Laton Spahr, SS&C ALPS Advisors President, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets following Tuesday's opening bell.
BRIAN SOZZI: Let's stay on earnings season here and bring in Laton Spahr, President of SS&C ALPS Advisors. Laton, good to see you this morning. Bank earnings are very much top of mind here. From what you've seen out of some of the banks this morning, what's your read on the healthy economy, and do you think the market deserves to trade where it is trading based off those results?
LATON SPAHR: Brian, thanks for having me. I think bank earnings are always the traditional kickoff. It's setting the tone for what I think is going to be a pretty positive earnings overall season. Coming from second quarter, which was one of the most dramatic downturns we've ever seen, third quarter is looking pretty good. And overall, especially in industrial and consumer sectors, we've seen revisions move up steadily through the summer. And I think that the signals that we're seeing about credit reserves being lessened is a positive. But to your point, a lot of that's priced in. So we'll see what expectations look like.
BRIAN SOZZI: But in terms of follows, I'm looking at a quarter this morning out of They're warning that outside of demand for COVID-19 type items, core demand remains weak in their business. If there is any risk to earnings season, do you think it's the company's outlook for fourth quarter? And in fact, for a lot of industrial companies, the demand is just not there yet.
LATON SPAHR: Yeah, I agree. Fourth quarter is not really what the story is. But the restocking that we're going to see over the next quarters is really historically large. We've seen inventories across the economy get drawn down. We see it all in grocery stores ourselves.
But that exists on shelves in industrial companies. Fastenal has had to deal with that themselves, I'm sure. But over the next three quarters, we think transportation looks good because we're going to start moving more materials around. Even if we don't see a huge consumption acceleration, just the lift back to somewhat normal inventories could add 3% to GDP. So starting with news in the fourth quarter into the first half of next year, inventories is going to start to drive that story, especially for industrial companies.
ALEXIS CHRISTOPHOROUS: Can you tell us which sectors you think are going to outperform here when they post results? I mean, we're hearing from the banks now, and they are beating an already-lowered bar in showing their resilience. We expect the airlines and the cruise lines to report dismal numbers. But who do you think might actually maybe even surprise this market to the upside with their earnings?
LATON SPAHR: Yeah, the third quarter is still going to be about the COVID trade. So anything to do with leisure, anything to do with digital consumer spending, all those elements have had a very good third quarter. And I still expect them to post overall better-than-expected earnings. A lot of the recovery trade that we're looking at into 2021-- industrials, banks, airlines, some of the experiences over things-- they're still dealing with really, really bad fundamentals. This isn't the quarter where they're going to see the inflection point.
But what we want to hear is, how are they dealing with operations in a much lower-demand environment? What are their balance sheets looking like, and what's the liquidity within things like cruise lines? Those are in the news today about raising equity and dealing with the overall decline in demand. But it's setting a stage that this is a bottom for some of those more negatively impacted industries for COVID.
So as we go through this quarter, I really think we're going to start to hear what the bottom looks like within some of the more cyclical, experience-type sectors. And we can start building in some more optimistic scenarios of what it looks like when we start to normalize the economy, hopefully next year as we get closer to vaccines and we get more used to dealing with the new routines. So I'm leaning towards looking at industrials, looking at more consumer experience-type industries.
So it's a little bit contrarian. This isn't the quarter they're going to look great. But we're going to start building optimism for next year.
BRIAN SOZZI: Are you in the camp that a blue wave sends the stock market ripping higher come November?
LATON SPAHR: No. I think there's enough confusion around what the tax consequences are going to be of a blue wave. It's going to be a little bit less corporate tax-friendly, at least the way that it would talk about overall corporate taxes. Capital gains would be a conversation. So I think stimulus-wise, people are going to feel pretty good. That may be bad for the dollar, which that starts to perk up things like the basic materials sector.
But it's also going to be a really complex tax conversation. So I don't think it's just blue wave, off to the races. It's going to be more nuanced than that. But as we get into 2021, a blue wave means a lot of stimulus, which should help advance some of this industrial recovery, inventory restocking theory that I'm looking at for next year. Overall good for the markets, though.
ALEXIS CHRISTOPHOROUS: I'm seeing news out this morning about the theater chain AMC saying that they could run out of cash by the end of the year. They desperately need to raise money unless revenues start to pick up and people start going to the movie theaters again. We don't really expect this to happen. We see Disney restructuring around its streaming service as it now sees this behavioral shift from consumers. What's your overall take on those companies, those companies in the entertainment space?
LATON SPAHR: Yeah. I think those are great examples of something we've seen from the market reaction through this COVID crisis, which is trends that were in place to begin with have just accelerated. So the move to streaming, the investment in content that we see from those huge streaming platforms-- that's just accelerating. And when you see people investing in their homes-- I'm sure they're building out their theaters and their sound systems.
And I've got two teenage kids, and we really have lived as a family around these new streaming services. So I don't think that's necessarily a new thing. Theaters have always been leveraged as a business model because they've been so steady. So when you get the black swan event where you can't go to a theater for health reasons, that's where the dangerous balance sheets really come into play. But it's not a new trend. It's just an acceleration, which is something we've seen over the last nine months.