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Oppenheimer strategist calls for ‘a slower recovery’ but is still bullish on stocks

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Oppenheimer Chief Investment Strategist John Stoltzfus joins Yahoo Finance Live to discuss his S&P 500 price target revision, the market outlook, and Fed policy.

Video Transcript

- Continuing the conversation, one of the biggest bulls on Wall Street has cut his price target for the S&P 500. For more on why, we bring in the man himself, John Stoltzfus, who is the Oppenheimer chief investment strategist. Love the title of this, don't stop believin'. Although you are revising your price target lower, still bullish on US equities. Give us the playbook here.

JOHN STOLTZFUS: All righty. Thanks for having me on the show, Brad. I've got to say, it's just a realistic approach, we believe, here. When you get rebounds from lows in transitional markets, and this is a highly transitional economy and market at this point, leaving the pandemic period, it would appear, the degree of oppression that was on the economy, you know, from 2020 through 2021, and now dissipating as we move forward here a pretty pronounced fashion, the reopenings, what we've seen is we've got high levels of inflation, 40-year highs, and a new 40-year high on the last read, about 10 days ago or so.

So when you look at it, it's how far can equities go in the rally. In past rallies in transitional markets, you know, I think it was in 2009, from a very dramatic low, the market rallied something like 63%. In 2020 from the low after it had lost 33% from February 19th through March 23rd, the S&P rallied something like 67.8%. So we were looking at that, and we had maintained the target that we put in last December of 5330 for quite a while because we thought if we get this kind of a rebound, a similar rebound this year from the lows that we've been seeing, that as we pass the half year mark, we thought it was more realistic to bring that down somewhat. At 4800, it essentially implies a fairly flat year for this year.

But based on the incursion of Russia into Ukraine and the zero COVID policy that at one point in China shut down a city of 25 million people and further supplied the-- further damaged the supply chain repair that is in the process occurring around the world, we'd have to say that we thought, well, it may be a slower recovery. But we still do think that the markets will move higher from where they are today, and particularly the S&P 500, as the main-- you know, they're largest 500 companies in the US. We think it looks good.

- John, why are you still so optimistic on profits for S&P 500 companies? We've been getting a lot of earnings warnings in the past few weeks.

JOHN STOLTZFUS: You know, it really depends where you look for the earnings warnings, and you'll find that it depends upon the company's capability to pass those higher costs that they're getting on to the customers and the willingness of the customer, the ability of the customer to look for different products or, essentially, look for alternative products. Let's put it that way.

So we've got to think, because let's see the way earnings season really works out once it starts picking up momentum after the big banks start reporting. We do expect there's going to be disappointments, but we do expect there will be some remarkable surprises over the course of this, and the next few quarters. The other side of it is inflation, in terms of the nominal earnings, will likely help earnings growth as we move forward here.

- But inflation, as well, it's not something that the Fed can completely eradicate by itself. Of course, there's supply chain considerations. There's energy prices that are totally skyrocketed at this point for consumers and businesses. And so at what point do those start to recess or retract themselves, in terms of the headwind that they do create for the broader inflationary environment?

JOHN STOLTZFUS: Well, I think with-- related to oil, I think the peak that we saw-- I think it was in March-- was around 123 bucks. And at 103 where we were a little earlier today, that's somewhat off from there. And we've been even below that. I mean, you've got a few investment houses, at least one, suggesting a price around $65 a barrel at some point between now and the end of the year. We wouldn't be thinking that, but we think the biggest problem is the administration still has a policy that is very negative on domestic production.

We like to say it's been looking for oil in all the wrong places. When it comes to oil, we don't think the place to go is the Saudis or going towards Venezuela or towards Iran, which are very favorable, in many ways, towards Russia in their viewpoint. So we would say why not use US producers, and recognize what we consider as the gap between where we are today in terms of dependence upon fossil fuel, in terms of scale, infrastructure, and the economics of it, and alternative energy.

We're investors in both. We're big investors in alternative energy. We're big investors in-- we're more modest investors in fossil fuel just because of the overall secular trend, and we're intermediate to longer-term investors. But what we would say here is there's just-- there's a gap. It's like when you go on the tube in London. The voice says mind the gap.

And we think the administration, in, believe me, in our humble opinion, we think it needs to take a look at that and recognize the fact that we have a large supply of natural gas under our surface of our earth. And that's a cleaner fuel than fossil fuels. And other fossil fuels near-term need to be allowed to be produced in greater quantity here, and encouraged, we believe, instead of discouraged, while we mind the gap and move forward to an alternative energy platform.

But it's going to take years, and I think more people are recognizing that than ever before. And it's felt at the pump. It's felt the price of food, whether it's beef, poultry, pork, or fish, or whether it's vegetables or fruits. This is the reality, is when fuel is up, like it-- as it has been over the last two years, what you really have is you have a real inflation engine. And that's what the Fed can't deal with this. It has to deal with rates.

- John, you wrote in the note, quote, "do not bet against the resiliency of US-- of the US consumer." What gives you the confidence that that is, in fact-- will hold true again this time? As you just mentioned, we're seeing inflation across the board. We go down to the local gas station, over $5 a gallon in gas. It's now costing $200 a ticket to go to Disney. I mean, what gives you the confidence in that?

JOHN STOLTZFUS: Well, I think, you know, the confidence would show up in just the two companies that you were speaking with a little bit earlier, you know, big box retailers that-- companies that can offer discounted fuel to attract their customers into their stores. This is-- you know, the American consumer will spend like a drunken sailor on leave during times when they're flush.

But when times are tough, the American consumer, in my experience-- and I've been in this business for 39 years, OK, so every boom, bust and recovery cycle since 1983 I've run through, you know-- it's not my fault, mind you, but I mean, I've had to deal with them-- and the biggest thing is the US consumer, in times when it's tough, gets the vacuum cleaner out, looks for coins behind the back seat of the automobile, behind the sofa, and keeps spending, to some degree. Not necessarily robust, but more resilient than naysayers would ever think. And thus far, of course, as your guest just in front of me, as I recall, was saying, the consumer is still in remarkably good shape at this point this long into this recovery cycle.

And lastly, you know, I really think it-- and the whole thought of this is we don't think the Fed is trying to kill the economy. It's just trying to end free money. Free money is bad, in our view, and I think in most people's view, in that it encourages all kinds of speculation, inflates asset classes, not only the ones that could use a little inflation, but also those that don't deserve it, and it creates instability in the economy. So I think that's what they're working at.

And I think, you know, well, it just takes time. We've only had three hikes, 25 in April, 50 in May, and 75 in June. It looks like July is going to be another 75. Based on the numbers that came out today on employment, it looks like the economy can take it. So I think we press forward. It doesn't mean that any kind of-- you know, it doesn't make things easy, but it certainly says that they are navigable.

- Yeah, based--

JOHN STOLTZFUS: We can navigate this thing.

- Right. Based on what we've heard from Bullard and Waller this week, as well, it sounds like they'll be pushing for 75 at the next meeting. John, always a pleasure to get your insights here. And thanks for breaking down exactly what you're seeing in the calculus today off of these numbers, and even further forward into the future. That's John Stoltzfus, who is the Oppenheimer chief investment strategist. Thanks very much for the time today.