Jill Carey Hall, Head of U.S. SMID-Cap Strategy at Bank of America Global Research, joins Yahoo Finance's Brian Sozzi and Emily McCormick to discuss the market outlook for the remainder of 2021.

Video Transcript

BRIAN SOZZI: Jill Carey Hall is a US equity strategist and head of US small and mid-cap strategy at Bank of America. Jill, always nice to see you here. Find me a bull market because all I'm hearing on earnings calls is supply chain problems, inflation. Where should investors navigate to now?

JILL CAREY HALL: Great to see you again. Yeah, I think, you know, even though we're a bit more cautious on the S&P 500 at these levels, we expect more downside than upside risk through year end. And we're looking for sort of a flattish market between now and the end of 2022, just given some of the risks that we're seeing right now within the market, given how elevated sentiment is, given how elevated valuations are. We do still see opportunities within equities for investors.

So one of those areas is small caps, which I cover. And we think that the outperformance of the US relative to some other regions over the next year, the pickup in CapEx spending by corporations, which we're seeing evidence of the starting season, that that's typically bullish for smaller, more domestic companies. And small caps aren't as stretched on valuations. So you're seeing that smaller stocks trade at multi-decade lows relative to where they usually trade versus larger stocks.

So the longer term returns, if you're a long-term investor, could actually be pretty bullish for small caps right now, after they saw a long period of underperformance. So we're projecting based on where valuations are today that small caps could actually see mid to high single digit annualized returns over the next decade, whereas for the S&P 500, our models are actually suggesting you could see flattish to slightly negative annualized returns over the next decade.

EMILY MCCORMICK: Jill, this is Emily. A couple of stats were really eye popping and stood out to me in a recent note from Bank of America. Your firm pointing out the supply chain mentions on third quarter earnings calls were now up 412% year on year. That's a record increase. And labor mentions were up 320%. When you look at numbers like this, is this the peak here for these concerns on the supply side constraints, or are some of these concerns going to be continuing to impact companies well into next year?

JILL CAREY HALL: Yeah, I think that that's certainly a risk that a lot of these issues could persist into 2022. And companies have been able to continue to expand their margins. So, you know, S&P 500 margins this quarter have continued to surprise to the upside. Companies have been able to exercise operating leverage, been able to price through, but we think the risk is really just given how much inflation and some of these supply chain issues have surged-- and companies are obviously talking about this on earnings calls that, you know, expectations for companies' margins next year look a bit too optimistic to us.