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Why 2021 has been a ‘robust year’ for earnings according to this strategist

Meera Pandit, J.P. Morgan Asset Management Global Market Strategist, joins Yahoo Finance’s Adam Shapiro and Seana Smith to discuss how she thinks the markets are faring, digesting earnings reports, and worries over the pandemic, as the month of July comes to an end.

Video Transcript

SEANA SMITH: Bring in Meera Pandit, Global Market Strategist at JP Morgan Asset Management. And, Meera, when you take a look at the action that we see not only today, but really this week, kind of a volatile ride, I guess you can say-- investors digesting some of those better than expected earnings. And then you see a name like Caterpillar today beating the Street's expectations, yet the stock is off just around 3%. What do you make of the action that we've seen this week?

MEERA PANDIT: So we've certainly seen a bit of a slide in some of the areas of technology market in particular, given not only some of the weaker indications of earnings ahead, but also given some of the regulatory crackdown we've seen in China over some of the tech names. And then more broadly, we are still seeing some concerns over the Delta variant-- to what extent might that impact growth and activity. And just generally, we are moving from a phase of recovery slowly towards recovered where the economy does moderate a bit.

ADAM SHAPIRO: What do you make of the fact that we have seen just dramatic beats in earnings expectations once again in this quarter-- I think, what, 80% is where we're running in the S&P 500 companies with so many now having reported. Is this realistic?

MEERA PANDIT: You know, we're on track for one of, if not the, best quarterly EPS on record, potentially only to top last quarter. So it's been a really robust year in terms of earnings. And part of it is that there was a big collapse in many sectors last year-- so areas like financials, industrials, energy do have to rebound and are rebounding from that collapse last year.

But the other thing that's a little bit more surprising is for the most part in areas like technology, not only did we see strong earnings last year, but we're seeing really strong earnings this year. I think that while that recovery can continue in 2021, there are some headwinds down the pike in 2022 as this recovery plays out, as potentially interest costs and wage costs get a little bit higher, tax reform also could potentially form a headwind. So I do think that we should expect slower growth heading into next year. But for the time being, we're going to enjoy this really record year of profits.

SEANA SMITH: Meera, you mentioned the slower growth, I guess how slow that growth are you expecting?

MEERA PANDIT: Well, typically, we are a 2% economy. I think it's going to be a while before we get back to that 2% pace of growth. We did slightly miss expectations on real GDP growth for the second quarter. They came at around 6.5% on an annualized basis. But again, comparing that to pre-pandemic levels, that's a really solid level.

And we're likely to continue to see levels like that in the high to mid single-digits throughout the rest of the year. It's really looking forward into 2022 when we think that the economy will moderate. And I would put an emphasis on moderate, not crash.

ADAM SHAPIRO: So when you talk about moderating, third quarter earnings, fourth quarter, and even in 2022-- if inflation is temporary, as the Fed is telling us, but wages don't come down because there's a shortage of people to work, what's the impact going to be on earnings as we go forward of that?

MEERA PANDIT: It's certainly going to be a headwind. But even regardless of that and the pressure that that might put on margins, we've seen just such an incredible bounceback within the margin space as it is across different sectors that it should be, again, a headwind, but not something that completely causes a turnaround within the earnings picture. And I think that the real implication for wages is to what extent could it cause slightly stickier inflation, perhaps not keeping it at the elevated levels it is today but close to that 2% to 3% range in the long run.

So when I think about wages, yes, headwind for earnings next year. But really what I'm more focused on is how that might impact the inflationary picture in the longer run.

SEANA SMITH: So, Meera, as we do head into August and then, of course, the fall, how should investors be positioned with all this in mind?

MEERA PANDIT: The biggest driver of S&P 500 returns this year has been earnings. It's not about multiple expansion. It's not really about sentiment anymore. It is about those quality earnings. So investors should be looking from an equity perspective for companies with strong business models and a good track record of earnings with some bright forecasts ahead. And also consider as the rest of the world starts to slowly catch up in terms of their recoveries, allocating internationally to stocks as well.

ADAM SHAPIRO: With the performance of the S&P 500 in July, there's been a lot of talk that the era of passive investing may be coming to an end using the index funds. What do you think? This has got to reinforce for a lot of just average investors that passive investing through index funds is the way to go.

MEERA PANDIT: Well, I think that what we are going to see, again, in no small part due to the earnings picture, is that we're going to have to start separating some of the winners from the losers, particularly as the economy does moderate. Because what we saw in 2020 was that that rising tide did lift most boats and that stocks did very well.

So just having that beta exposure would have really benefited you. But now we're in a much more selective environment where not everything can and will go up. We're going to have to look for quality stocks. So I do think that active stock selection is still going to actually become more important as the economic environment slowly but surely becomes a little bit less enthusiastic as it is today.

SEANA SMITH: Meera Pandit, Global Market Strategist at JP Morgan Asset Management, thanks so much for taking the time to join us.