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Markets open higher with stimulus prospects in focus

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down today’s market action with PNC Chief Investment Strategist, Amanda Agati.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, time to dive back into the markets now and say good morning to Amanda Agati, chief investment strategist at PNC. Amanda, good to see you here on this Friday.

So we have got third-quarter earnings season looking at us here smack in the face. What are your expectations for this season?

AMANDA AGATI: Well, good morning. It's great to be with all of you again on this Friday morning. We are gearing up for third-quarter earnings season, absolutely. And really it's shaping up to be very similar but thankfully a bit less negative version of Q2. Every sector is expecting negative earnings growth. So that's the negative news.

But we have seen pretty positive and strong intra-quarter earnings revisions, to the tune of about 300 basis points. So that is certainly promising relative to what we saw play out in Q2. At the sector level, industrials and utilities really didn't see much in the way of positive revisions, so we think it could be still a bit of a tough slog there for them this quarter.

And at the industry level, again probably not too surprising. Metals and mining. Yes, gold, unfortunately or fortunately, depending on how you're positioned there, saw the strongest revisions coming into earnings season. Biotech as well, again, not too surprising there, while the travel and leisure names continue to struggle.

And so net-net, we're still very positive on the stay-at-home trade, everything that you need when you're hunkered down for stay-at-home orders. We're not fully reopened here in the economy, and so we think the leaders for Q3 will be the leaders that were in Q2.

Tech staples, health care, they've seen positive growth revisions. We're certainly expecting the fundamental story to continue to be very strong on a relative basis. And so we think they'll continue to lead the charge here and hopefully lead the market higher as well. While the go outside trade, you know, the more value-oriented names, CD, energy, industrials, more of the cyclicals just are continuing to struggle, really negative growth expectations, sharply negative. Revisions not looking good.

And then of course, the wild card, which it definitely was for Q2 and it will be in Q3, is guidance. Will companies, just given the heightened volatility backdrop and uncertainty in this race into the election, actually start to offer more meaningful guidance? We're pretty skeptical on that. So-- but we're watching very, very closely for signs of life here in the short run around guidance.

BRIAN SOZZI: Amanda, without or absent any stimulus plan, is the consumer staples and the Consumer Discretionary sectors, are they at-- most at risk for really disappointing investors this go-around in terms of earnings but also guidance?

AMANDA AGATI: Well, I would actually account the consumer staples area as a key beneficiary of the stay-at-home trade. So we actually think that they will continue to do very well. Yes, I think CD is definitely likely to set up for disappointing investors, as the consumer is clearly not back to normal in terms of spending behavior and just, you know, general activity, economic activity as it relates to travel, leisure, and discretionary, you know, big-ticket items.

So I think the CD story is going to continue to be tough. I think staples will be OK, if not, you know, be ahead of expectations. If you look at just some of the early reporters, FedEx, Oracle, General Mills-- there's that staple name-- Micron, Pepsi, another one, they've all had pretty strong beat rates here early as early reporters here for the quarter.

And what's kind of the key theme that they all have in common, it's key beneficiaries of stay-at-home trade. So I think there's a big distinction between discretionary and staples, as it has been really all year.

ALEXIS CHRISTOFOROUS: Amanda, we've certainly talked a lot about high valuations in the tech sector. And investors looking for a little value see some stocks out there, maybe even within tech. And they say, you know what? They look a little cheap or cheaper right now. But you say be careful of what you call a value trap. What is it, and how can we avoid it?

AMANDA AGATI: Well, so investors have obviously been looking for pockets of opportunity in this relatively expensive market. We've talked over the last few months certainly about how the S&P 500 has kind of been pricing for perfection when we know the backdrop is anything but that.

So when we're just shy of 22 times the forward PE on the S&P 500, that's kind of pushing it. When we know that we have an election cycle, we're worried about stimulus, we have a second wave of COVID, that is not a picture perfect backdrop by any means. But I think valuations really have to be thought of as a relative game.

And so when you look at valuations relative to bonds, that is equity valuations relative to bonds, nowhere near as elevated. I'll just quote a couple of stats here for you. The yield-to-duration ratio for investment-grade corporates is at its all-time high. And when you look at Treasury yields to earnings yields on stocks, it's actually double its 10-year average in favor of stocks.

So very much a relative game. If you think stocks are expensive, bonds are wildly expensive here at current levels. And I think that's just really what happens when you have interest rates effectively pinned at 0. So investors are naturally kind of clamoring for, what is that bargain? What is that value opportunity?

We do think that there are pockets of opportunity, but particularly on the value side of the trade, you know, when you look at consumer discretionary, when you look at energy, industrials, financials, they're all really challenged. And so we are very much a buyer beware kind of mindset here when it comes to value. They may be cheap, but they may be cheap for a reason.

And so in this environment, things that might ordinarily look like deep value, and a.k.a. a bargain, are actually more of a value trap, not-- I wouldn't go so far as to say broken stories, but really struggling for a catalyst to meaningfully improve the fundamentals from here. It's not a permanent kind of broken situation that we're in. I think it's just very much a function of the still challenged economic backdrop and earnings growth backdrop that we find ourselves in, not likely to reverse course here in the very short run.

- Amanda, before we go, I just wanted to get your take on the currency market. We've seen the US dollar kind of sliding overnight. But also specifically towards China, which reopened today, coming five days off their holiday, the yuan is strengthening and seemed to signal that all's clear with the US. Do you think this can last?

AMANDA AGATI: Well, you know, it's such a tough call in terms of currency movements. And we try not to spend too much time getting bogged down in very short-term currency adjustments. It's all relative again, right? Interest rate differentials matter here. And certainly what's happening on the stimulus front is kind of a key in terms of the trajectory of the US dollar in particular.

And I think a lot of this comes down to a function of increasing hopes, again, although very volatile around stimulus. And so, you know, we'll kind of just have to see how things play out. I don't know that I would put too much stock in necessarily what's happening relative to the yuan just here in the very short run.

Net-net, you know, it's much more a function of debt and deficit levels and interest rate differentials. And so, you know, we're kind of staying the course. We're not making any adjustments relative to shorter term currency movements at this time.

ALEXIS CHRISTOFOROUS: Amanda Agati, PNC's chief strategist, good to see you. Have a great weekend.

AMANDA AGATI: Thank you. You too.