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Will equities continue to deliver into 2022?

Principal Global Asset Allocation Chief Investment Officer Todd Jablonski joins the Yahoo Finance Live panel to discuss the latest market action, as Bitcoin hits a new record.

Video Transcript

ZACK GUZMAN: And joining us now for more on all that is Principal Global Asset Allocation chief investment officer Todd Jablonski, ahead of Yahoo Finance's All Markets Summit presented by Northern Trust on October 25-- got to plug that. But Todd, when we look at this, I mean, it's a hot start to earnings season. There are still, of course, overhangs that investors are watching, including maybe potentially the idea that the inflation we're seeing right now is not as transitory as some people would like it to be. What's your take on maybe where we're at as we look ahead to Q4?

TODD JABLONSKI: Well, it appears from Seattle that investors have been fed a pretty steady diet of directionally negative news over the last quarter, from rising inflation to potentially slowing growth to normalizing monetary policy. But ultimately, I think what investors are taking some comfort in, in recent weeks and what you see in the market action in the last several days is optimism around earnings and optimism around fundamental improvement. That's just part of the reason why we remain long risk assets and feel that equities can continue to deliver into 2022.

ZACK GUZMAN: Yeah, and I guess, you know, there are some questions around what could happen if we do see some of those price increases maintained, or dare I say, continue higher. Particularly right now in the energy space, I think a lot of attention being placed over there. I mean, what are some of the downside risks? I mean, we could potentially see a record high close here in the S&P 500 today. But what are maybe some of those risks that aren't getting priced in maybe effectively, if you want to look at it that way?

TODD JABLONSKI: Well, no doubt I think the tremendous surge in inflation is one of the great sort of lasting legacies of COVID, among other items. But as the global economy plays whac-a-mole with surges in inflation, I think what you find is, yes, that does eat into margins when it doesn't get passed through to consumers. I mean, overall, when you consider I think the landscape for risk and return for assets today, you see, I think, a slowing, potentially, in the beta of returns from risk assets, just from owning equity market direction.

We also see additional challenges related to the speed with which interest rates might move up longer term. And modern stagflation, indeed, remains on investors' radar screens. Despite that listing [INAUDIBLE] concerns, however, I think investors should stay focused on fundamental improvement. And with 44% growth of forecast this year on earnings and 8% in 2022, that's the recipe for good support for continued performance on equities.

ZACK GUZMAN: Yeah, when you look at performance, I suppose, in kind of the sectors, the names you like right now, it's interesting to see you kind of leaning more into the mega cap tech stocks. Of course, those had been kind of beaten down a few weeks ago, but now kind of coming back, as the market has overall. It's been the growth engine for a long time for the broader market. I mean, how are you looking at maybe that being a continued theme, as we look ahead to next year and maybe where investors should be allocating?

TODD JABLONSKI: Yeah, I was surprised by the speed with which investors moved off of the narrative around big US technology names that have really been a savior for a lot of what we've seen in the stock market for the previous decade since GFC. But it's difficult to throw me off the scent.

And when you see a secular growth force and remarkable, I think, cash flow generation that comes forecast for that group in an environment where stability, predictability, and an emphasis on quality, we think, will be rewarded in the marketplace, that mega-cap cohort, we think, retains its attractive features. And it's an overweight heading into 2022.

ZACK GUZMAN: Yeah, we'll be watching those names as we get some of the big tech earnings trickling in here. I'm not sure Tesla really falls into that, but we got that one coming up after the bell today. Todd Jablonski, Principal Global Asset allocation chief investment officer, appreciate you taking the time here to chat with us.