Stocks close mixed, Nasdaq ends losing streak
The Dow Jones Industrial Average (^DJI) closed the day lower by about 37 points, but the S&P 500 (^GSPC), and Nasdaq Composite (^IXIC) ended higher, with the Nasdaq snapping a 4-day losing streak.
In the current environment, Baird Investment Strategy Analyst Ross Mayfield tells Yahoo Finance Live that he favors industrials and consumer discretionary stocks. "The broad base case or idea of the market right now is that we are in a cyclical bull that's in the middle of a seasonal corrective phase. And, so, the leadership going into that, industrials, discretionary, some of those more cyclical sectors, we think will ultimately continue to be leadership once this corrective phase kind of settles out," Mayfield says.
Video Transcript
- I'm looking at your notes here. It looks like you like industrials, consumer discretionary. XLY, one of the leading sectors, large cap consumer discretionary today. How does this translate into what you might expect for the rest of the year?
ROSS MAYFIELD: Yeah, so the broad base case or idea of the market right now is we're in a cyclical bull that's in the middle kind of a seasonal corrective phase. And so the leadership going into that, industrials, discretionary, some of those more cyclical sectors, we think we'll ultimately continue to be leadership once this corrective phase kind of settles out. So we like the cyclical parts of the market. The defensive areas have given us nothing all year and continue to look weak.
We might pair that with some high quality fixed income. Again, yields pushing up at 15 year highs. And ultimately, once you do get to peak Fed, even if it's farther out than the average investor might expect, you get the one time capital appreciation from yields falling. So I think that trade works well, that paring. But we still think we're in a bull market even though things are looking a little gloomy right now. And so we want to be owning those economically linked sectors on our way out and into the back end of 2023.
- So Ross, the tech sector has been a standout. Today, no different. Is the AI play overplayed?
ROSS MAYFIELD: These big themes-- and I'm not breaking any ground here-- they tend to be overestimated in the short term, underestimated in the long term. You're seeing some of the AI linked plays really rallying. And obviously, the earnings of video on Wednesday will be kind of a flash point as they're one of the leaders in the space. But I do think there's a lot baked into these stocks right now and the follow through in the near term.
While it's been impressive and while there's real investment, real pull through to the bottom line for a lot of these companies, it's probably a little overestimated. The near term valuations are pretty extended especially as you move down the cap scale in some of those names. So probably a pause or maybe just a break needs to be taken. But it's a theme that we have belief in. And we think that over the longer term, the winners are going to be real standout winners.
- I'm wondering what you're thinking about the current earnings season, which is wrapping up here, and then into the end of the year because we came into this year with really low expectations, negative implications for earnings. And that just did not materialize. What are you seeing now in the current quarter and also looking ahead to the final two quarters of the year?
ROSS MAYFIELD: Right. Well, we've had economic surprises over the last several months that you can see it reflected in earnings. So earnings x energy, which was a real drag this quarter. Were actually up again against depressed expectations. But that's been the theme of the year is beating expectations.
The recession hasn't materialized. And so we're not seeing earnings that would be associated with a recession. It's going to be flat, it's not exactly awe inspiring. But you're not getting the big trough. You're seeing profit margins importantly stabilized. And earnings are really expected to ramp up into the end of the year in 2024.
I will say we need that to be the case because valuation is a bit extended here, especially where rates are. But so far, we've seen no reason that won't be the case. Again, the economy in Q3 has re-accelerated, the Atlanta Fed's GDPNow number got a lot of play because it's up around 6% real GDP. That will flow through to earnings. The consumer has been resilient.
So we expect the trough to be around Q2, Q3, and an acceleration into the end of the year. Again, profit margins stabilizing here is really, really important given all the pressure's on the cost side of the books.
- And Ross, I want to ask you-- so to your point about I guess kind of a takeaways on this latest earnings season. As we're winding down, we have a few big players to come up. We have Nvidia, we've got some big retailers still left to report. What has been what stood out to you as a theme? Because I know the previous earnings season, it was all about AI. Is it the kind of profit, the margin stabilization piece that stood out to you? And I have a follow up question I want to ask after I just hear what you have to say on that.
ROSS MAYFIELD: Yeah, I think margins are an important part of the story. I think the year of efficiency or managing the cost side of the books has been really important and companies have been really effective in doing so as top line growth has slowed. So I think that's really important. Typically, you don't get recessionary earnings unless profit margins can track quite a bit.
I think the other thing outside of AI that you have to watch is just what are the consumer facing names saying about the resiliency of the consumer. There are a lot of well known headwinds coming up, whether it's the depletion of excess savings or the resumption of student loan payments. And yet most of those names have said, the consumer is doing OK, maybe some trading down, but not painting a picture of falling off a cliff of the consumer spending that might be expected.
