Jonathan Golub, Credit Suisse Chief U.S. Equity Strategist & Head of Quantitative Research, joins Yahoo Finance Live to discuss Credit Suisse's bullish outlook on the S&P 500 and which sectors to watch in the second half of 2021.
Video Transcript
BRIAN SOZZI: I know one person will be watching the Fed meeting today very closely, that is Jonathan Golub. He's the chief US equity strategist, the head of quantitative research over at Credit Suisse. Jonathan, always good to see you. Is there anything the Fed could say today that would upset where you think the market might go over the next 12 months?
JONATHAN GOLUB: Could they? Sure. Do I expect them to? Not at all. I mean, the-- our expectation is that the Fed is probably going to wait until November to indicate that they're going to begin the taper process and that it'll start closer to December.
But with economic data weakening recently-- and we're seeing that in all kinds of things, everything from the last GDP report to the last jobs report, economic surprises have turned negative-- I think that the Fed is going to want to provide some calm to the market while still leaving their options open to move when they want. So I think the Fed has done a brilliant job of keeping the market confident and I expect nothing but that in their comments today.
EMILY MCCORMICK: Jonathan, you recently initiated your 2022 S&P 500 price target, and it's 5,000. Now that's almost 15% upside from yesterday's closing prices. What's the case for this continued march higher as we look into next year, even against this decelerating growth environment?
JONATHAN GOLUB: Right, so first of all, 15% or so up over the next 15 and 1/2 months is a pretty constructive optimistic view, but it's not-- it's not as big as the number itself would indicate. But it's really one simple story, that this environment of rising prices where companies have terrific pricing power, that they're able to deliver fantastic earnings growth. And if you look at the last five quarters, they've surprised-- they-- companies in the S&P 500-- have surprised by something like 19% on average for the last five quarters.
Now we actually think this quarter is going to be a smaller surprise, something maybe closer to 6% or 8%, but still, that's a very, very big number compared to history. And we think that ultimately, that's going to be the driving force. It's not a sentiment issue. It's not fun flows. It's not easy Fed money, it's good old-fashioned profits.
EMILY MCCORMICK: Speaking of profits, though, one of the things that we've been watching and asking some of our other guests is when we look at some of the companies that have been reporting recently-- FedEx being one of them-- really highlighting here the profit margin pressure due to these rising labor costs, rising input costs, is that something that concerns you? Or when do you think this is actually going to dissipate some of these pressures?
JONATHAN GOLUB: Well, you know, I think you have to separate that. First of all, on an individual company, and I don't cover this particular company, obviously, but there are going to be individual companies that are feeling different types of pressure from rising labor costs or rising input prices. But generally speaking, what you're seeing is companies have relatively little problem passing on higher expenses to their customers.
And as much as they are broadly-- companies in the S&P-- are broadly increasing wages for their employees, those are being really well managed so the companies remain extremely profitable. So we're going to see, as we move into the broader earnings season in late September and early October, we're going to start to get profit warnings. You typically get those bad news warnings earlier, and the beats and the good news comes a little bit later.
So I wouldn't be surprised if we hear more chatter that looks like what we've heard over the last day or so. But I think in general, we're going to be surprised to the upside again.
BRIAN SOZZI: Jonathan, does seem to be-- at least from my vantage point-- reading a lot of these earnings calls, talking to executives, inflation is proving stickier than they would have thought. They're pushing a lot of price increases through. When you look at FedEx pushing close to an 8% price increase in coming weeks because of higher labor costs, do you think that is something that concerns the Fed and pulls forward their rate hikes and that would unsettle the markets?
JONATHAN GOLUB: Well, I mean, so first of all, there's a couple of things going on here. One thing I think companies are going to want to do is use this reporting-- the reporting cycle-- as a way of saying to their customers, listen. We're going to be increasing your prices, but understand it's not because we're doing something nefarious. I'm not talking again-- I'm not talking about this specific company, but in general, they want to explain, we're going to be raising your prices, but it's because we're having price increases ourselves and we need to do that in order to be able to continue to service you.
So this is a messaging exercise for many companies, and which is one of the reasons why even companies that do quite well on their earnings numbers, they're still going to go and complain that they're facing all kinds of input cost issues.
Now with respect to the Fed, if you have a labor shortage, you know, the Fed doesn't necessarily have an easy way of easing that. They could, if they want, raise rates and crush the economy and kill demand, but they don't want to do that. So the Fed, I don't think, is going to want to act aggressively to kill these numbers, to kill the growth here. They've told you that they think that this is all transitory. The real question is, how long is transitory for?
I think when people hear transitory, they think, you know, a couple of months or a couple of quarters, and it's really it's pretty clear that transitory is going to be longer than that. I don't know whether it's going to be a year or two years, it's going to take a while to work through the supply chain issues, these labor issues, these disruptions coming from the pandemic.
And we all need to be patient and we're probably going to be living with higher inflation and that's going to play itself out very differently whether you're a retiree or whether you're a corporate executive. But we're going to be addressing this for a longer-- transitory does not mean tomorrow, it means something a little bit, unfortunately, a little longer term.
EMILY MCCORMICK: And Jonathan, taking a look at some of your sector ratings, your overweight industrials, materials, energy, health care and financials, so again, a lot of those cyclical areas of the market-- while your market weight, technology, communication services, a lot of these areas that had led in 2020, I'm wondering, is this a matter of valuation here? These tech stocks are just a little bit too richly valued at this point? Or what do you think, over the longer term, is really the trend here?
JONATHAN GOLUB: Right, so there's a couple of things at play. First of all, I just want to acknowledge that since March, well in the period after the Pfizer vaccine announcement, cyclical stocks and financials did incredibly well leading the market. And then since March, a lot of those names have kind of lagged, like technology. The reason for that is that interest rates play a really important role.
When interest rates are rising, cyclical companies-- industrials, materials, energy, things like that, financials, they tend to do really well. When interest rates are falling, it favors tech companies. So if you have a strong opinion on the direction of interest rates, that should inform your choice on how to effect these.
But there's two main issues that we're looking at. The first one is tech looks really quite expensive. Normally, tech companies trade at a couple of multiple points above cyclical sectors, traditional old-economy companies. That spread right now, they're trading at, like, 10 multiple points above. So they're really quite expensive.
The other thing is these old-economy companies are gaining a lot more of that pricing power, a lot more of that operating leverage. So in an environment where costs are rising and selling prices are rising, tech doesn't-- tech wins, but they don't win as much as, you know, traditional old-economy companies.
BRIAN SOZZI: Jonathan Golub, chief US equity strategist and head of quantitative research over at Credit Suisse. Really appreciate the insights on these really crazy, this crazy week for the markets. Good to see you.