Morningstar Chief U.S. Market Strategist Dave Sekera joins Yahoo Finance Live to discuss currency rates, the outlook for corporate earnings, and market themes such as the green transition and electric vehicle shift.

Video Transcript

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- Let's keep the market conversation going with our first guest for the hour. We've got Dave Sekera. He is Morningstar's chief US market strategist joining us here in studio. And Dave, we'll look at the broader economic picture, but I want to just pick up on that point that Ines made about where the currencies have been moving. When you look at the strength of the dollar, we have heard so many companies really signal the FX headwinds they've been facing.

DAVE SEKERA: Certainly going to see that in the earnings coming up for the next couple of quarters. And that's going to be a big headwind, especially for those companies that have a lot of their revenue and a lot of their earnings in foreign exchange, because, of course, when that foreign exchange then is converted back to the dollar, that's going to reduce the number of dollars and keep their earnings much lower.

Now, having said that, I think what investors really need to think about is figuring out which of those companies that dollar appreciation is actually going to impair their earnings going forward as opposed to those companies that will be able to continue to keep holding those margins. So that's really what I'm trying to differentiate right now, between those two different types of companies in these currency headwinds.

- Yeah, I mean, how do you differentiate those companies? Is it really more about the international exposure? We've heard a lot of these warnings coming through from tech companies.

DAVE SEKERA: Well, specifically we are looking for those companies that do have very high exposure to the international markets. And what I'm really looking for are those companies that we believe have a wide economic moat. So again, those are the companies that we rate having long-term durable competitive advantages. Those are the companies that we think in an environment like this are going to be able to hold their value the best. They're the ones that are going to have the best pricing ability to put through additional cost increases in order to be able to maintain their margins and should be able to hold up their earnings over the shorter term.

- Let's talk about your broader economic outlook, because it looks like you're a little more positive on where things are headed. You believe inflation has now peaked. We are, obviously, going to get another CPI print before the next Fed meeting. But what's your expectation right now with where the central bank moves?

DAVE SEKERA: Sure. So looking at our economics team's recently published forecast, we actually do think that the second half of this year probably looks pretty good. So their forecast for US GDP for the full year this year is 1.8%. So, of course, after the following two negative quarters we had, that means we need to have about an average annualized run rate of 3% for the rest of this year.

Now, having said that, we do expect the economy will be slowing going into 2023. As you know, it takes some time for the Fed's monetary policy to affect the broader economy. So we're only looking at 1.2% GDP growth next year.

Now, we do think that GDP growth will rebound after that. But part of the reason is, as you mentioned, we do think inflation has already peaked here in June. It'll come down in the second half of this year. We're looking inflation of 2.1% next year. So in our view with the slowing economy, next year inflation getting back under control, that really gives the Fed room to actually starting to turn around and start easing monetary policy late in 2023.

- So it doesn't sound like you're expecting that hard-landing scenario coming into-- going into the end of year. You think the Fed will be able to centrally manage this between the rate hikes and also making sure that the labor market does not see unemployment tick up too high.

DAVE SEKERA: Correct. And so our base case is that 1.2% GDP next year. Now, having said that, our head of US economics did say that if we do have a recession, the highest probability for that recession is in 2023.

- OK, really quickly, investment themes that you're looking at-- one is the shift from goods to services, but you're also looking at the clean energy space, particularly everything that comes with the big EV buildout.

DAVE SEKERA: Yeah, so we do have a little bit of a differentiated opinion there. So our basic materials team, they've done a lot of work looking at the demand for EV vehicles. And so we think that by 2030, about 2/3 of all new global auto production will be electrified, whether that's going to be a hybrid or a battery electric vehicle.

And so when we look at the amount of lithium that's being produced today and how much they expect to come online over the next decade, we think the lithium market is going to be pretty significantly undersupplied over the next decade. And so some of those lithium producers we think are pretty undervalued. So Lithium Americas will probably be our favorite pick there, but also looking at some of the-- Albemarle would be another one that we currently rate four stars. Livent, SQM would be some others that we would highlight.

And there's also a number of different other ways to play that growth in the EV market. So another one we've been looking at is the specialty chemicals area. So it takes two to three times more specialty chemicals to make an EV than a car with an internal combustion engine. So we're looking at DuPont. And Eastman is another one there that investors can take a look at.

Or otherwise look at those companies that are the parts suppliers. So someone like a BorgWarner we think is pretty undervalued. They have a really good product lineup to be able to support that EV growth.

- Pointing to the fact that it's not just about the cars themselves. Obviously, so many suppliers that come with that. Dave, it's good to have you in studio today. Dave Sekera, Morningstar's chief US market strategist.

DAVE SEKERA: Thank you.