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The narrative that we’re going into recession is ‘very seductive,’ strategist says

Baird Managing Director and Market Strategist Michael Antonelli joins Yahoo Finance Live to discuss the key things to watch for ahead of Big Tech earnings, the expectations for GDP data, investor sentiment, and the outlook for markets.

Video Transcript

JULIE HYMAN: About 35% of the S&P 500 members set to report earnings this week with a particular focus on big tech. Amazon, Alphabet, Microsoft, Meta, they're all in focus this earnings season is off to a better-than-expected start from the companies we've heard from thus far.

However, investor sentiment may not be painting a rosy picture. Here with more on the key things to watch, Baird managing director and market strategist Michael Antonelli. Michael, good morning. It is great to see you here. So it does feel like the tenor of the season thus far has been a little bit better than estimated, which, let's face it, tends to happen usually. But how are-- how are people sort of positioning as we get into this really blockbuster week for earnings?

MICHAEL ANTONELLI: Right, and not only is it a blockbuster week for earnings, Julie-- it's good to see you too, Brad. We have GDP this week, right? We'll get to-- we'll get a look at first-quarter GDP, spending, PCE data, durable goods. It's definitely a week where you're going to want to stay tuned in.

Barron's just had its big money poll. You guys maybe have seen that. And there were some great tweets kind of summarizing it. I saw one that said that they interviewed about 130 money managers, and only 6% of their clients were bullish. So positioning does seem to remain very, very bearish with this notion that a recession is coming. Expectations for year-end prices in their poll was about 4,150, which is right here. So even bullish people think that where we are right now is it for the year.

Hedge funds are really kind of net short S&P futures. JPMorgan did a survey of their clients, and over 60% said the S&P would close at 3,500 or lower. So that's, you know, a 10%, 15% downside from here. So no one's positioned for this at all, and earnings-- we can dig into a little bit. Earnings better than expected, like you said, but worse than usual right now.

BRAD SMITH: So even that considered, we had already heard a little bit of the inkling of how the executives wanted to address the investor community, analysts, and as well their customers when they do report earnings. And we got that from Andy Jassy's shareholder letter as well, and it sounds like they're going to try and continue to paint this picture of a growth narrative for these companies, even though, in near term, there could be some headwinds that they face, especially in some of their most growth friendly businesses over the past couple of years. Largely thinking about some of the cloud services. Are these still growth companies?

MICHAEL ANTONELLI: I think they are. There's-- you know, one of the things that the history has taught me or being in this market for the better part of 22 years is that even in a slowdown, there's companies that can thrive. There's companies that can find pockets to really excel in and kind of push their-- push their agenda forward. So I do think there are still growth companies to be had around.

You know, when we say that QQQ is up so much this year, I mean, those are all mostly growth companies. It's probably because, you know, they got-- they got punished so hard last year, and they're doing a little bit better than we thought. They'll also get the boost from-- tailwind from, you know, cost reductions in their labor force.

So, you know, I do still think that the narrative that we're going into recession, the narrative that things are slowing dramatically, it's seductive. It's very seductive. We hear it all the time. But still, companies are still performing pretty well.

JULIE HYMAN: Well, and what's interesting is, as you pointed out in your note to us, the companies whose earnings per share are growing fastest right now are not in what we tend to think of as those growthy sectors like tech. It's rather in places like industrials and energy. Is that where investors should be looking right now?

MICHAEL ANTONELLI: Right. You know, we've been talking about sectors a lot with our clients, the ones that are kind of interested in picking through the market right now, and energy has been one of them for a while. We believe that that secular trend is still in place, and it's something you could look for ideas to invest in.

Industrials, same thing. If you were to look at, say, a big Midwestern industrial or, you know, an ag-focused industrial, they're still doing really well. Their charts still look really good, and now their earnings are showing up as being quite strong.

So these are sectors that we've been focused on. I mean, tech and materials were the ones that were doing the worst. You know, again, those are growthy stocks that were really flying high for a better part of a decade. So yeah, those are two sectors we're still interested in and we're engaging with clients on, yeah.

BRAD SMITH: It seems like there's also going to be a lot of people watching to see if tech companies, when they do report earnings-- similar to when Elon Musk was on "SNL." People were waiting to see if he'd mentioned Dogecoin at all. When people report and the earnings come through for some of these tech companies, people are going to be waiting to see, what do they have to say about artificial intelligence, right, and whether or not that's a near-term type of beneficiary that they-- or at least additive to their business versus something that you would look at this and say, yeah, it's going to be a little bit more long term perhaps. And if so, at what stage in time would you really see that come through some of the numbers?

MICHAEL ANTONELLI: So this is really interesting that you guys brought this up. I spent a lot of time in client events. I spent a lot of time talking directly with our clients, and the number-one question recently has been around the dollar, you know, the whole USD thing that we just went through. The number-two question's been what about AI? Is there a way that I can get involved in this? What's an interesting way for me to play this? So like you said, that is what people will be looking for.

And if you were to think about kind of pure plays on AI, there aren't a lot of great ones right now. You do have these big tech giants dabbling in them and saying, hey, we have-- we have a platform for this to spread on.

And again, not only do I want to see are they talking about AI? I want to see, you know, how is it impacting their strategic view? Is this-- you know, when I use Microsoft Office to write a blog, is AI going to be a partner with me on that? Like, I'm on Amazon. Is AI going to be helping me shop? Like, I can't wait to hear what they say because I'm one of these people that's not bearish on it, and I think it's going to be a tremendous productivity enhancer for everyone. I know people using it today-- real-estate agents using it today to write listings. Like, it's going to be with us, and I really want to see how these big tech companies are using them.

JULIE HYMAN: Well, and it's interesting you say that because when you talk about it as interacting with it as a consumer versus investing in it, right, as an investor, those are obviously two different questions. And I've been reading a little chatter that while the big-cap tech companies are saying, look over here at AI, well, maybe their core cloud businesses are slowing to some extent. So you have to wonder if they are the best way to play it or if there are other ways to approach it.

MICHAEL ANTONELLI: Yeah I've spent a lot of time thinking about this too. I actually don't have a great answer, and it's kind of unfortunate when you have to say that, you know, not only to an advisor, to a client. There's no great pure play on it yet It's still kind of in the fringes of, you know, profit centers. It's still kind of the fringes of how we will use it, you're right, as an investor or as a customer.

So I'm still looking. I'm still trying to dig into what that is. I'm sure we'll get a million ETFs, and I'm sure we'll get-- you know, there will probably be a million different marketing-- you know, marketing pitches around it.

But the big tech companies to me are the ones where it will take root the quickest. They have the most amount of size and the most amount of product offerings. And yeah, when we see them report, we really need to kind of look away from AI for a second and say, how is your business actually doing? because that will be important.

BRAD SMITH: All right, Baird managing director and market strategist Michael Antonelli. Michael, always a pleasure to get some of your insights, and thanks for joining us this morning.

MICHAEL ANTONELLI: Thank you, guys.