Satya Pradhuman is founder and director of researh at Cirrus Research.
Harlan Levy.: How do you think Q2 earnings will play out for small caps, large caps, and blue chip stocks?
Satya Pradhuman: The earnings environment should become a bit challenging this quarter. We have witnessed a sharp build-up in earnings estimates for the 2016 results. This creates a higher hurdle rate for success in the upcoming weeks for reporting season. Consumer-based groups appear to reflect some of the most sizable ramp-up in earnings estimates. The rise forecasts also appear to be strong across the capitalization spectrum, from small caps to mid-caps to large caps.
H.L.: What kind of buying opportunity is there, and in what sectors?
S.P: We think the defensive bias will continue to outperform. Some of these sectors -- staples, REITs, healthcare and business services -- are expensive but will likely remain in favor as uncertainty abounds.
H.L.: What would you sell and when?
S.P: We think European exposed firms have come under pressure and will likely remain as such until we get some added clarity. Deep cyclicals in energy and materials, except gold, will also remain under pressure as we debate the severity of the slowdown due to Europe in the coming months.
H.L..: What's your reaction to the June jobs report and the import and impact on equities?
S.P: We were not surprised. The May report seemed a bit too weak. Looking at U.S. loan growth data indicates that the domestic activity remains on good footing. There is a lot of turbulence due to the uncertainty introduced by Brexit though that was unlikely to affect last week's numbers. The challenges and uncertainty in the UK remains an unknown in terms of the impact to the U.S. economy in the months to come. It could be marginal if agreements between the UK and Europe go well. Conversely, the UK vote could create more uncertainty with the EU creating further strains on continental Europe. As that unfolds, we will likely start to feel the impact on the U.S. The spike in the U.S. dollar remains Sterling/U.S. dollar-based. We are yet to witness a further erosion of the Euro/U.S. dollar linkage.
While the level of concern is far from the 2008 global fallout, the initial impact in the UK economy seems to be negative as credit markets appear to reflect tightening conditions. That said, the global impact is yet to be seen. That is dependent on whether we see a similar fallout in continental Europe as divisions in most nations continue to stir. Markets appear to be pricing a benign impact. We continue to suggest a more defensive, high-quality portfolio until we can have some additional insight to changes overseas.
H.L.: What do you think will happen to the U.S. stock market in Q2 and in 2017?
S.P: We expect returns to remain noisy as we close the year. The supportive interest rate backdrop will continue to inflate equities. Volatility will remain high, but we should see high single-digit gains 12-months out. As the dust settles, we also expect to see a more broad market leadership instead of the current defensive liquid bias currently underway.
H.L.: How do you analyze the credit markets, the bond buying opportunities, and the strength of loan growth ?
S.P: There is a dichotomy in the credit markets in the U.S. versus the UK. Spreads remain benign in the U.S. as the UK credit markets weaken. This deflationary period is unlikely to reflect a reversal in the interest rate picture. Slowing global growth remains the underlying tone on markets. U.S. trends will continue recover as U.S. loan growth remains in the high single digit levels.
H.L.: What do you think about interest rates and the sticky situation the Federal Reserve finds itself in?
S.P: We think that the Fed is on hold for the remainder of 2016. A combination of the uncertainty in the European Union and the potential for a fallout in growth in the U..S will keep the Fed on the defensive the remainder of the year. Additionally, the election cycle this year will further place the Fed on a pause mode.
H.L.: How do you analyze the U.S. economy?
S.P: We focus quite a bit on the credit cycle to estimate domestic growth. Job trends coupled with capex also allow us to further build out a fuller growth picture in the states.
H.L.: What sectors of the economy are healthy and not?
S.P: We believe that the consumer segments will continue to surprise on the upside. Capex trends should remain stable as tech spending continue to climb higher. A combination of improving jobs market and low interest rates will continue to fuel the housing sector. If crude prices remain stable, the deep cyclicals in the U.S. economy should also remain favored.
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