US equity markets (^GSPC, ^DJI, ^IXIC) are slipping Wednesday morning as investors remain wary about upcoming inflation data in the form of the Personal Consumer Expenditure (PCE) reading, which will be released on Thursday. In addition, leadership in the Federal Reserve, from Atlanta, New York, and Boston, will speak before the reading.

Citi US Equity Strategist and Managing Director Scott Chronert joins Yahoo Finance to give insight into how markets are moving before the release of key inflation data and the valuation of both the Magnificent Seven and the broader market.

Chronert elaborates: "In the case of the Big Seven, you definitely have seen an earnings tailwind that's supporting the move in that action. For the broader market though, that other 493, you're seeing better price action, but we're still looking for that underlying earnings inflection. The result is that, the market, whether the big seven or the other 493, are trading at valuations that are in sort of the top ten percent of its last 20 year history. Bottom line, we are fairly constructive on the earnings outlook from here, but we think we are at a point where need to buy some time for the fundamentals to grow into said valuations."

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: All right. Well, stocks under some pressure at the start of the trading day. Investors here looking ahead to comments that we will be getting from Fed officials later today and also tomorrow's read on inflation, the PCE print, could potentially move the market. Can be a catalyst or could really put equities under pressure. So let's talk about where valuations are today, and what that tells us about the trading activity that's likely ahead for the markets.

We want to bring in Scott Chronert. He is Citi's US equity strategist and managing director. Scott, it's good to see you here. So the debate that most people are having on the street right now is it all comes down to the valuations of just a handful of names. S&P valuations is really front and center of that conversation. What do you think the setup looks like for the S&P at this point?

SCOTT CHRONERT: So, you know, so we've been using a 5100 year end target Seana for some time now, and so we're approaching that level. The way we're characterizing this is that, obviously, we've had a very strong move in the broader market. It's led by several of the big or mega-- the Big Seven or Mag Seven, however you'd like to phrase that.

But we do think there's been broadening under the surface. You've had a pretty strong rally in many other sectors and stocks off of that November low with a number of companies hitting 52-week highs up to levels we haven't seen since 2021.

Now, what's been happening here in the case of the Big Seven, you definitely have seen an earnings tailwind supporting the move in that action. For the broader market, though, that other 493, you're seeing better price action, but we're still looking for that underlying earnings inflection.

The result is that the market, whether the Big Seven or the other 493, are trading at valuations that are in the top 10-- the top 10% of its last 20-year history. Bottom line, we're fairly constructive on the earnings outlook from here, but we think we're at a point where we need to buy some time for the fundamentals to grow into the said valuations.

BRAD SMITH: Scott we were trying to remember in our morning meeting, was it your team that came up with Mag Seven and how much longer does this kind of Magnificent Seven trade kind of still have legs or do we need to reframe it? Do we need to retitle it?

SCOTT CHRONERT: Yeah. I can't take credit for Mag Seven, we've been using Big Seven for a while as our alternative. But what I would say we've been arguing for some time now that that cohort would become more idiosyncratic. They'll begin trading off of their own company specific fundamentals and less so as a group of seven names. You're seeing that in the year-to-date performance.

And we've tried to play that via our industry group and sector weights. As an example, we're underweight autos, but we're overweight retail. We're trying to capture components within that on a more company-specific basis.

SEANA SMITH: Scott, when you take a look at the euphoria maybe that's playing out in the market right now, and I want to bring up the Levkovich Index, and what we are seeing from that, as you guys have pointed out here in recent notes. And when we pull that up on the screen, you can see we are right below that euphoria level.

When we talk about the upside maybe that we still have to go here for the S&P, do you see that index crossing above that euphoria level soon, and how much fluctuation do you typically see on a weekly or monthly basis within this?

SCOTT CHRONERT: Yeah. So the Levkovich Index, it will tend to lag. It has some elements in it that will lag by a couple of weeks or if not a month. So I wouldn't be surprised if we see it mechanically move into more of a euphoria position here.

You know, I think the way we're thinking about it is that yes, that's a sentiment indicator. We have to be attentive to that. Typically, what you need is some let's call it fundamental or macro prod to cause the sentiment to shift. That's the tricky place right now. We think we're in a very strong fundamental position in aggregate for the S&P 500.

Again, we just keep coming back to this point that our fair value work suggests the S&P is a little bit stretched as you go to heightened sentiment reasons. You just have to be a little bit circumspect here and allow for sort of, you know, the market to digest some of these gains as fundamentals catch up with the price action.