US equities still a favorite despite headwinds: HSBC's Sels

Wall Street is attentively watching the outcome of the March FOMC meeting set to wrap on Wednesday followed by a press conference held by Federal Reserve Chair Jerome Powell. As economic uncertainty continues, with the Fed poised to keep interest rates for longer, many investors are looking for where to park their investments going forward.

HSBC Global Private Banking and Wealth Global Chief Investment Officer Willem Sels joins Yahoo Finance to share his insights into the US stock market (^DJI, ^IXIC, ^GSPC) as economic headwinds play out ahead of the Fed's latest monetary policy decision.

Sels elaborates his stance on US equities and adds another country's market for portfolios: "We continue to be overweight on US stocks. The US economy has been very resilient and it's not just the economy, it's also the earnings, which continue to grow together with the margins actually in the US. That's the standout, really, around the world. The other country we like to add to that, in part because of its own local situation, but also because it helps diversify portfolios, is Japan."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

SEANA SMITH: Yields are ticking slightly lower here ahead of the Federal Reserve's latest interest rate decision and latest economic projections. Now here to talk about what this could mean for your portfolio, we want to bring in Willem Sels. He is HSBC's Global Private Banking and Wealth Global Chief Investment Officer. It's great to see you there. Willem, so how are you thinking about what we are going to hear from Fed Chair Jay Powell? And will it at all affect your strategy here going forward?

WILLEM SELS: You know, obviously, it will be interesting to watch more the language rather than the action. I don't think the Fed will do anything at this meeting. We still think they will start to cut in June. But the language is obviously very important, because the market has been reassessing how many rate hikes we exactly are going to get this year and starting when.

You know but the prospect of rate cuts, right-- the prospect of rate cuts is obviously very positive for markets. And therefore, we have been putting our cash to work. Typically, what happens is that both bonds and equities rally well ahead of that first rate cut. And that's indeed what we're seeing again as well.

BRAD SMITH: Where is the hottest spot to put cash to work right now, Willem?

WILLEM SELS: The US, actually. And we continue to be overweight on US stocks. The US economy has been very resilient. And it's not just the economy, it's also the earnings, which continue to grow together with the margins actually in the US. And that's the standout really around the world.

The other country that we like to add to that, in part because of its own local situation but also because it helps really diversify portfolio is Japan. We're also seeing that positive momentum. And there is a reflation trade now in Japan. Actually, getting a little bit of inflation is a good thing. And that's why we also have an overweight on Japan.

BRAD SMITH: You know it's interesting, based on some of the FactSet analysis of the earnings that we've seen so far this quarter for Q1 2024, this is looking forward then in current quarter analysis. 78 S&P 500 companies issuing negative EPS guidance, 32 issuing positive EPS guidance. When you think about ultimately what companies are trying to get ahead of and trying to spell out to investors why, in this case, is the hotspot US equities and on the back of some of the guidance and some of the earnings that's expected?

WILLEM SELS: Yeah, we often get the question, is it just the Mag Seven that are driving the earnings. And to some extent, if you look at the sector composition of where you see that earnings growth, it will immediately reject that hypothesis. Because we do see earnings growth in technology, positive earnings revisions in technology and communications, where there are some Mag Sevens, but we're also seeing it in the industrial space and in the financials. So it is more broad based than people think. And that's why we want to broaden that exposure as well.

The other question that we get is around valuation of the Mag Seven. But given that we also see earnings growth elsewhere, we're happy to broaden that sector exposure to these other sectors. And that helps lower your average valuation somewhat.

SEANA SMITH: Willem, do you see any validity or any reason to be concerned about tech valuations or this talk here of an AI bubble?

WILLEM SELS: AI, in my view, is going to spread. Whatever client that I talk to-- and obviously, we have many business owners amongst our clients. Every single business owner tells me that they're using AI to some extent already. Sometimes it's marginal, but in many cases, it's already actually reasonably substantial in the area of ordering and inventory management, but also logistics, their client servicing and so on.

So I do think this is something that is really going to come and going to spread from those couple of-- that handful of companies that so far are benefiting to a much broader area. And that will lead to productivity gains, which to some extent, you're starting to see already.