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Right now we’re dealing with an ‘emotional market’: CIO

Charles Schwab Investment Management SVP and CIO, Passive Equities & Multi-asset Strategies, Omar Aguilar joins The Final Round panel to break down what to expect from third quarter earnings and how its driving investor sentiment during a volatile time for the market.

Video Transcript

SEANA SMITH: Welcome back to The Final Round. We have stocks posting gains today, although, we did close off the highs of the day. Of course, the big focus I guess you can say of investors continues to be the stimulus talks and whether or not we are going to get a deal out of Washington before the November 3 election.

So for more on this, we want to bring in Omar Aguilar. He's the senior vice president and chief investment officer at Charles Schwab Investment Management. And Omar, I'm just curious to see get your sense of what we've seen play out in the markets, because when you take a look at really just today and yesterday, two totally different pictures, we saw a pretty big sell off into the close yesterday. Now, we saw some buying action today. How did you explain just what we're seeing play out in the market?

OMAR AGUILAR: Yes, it is clearly, you know, a very emotional market. I actually think that the levels of volatility that we've seen today and yesterday, and you know, we'll kind of probably see for the next couple weeks, you know, all have to do with just the markets trying to find its footing for what may come after the election.

So if you think about what's driving, you know, the volatility in the market, you have the election. And obviously a lot of the political comments are going into the potential debate that we have this week, as well as what the outcomes might be on the election and the high uncertainty that happens after the day of the election. So that's sort of one big factor.

Another factor is earnings season. We've got another set of 19% of companies that are reporting throughout this week. And, of course, we're going to see dispersion of earnings numbers that will come in different areas of different parts of the market. You also have, as you well mentioned, expectations about a fiscal stimulus, and what does that do to the political landscape? But also, what does that mean in terms of the economy and supporting the economy down the road?

You know, the situation regarding the coronavirus. The effect of that will have of a potential second wave. You know, that particular part has actually investors incredibly worried. You know, without the stimulus or anything that resembles on a stimulus into the next few months, you know, clearly, the effect of a second wave, it could be difficult for the economy to absorb. So when you put all those pieces together, the micro on the earnings side as well as the big global pieces, it is very natural to have these levels of volatility.

SEANA SMITH: So, Omar, taking that all into account, how are you positioning yourself right now?

OMAR AGUILAR: Well, you know, it is an interesting-- there are certain trends that are continued to be the case. And when you actually see the numbers in terms of the fundamentals of the economy and we actually see the fundamentals of the corporations, clearly, a big part of the trends continued to be the case. You know, we have discussed these many times where we say we're not going to get out of the recessionary period until we get a solution to the virus. And until then, you know, their rotations or cyclicals will be a little harder to have.

So we're going to see that earnings numbers or earnings growth will continue to be driven by the same leaders that we have seen throughout this year. So we'll see technology. We'll see consumer discretionary. We'll see telecommunications. We'll continue to lead the market until we get a better sense of how the virus will continue to emerge. And that may take a few more months even if we get a vaccine, you know, down the road.

SEANA SMITH: Omar, what do you make just of the current valuations, because I think that's been a huge question over the last couple of months, just whether or not the valuations are justified. But when you take into account and get some of your expectations that a lot of those big tech names had led the market rally here over the last several months that they're going to continue to outperform. We're going to see strong results from them during their third quarter earnings season. Maybe we're making too much, then, of current valuations.

OMAR AGUILAR: Well, it is kind of interesting. And I always try to go back to the reasons why we have these elevated levels of the market. If you actually evaluate the gap between the economic growth and the equity market, you know, the gap keeps on growing and growing. We know that the economy is slowing down.

But at the same time, you know, we see the market continue to grow, particularly in certain parts of the market like technology, where we actually see the reasons behind it and all the stimulus that have gone. But on the monitors that, particularly, is that a lot of what it is, the fixed income or the bondholders, are very comfortable having negative real yields that are propelling the equity market to continue to grow.

Now, that being said, as we have seen over the last few days and going forward, expectations for those high growth name continue to be very high. Free cash flow is pretty good. Leverage levels are low. They continue to generate growth in earnings that basically justify the level of some of them, not all of them, in terms of those particular EPS growth numbers that they have.

I do have to say what is healthy about the market is that the momentum trade that we had earlier in the year seems to actually slow down going through this earnings season. And what we can actually see is that typical FANG names are not doing as well as other sectors-- on other subsectors within the technology area that justify more of the valuations that we've seen so far.

SEANA SMITH: All right, Omar Aguilar, senior vice president and chief investment officer at Charles Schwab Investment Management. Great to talk to you again. Thanks for joining us.