Investors should be ‘on watch for further deterioration’ in markets: Strategist

Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Yahoo Finance Live to discuss stock futures, earnings per share (EPS) amid inflation and rising rate hikes, and the outlook for investors.

Transcripción del vídeo

BRIAN SOZZI: All right, let's stay on the markets here and bring in Charles Schwab Chief Investment Strategist Liz Ann Sonders. Liz Ann, always great to see you here. We are right in the middle of earnings season here.

And I have a chart I want to pull up here, because we are seeing before earnings season estimates for profits really go on an uptrend. I think that would surprise a lot of folks, given what we are seeing with inflation and rising rates. Are you surprised that the street is taking up their estimates? And does that set the table for disappointment?

LIZ ANN SONDERS: Well, we may be the first quarter in six or seven quarters where analysts might end up moving estimates up a little bit too much, to your point of the question about setting up for some weakness. We also have the fact that right now, the blended consensus, which is the 10% or so of the S&P that has already reported, combined with consensus for what's left, is decent, 6% and change for the S&P. But ex energy, it's close to flat.

And again, we're only early in the season. But we've got a lower beat rate than what the trend had been from the lows of a year and a half ago and the percent by which companies have beaten. And then revisions going forward, as well as preannouncements, are more biased toward the negative side. So in aggregate, earnings will still be positive. But I think some of the underlying trends are certainly weaker for the first quarter.

JULIE HYMAN: And let's also talk about underlying trends, Liz Ann, in the economic data. I was just reading through your commentary from yesterday. And you talk about the people need to pay attention to not just the absolute level, but the direction.

It doesn't matter so much if economic data is good or bad. It matters if it's worse or better. And then you outlined some numbers that are not so great in your commentary. So how are you feeling about the overall economic picture right now, with all the recession talk out there?

LIZ ANN SONDERS: And I think that the trend versus level is always important. I've said for three and a half decades that I've been in this business that better or worse tends to matter more than good or bad. It's human nature for us to look at economic data, whatever variety you're talking about, and think of it in strong versus weak, good versus bad. But it's that second derivative. It's the rate of change, especially as you're approaching a potential inflection point.

We growth is slowing. The burning question right now is it mid-cycle slowdown or ultimately a harder landing into a recession? And you have to focus on the leading indicators, but not wait until the point where in level terms, they have started to look weak. You want to look for that, the start of deterioration, which certainly not across all the leading indicators, but in the case of some, you've started to see a bit of that deterioration.

And it just means you want to be on watch for further deterioration, such that it gets to the point of recession conditions. We're certainly not there yet. But if things continue to worsen, I think the odds go up.

BRIAN SOZZI: Well, how do you invest in this type of backdrop, this uncertain backdrop, Liz Ann? On one hand, you have utilities still rocking. They're really boring. No one wants to invest in overvalued utilities. But then you have tech stocks that have taken a beating and there might be some values there.

LIZ ANN SONDERS: I think that the trend in interest rates, the move up in the 10-year yield to 2.9% has put downward pressure on the more highly valued segments of the market, clearly the underlying shift toward defense, not just in the very recent period, which has been a choppier market period, but even in the three or four week period in March where we had the rallies off the early March lows. That was not driven by cyclical segments of the market. So I think the underlying message coming from the market, beyond just looking at the index level, is one of slowing growth.

I think you have to be really careful, though, because in the case of a sector like utilities, they're actually trading at a richer multiple than the S&P. So even though they live in value indexes, they don't really offer a lot of value from a factor or characteristic perspective. We've been recommending that investors, especially those that do it on their own, they're stock pickers, focus more on factors.

And the umbrella around factors that we think will continue to be generally in the leadership position is quality. And that encompasses not just certain value characteristics, like strong free cash flow, yield, strong balance sheet, but also more hybrid into growth characteristics, like positive earnings revisions in an environment where we don't have as many positive earnings revisions. So we think that factor-based approach is the way to tackle a very difficult market at this point in the cycle.

JULIE HYMAN: So, Liz Ann, that sounds like, then, if you're applying that factor-based approach and looking for those characteristics, that you're not going to get an umbrella sector waiting, right? To come back to that old saw, it's a stock picker's market, if you apply that screen, is that fair to say?

LIZ ANN SONDERS: Absolutely. In fact, I think there's this misperception that to look for value, you're limited to the sectors that generally live in the value indexes. I already used the example of utilities living in the value indexes, but not offering a lot of value. You can also find value through screening in sectors like technology that for the most part live in the growth indexes.

I often describe it as there's growth and value, uppercase G and V, which are the indexes labeled as such and what their constituents are at the sector level. But then there's the factors or characteristics of growth and value, lowercase G and V. And you can apply an analysis on them and a search for them across all the sectors. You don't have to limit yourselves to just certain boxes, style boxes that they live in.

JULIE HYMAN: Liz Ann, thank you so much. Good to see you. Liz Ann Sonders is--

LIZ ANN SONDERS: Pleasure.

JULIE HYMAN: --Charles Schwab chief investment strategist. Appreciate it.