With earnings season kicking off Friday with Big Banks set to report fourth-quarter results, Wells Fargo Head of Equity Strategy Chris Harvey joins Yahoo Finance Live to discuss market outlooks for 2024.

While expecting further "good news" in earnings after a robust past 12 months, Harvey argues investors shouldn't assume the positive trends will continue. Instead, he advises investors to "manage expectations down" and look for companies to exceed more modest expectations. Harvey also notes how headwinds from China will weigh on pricing power.

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 Angel Smith

Video Transcript

JULIE HYMAN: Well, after a strong end to 2023, stocks have stumbled somewhat in the new year. The market's next big test comes later this week. Fourth quarter earnings season kicks off Friday providing insight into how companies are thinking of the year ahead. Our next guest says there's good reason to perhaps be cautious.

Joining us now, Chris Harvey, Wells Fargo head of equity strategy. Chris, do you think we were going to start you on the Bitcoin ETF? I'm just kidding. So let's talk about earnings season though and how even last year when we were talking about a possible earnings recession, stocks still went up. So what are we expecting now?

CHRIS HARVEY: So what we're expecting is we're expecting good news as we go forward, but you've had a great 12 months, right? You're coming into the new year, you don't want to set the bar too high. You want to manage expectations down. You want to be able to beat those expectations going forward.

So we do expect a fair amount of volatility and we do expect the expectations to come down somewhat, right? And what we've seen over the last couple of weeks is the macro has been great. But when we get to the micro or the idiosyncratic, the reaction function hasn't been too positive. You look at FedEx, you look at Nike and a few others, once you start talking about the fundamentals, the stocks haven't performed as well. So we're a little bit concerned that you could see a downdraft as companies begin to manage expectations and talk about 2024.

JOSH LIPTON: And Chris, another theme I'm interested in with this earnings season-- I'm just interested to get your take on this-- is China and how you sort of hear CEOs, CFOs talk about that. China is shaky. And there's so many American companies across so many sectors look at China though still as a really important end market. I'm just interested how you think about that and how much that kind of might pressure results.

CHRIS HARVEY: It could pressure results. However, China has been shaky, as you point out, shaky for some time. A lot of people play the reopen. But after the reopen, things haven't been so great.

And everyone's waiting for China basically to get out of its own way. It hasn't yet. But the bigger picture, the rest of the world, US is in a lot better shape than the rest of the world, including China.

And anyone who has overseas exposure in the here and the now, that's not great. But as we go forward in time, I think that'll be better. And I think people will rotate to rest of the world as we get through 2024.

JULIE HYMAN: Also, sort of tied up with the China story is the inflation-deflation story, right? That the talk that China is sort of exporting deflation in some sectors, how is that going to feed into earnings as well? And I imagine it's going to be sort of sector specific.

CHRIS HARVEY: Yeah, I wouldn't say it's so much China specific. One of the things that we keep talking about and one of the things we keep seeing is that the pricing power you had 12 months ago, 6 months ago, not the same pricing power that you're going to have 6 months from now or in the here and the now. We've had the supply chain normalize. We've had supply and demand come back into line and you just don't have that same pricing power. And I'm not really sure the market-- that's the other thing we worry about during earnings season is I'm not really sure if people really appreciate that pricing power has come down and I'm not sure the stocks reflect that.

JULIE HYMAN: But at the same time, are you going to have better spending power on the part of consumers if inflation is coming down?

CHRIS HARVEY: You would think so, but we're not seeing that just yet. What we're seeing is pricing is coming down and you're still seeing a contraction. And some parts of the market are unifying for things like staples, parts of industrials, chemicals, commodities so on and so forth, so you're not seeing that reaction function. They're not as elastic as you would think them to be.