. The US is a very defensive market. If we want to have a better balance with cyclicality, that's actually everybody else's time to shine around the world.
International stocks have a representation of around over 50% of cyclical sectors versus only about a third in the US. So I think it's-- this is also happening, this better diversification between regions. And for us, it's a big theme that we've been talking to our clients about, getting more exposure to regions like Europe, like Asia. And that's what I think the dollar is showing us.
BRIAN SOZZI: Gabriela, I do think there's another earnings cliff. I'm going through some of these-- these earnings reports, a JP Morgan, a Wells Fargo, even a Goldman Sachs this morning, a Fastenal industrial player. They are warning about business trends continue-- continuing to be uncertain this quarter and the next quarter. It doesn't seem like things are getting any better, which goes against the whole market narrative.
GABRIELA SANTOS: So I think it's all about how we frame it. When we started to get that recovery in activity and the data in May and June, we started to hear about the potential for a V-shaped recovery. And we always pushed back against that. We said, look, this is just the beginning of a long road to recovery. It's really good right here in the past two months, and we're really pleased to see that, but it's going to start moderating. And this is ultimately a long road to recovery, something that's much more U-shaped.
And I think that's consistent with the narrative that we've been hearing from banks. They still see a long road ahead in the recovery and one that does have coronavirus as the main protagonist and with it a lot of uncertainty. So, so far, it's been consistent.
And I think when we mention adding cyclicality, we don't mean going to the other extreme and being all-in, overweight cyclicals to the maximum amount possible. We just mean adding some so that your better balanced between cyclicals and defensives.
BRIAN SOZZI: All right, let's leave it there. Gabriela Santos, global market strategist at JP Morgan Asset Management, always good to see you. Enjoy the start of earning season.
GABRIELA SANTOS: Good to see you. Thank you, guys.
