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HSBC Global Asset Management Global Chief Strategist Joseph Little joins Yahoo Finance Live to break down the latest market action.
AKIKO FUJITA: We've got Joe Little, HSBC Global Asset Management global chief strategist. Joe, it's good to talk to you. We are starting to get into the thick of earnings season. Last week, it was all about the big banks. But as you look through the numbers, what stood out to you so far, especially given that we were expecting significant upside year on year?
JOSEPH LITTLE: Yeah, you're right, Akiko. The big story is that we're seeing some significant earnings growth here at the start of 2021. But also, as we're looking through the year, just in the US, but also right around the world, we're going to see some pretty strong earnings growth numbers all this year, 20% plus in many economies, many parts of the world. And that's really consistent with what we see as the sort of catch-up story in GDP terms as well.
So it's a catch-up story in profits. It's a catch-up story in GDP around the world as well, linked very much to those familiar themes around cyclical restoration and cyclical recovery. So as the vaccine rollout continues, as the virus trends improve a little bit, as policy remains very supportive, many of these real economy stocks, names, value parts of the stock market, cyclical parts of the stock market, are really coming into the attention of investors and beginning to perform. But the backdrop is really one of strong restoration, strong cyclical recovery. And that's what's playing through on the profits piece as well.
AKIKO FUJITA: Joe, having said that, we haven't necessarily seen huge pops on the back of these upside surprises. You look at where the Dow is trading today, down about 253 points. To what extent do you think these expectations have already been baked in? And are you concerned about the valuations we have seen in the market, looking not today, but over the last several weeks, reaching new highs on the Dow and the S&P 500?
JOSEPH LITTLE: Well, I mean, the first point I would make is in terms of the recovery story, don't be short of the recovery at this juncture because the macro story in terms of progress on restoration, the profit story in terms of the profits that are going to be delivered as we're moving through this year in this recovery phase are going to continue to be very, very strong. The Q2 data, Q3 data is going to look really very promising.
But I agree with what you say. There is a tension here that investors need to acknowledge very closely because while the point in the economic cycle, the points in the profit cycle, the news on the credit side of the economy as well remains very good, the fundamentals are rather impressive, growth trends rather appealing. There is a tension because market pricing has moved to discount quite a lot of this positive news already. Valuations have moved significantly higher over the last 12 months, over the last 18 months.
So P's are now significantly higher. Credit spreads are significantly lower than they were. And that means that investors need to be realistic about what's achievable from here. Future returns have fallen. And even in a good macro environment, even in a good operating environment for many corporates, that has to create a little bit of a pause for thought. An awful lot is now discounted in pricing.
The problem here is not so much that we're in a bubble. I don't think we're in a bubble situation at this point. The challenge is a bit more subtle. It sort of means that there's not much margin for error in credit markets or equity markets. So if the news were to disappoint, that could begin to have some ramifications for markets.
AKIKO FUJITA: Joe, all of this is happening against the backdrop of inflationary pressures building up, certainly a lot of concern around that. You've said that you think the key level is a 2% yield when you talk about 10-year treasuries. I mean, we're looking at it trading right now at 1 and 1/2 roughly. Are we likely to see it hit that mark? And what's the concern that comes with that?
JOSEPH LITTLE: Well, so you're right. The level that I've sort of pointed to as being a key level is around 2% for the 10-year Treasury yield. So yields expanded, curves steepened, and then more recently, we've seen yields come in a bit and the yield curve flattens somewhat. But I think at a 2% Treasury yield, not only is that offering quite interesting return and diversification opportunities for investors operating in the US space, but it also has some significant implications for how other asset classes are priced.
So it has some knock-on effect for how we might think about relative value in credits, relative value in equities, and relative value in other parts of the global bond market as well. So we think that 2% is an important level. We're not so far away from that now, even after the recent market action that we've seen. I think the backdrop that we have to bear in mind is that we're in a point in the economic cycle where we're seeing restoration. We're seeing economic recovery.
And so the base case, the assumption that we would make would be macro data continues to improve-- surprise-- even still surprising positively for economists. And equities are performing OK. And bond yields are moving up in that environment. The challenge, as much as anything, is how quickly and disorderly some of that action in bond markets might be. And that's really the big risk for stock markets and other risk markets at this point in time. But certainly in an environment where the economy is recovering, where inflation is going to be moving higher cyclically, it does look like bond yields are going to remain under some pressure.