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S&P 500 Q3 earnings beat 'suggests things are improving globally': strategist

Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi discuss stock market outlook with Doug Peta, BCA Chief U.S. Investment Strategist.

Video Transcript

MYLES UDLAND: Let's talk a bit more about everything that is going on in the markets these days. For that conversation, we're joined now by Doug Peta. He is the Chief US Investment Strategist over at BCA Research.

Doug, great to talk with you this morning. I'd love to begin with your thoughts on how you're thinking about next year. On the back of all we've heard in the last couple of weeks on the vaccine front. There's been so much optimism from your colleagues across Wall Street about what the earnings backdrop looks like, the growth backdrop looks like. How are you sizing up next year?

DOUG PETA: I think there's a good basis for the general optimism. We looked at 2020 once the pandemic arrived, from a macro perspective, as being about policymakers versus the virus. And to that end, the Fed got as accommodative as it could possibly be in a really short period of time over a few weeks in March, and then, Congress passed the CARES Act.

And that really provided a base for the economy to hold up much better than anyone would have expected in February or March when the pandemic arrived, especially, if we'd known then, that it was going to last as long as it has.

Coming into next year with that base, the Street's right. Earnings were fantastic in the third quarter. We know that companies deliberately guide down. They try to give themselves low expectations that they can beat, but we beat earnings by 19%, the S&P 500, and third quarter. That's a remarkable margin. And I think it does suggest that things are improving here. Things are improving globally. And the much better than expected vaccine news is just the cherry on top.

BRIAN SOZZI: Where do you see, Doug, if we're-- this time next year, we're sitting in the exact seats. Maybe we'll be back in the studio, and maybe you'll be out back there joining us. Where do you think the S&P 500 will be? And where do you think US economic growth will be?

DOUG PETA: I don't think 4,000 is unrealistic at all for the S&P 500. Four over 36 is 11%. I could certainly see high single digits, low double digits, because we do think earnings are going to snap back pretty nicely.

As far as economic growth, we think it should surely be above trend. Trend in the United States being around 2% real or call it 4% nominal when you assume a 2% inflation target. And we get to that [INAUDIBLE] trend, because there's so much dry powder built up for consumption.

US households, by our estimate, have saved $1.3 trillion more than they would have had there not been a pandemic. That money is going to be spent, I would wager, or else my country, my fellow citizens aren't what I thought they were. I think if you give Americans a lot of money for consumption, it is eventually going to get consumed.

And there is just a mountain of savings that have been built up, because believe it or not, household income in every month from April through October has exceeded its level in February, the last pre-pandemic month. That is testament to just how much heavy lifting Congress did with the CARES Act, and it has put the economy in a position to really surge forward once we get over the concerns about interacting with other people.

Once we have a vaccine and widespread inoculation, the economy really should be something like a volleyball that you hold under the surface of a pool, and then you let it go, and it surges higher. I do think we've got that built in charge coming next year.

JULIE HYMAN: So, Doug, where are people going to spend the money is one of the big questions, right? Are they going to keep buying stuff? Are they going to go back on cruises? Are they're going to go fly places? Are you buying cruises, and airlines, and movie theater chains, for example, in anticipation of that volleyball popping above the water?

DOUG PETA: I'll tell you, I would prefer to buy the SIFI banks, the Systemically Important Financial Institutions, which have really gotten hammered, or they got hammered through November 6th, which was the last day before-- Friday, November 6th, that last day before we got the promising phase III data from Pfizer and BioNTech before they opened on Monday the 9th. They'd really gotten hammered. And I think they were hammered in expectation of sizable credit losses, because there was very valid fear that we would have chain reactions of bankruptcies.

Well, the Fed and Congress's joint efforts to this point have completely staved off those worst case credit scenarios, and left the banks with what I would argue for [INAUDIBLE] experience something of a spurt.

I would think when-- you mentioned the airlines, cruise ships, movie theaters, I would think one of the things that we're going to consume again is travel. And that you will see some revival for hotels, and some revival for airlines, because people put off vacationing this summer. Hopefully, they're going to put off vacationing around the holidays this year, so we can get this all over sooner. But, I would think that sort of demand will revive.

MYLES UDLAND: All right. Doug Peta, Chief US Investment Strategist at BCA Research. Doug, great to have you on the show today. Hopefully we'll talk to you soon.