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The U.S. dollar ‘is becoming a challenge’ for companies, strategist says

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J.P. Morgan Asset Management Global Market Strategist Gabriela Santos joins Yahoo Finance Live to discuss challenges for companies this earnings season and the next catalyst for markets.

Video Transcript

BRIAN CHEUNG: Let's get a little bit deeper into the market conversation with Gabriela Santos, JP Morgan Asset Management global market strategist in blue today. But I do want to ask about the broader story. Not going to ask you about those specific companies, but look, the overall picture is that this is going to be an earnings season to watch. What are you expecting? What are threads that you're looking for that could tell us what stage in this economic cycle we're in?

GABRIELA SANTOS: So I think there's a very big disconnect between investors, which are clearly very gloomy about the upcoming next 12 months, starting to price in recession risk, and actual C-suite of companies and analysts of companies, which still seem extremely optimistic in their projections of the future. So what I think investors are looking for in this earnings season, it's, let's start to close this gap.

And really, what investors are looking for is for companies to acknowledge the slowdown that's already happening in the economy and to start giving a little bit more negative guidance about where their cost pressures, as well as their revenue, can go in the future. And that's a necessary step. To actually price in all of the risks is to actually have more realistic earnings expectations and even lower them enough to price in a possible recession.

AKIKO FUJITA: What do you think is driving that disconnect, though? I mean, if you think about what we heard from the big banks last week, for example, we were talking about even the big banks aren't on the same page in terms of what that outlook looks like.

GABRIELA SANTOS: I think there's just too much uncertainty, right, for the C-suite versus what's happening right now, which is the consumer looks fine. The economy is slowing down, but is not currently in recession versus what investors care about, which is, but tell me a little bit more about the next 12 to 18 months. And there, there's a lot of uncertainty about how higher inflation, tightening financial conditions could weigh on that dynamic, both at the revenue side, as well as the margins and bottom line side.

But we need to have more realistic expectations. And especially about next year, 2023, where analysts are still projecting 9% earnings growth, that's just completely unrealistic for a slower economy, never mind a potential mild recession next year. That's a really important catalyst, I think, to get investors off the sidelines.

BRIAN CHEUNG: So a little bit of Curb Your Enthusiasm that we have to go through here. But at the same time, does that suggest that-- because, look, we're seeing a pretty decent week so far for overall equities-- that we have not seen the bottom, that we should expect to see some of those expectations price in a further decline from here?

GABRIELA SANTOS: I think in the very short-term, yes, pricing and lower earnings expectations can be a painful process, as it's happening here over the next few weeks, as we get really further deep into the heart of earnings season. But I think it actually sets you up for a much better sustainable rebound once you're on the other side. And when you look at several indicators of investor pessimism, consumer pessimism, they're really suggesting very strong future returns over the next 12 months, the next three to five years.

So for those investors that have a longer time horizon, it makes sense to very, very slowly add exposure to good quality names within risk assets. But if the focus is very short-term tactically, it's still not the time to ramp up the risk exposure, because we still have another bit of a painful process to go through.

AKIKO FUJITA: Brian touched on some of the overarching themes we've heard on some of these earnings calls so far. Currency headwinds, one that we continue to hear. And the expectation here is that the dollar is going to get even stronger. I mean, how big of a risk does that pose?

GABRIELA SANTOS: I think there's a perception of a strong dollar has to be a good thing if you're sitting within the US and you're thinking about, oh, strong currency must be good. But it's clearly gotten to the point where it's at 20-year highs.

And it's becoming a challenge. It's becoming a challenge for companies, multinationals, once they convert their earnings back into US dollars. It's also posing a challenge overseas in the extent to which it's just fueling more inflation. So it's just counterproductive at this point. It would be really good to have a pause and a move down in the dollar. And for that, we need a bit more comfort around the future of the global economy.

AKIKO FUJITA: Yeah, a lot of people are watching those levels really closely. Gabriela Santos, it's good to have you on, on set.

GABRIELA SANTOS: Yeah, thank you.

AKIKO FUJITA: JP Morgan Asset Management global market strategist, thank you for your time.