WEBVTT - Schwab's Liz Ann Sonders Talks Market Forecast

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>I'm looking here at the intellectual combine over at Schwab

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<v Speaker 2>and I got SMP tech sectors, forward price to sales

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<v Speaker 2>ratio pushing up against this all time Hi. Thank you

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<v Speaker 2>Kevin Gordon for that wisdom. Joining us now, Lizzie Saunders

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<v Speaker 2>is a privilege of working with Kevin Gordon. Lizzy, and

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<v Speaker 2>you do the best charts on you and you're in Timmer,

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<v Speaker 2>do the best charts on Twitter today. What's your most

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<v Speaker 2>important chart that you're putting out for schwab right now?

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<v Speaker 3>Oh boy, that's a good question. There's so many. I

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<v Speaker 3>think it's labor market data. I think it's claims, continuing claims,

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<v Speaker 3>what we see in the monthly jobs report. I think

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<v Speaker 3>that's the needle mover in terms of Fed policy.

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<v Speaker 2>Correlate targets earnings this morning and very great disappointment on revenue.

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<v Speaker 2>Can you coordinate that we correlate that, I should say,

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<v Speaker 2>with the labor market.

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<v Speaker 3>Well, you know I don't cover individual stocks, including covering target,

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<v Speaker 3>but you know you have the earnings story this quarter

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<v Speaker 3>at the bottom line level has been better than expected.

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<v Speaker 3>The beat rate, the percent by which companies have beaten,

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<v Speaker 3>but you've got overall revenue growth down around in line

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<v Speaker 3>with where inflation is, so it really has exposed the

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<v Speaker 3>companies that actually do have pricing power and don't have

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<v Speaker 3>pricing power. In addition, revenue beat rate has been below average.

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<v Speaker 3>The percent by which companies have beaten on the top

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<v Speaker 3>line has been below average. So I think this is increasingly,

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<v Speaker 3>yet again a sign of this bifurcation happening, whether it's

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<v Speaker 3>between nominal and real, high end consumer and low end

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<v Speaker 3>consumer services versus the good side, discretionary versus non discretionary,

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<v Speaker 3>and I think there's a reason why the consumer discretionary

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<v Speaker 3>sectors been performing poorly, as we're now seeing more than

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<v Speaker 3>just cracks in the facade of the consumer.

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<v Speaker 1>So, Lizane, I guess one of the key issues here

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<v Speaker 1>are the earnings that we have seen and again we're

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<v Speaker 1>going to another big one after the close tonight with Nvidia.

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<v Speaker 1>Have they been strong enough to support this big move

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<v Speaker 1>up and equity valuations that we've seen since October.

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<v Speaker 3>Well, you've got about I think the blended growth rate

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<v Speaker 3>right now is eleven percent. That's inclusive of the companies

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<v Speaker 3>that have yet to report, and that is well better

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<v Speaker 3>than what was expected at the beginning of reporting season.

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<v Speaker 3>That's getting there, but I think earnings do need to

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<v Speaker 3>continue to surprise on the upside because last year's strengthened

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<v Speaker 3>the market was all multiple expansion because you didn't have

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<v Speaker 3>much in the way of earnings growth. So I think

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<v Speaker 3>the earnings do have to play catch up. Obviously, the

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<v Speaker 3>report out today is incredibly important, not just psychologically, which

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<v Speaker 3>we know it's going to be important psychologically, but if

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<v Speaker 3>you look at the overall tech sector, the earnings growth

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<v Speaker 3>rate drops from about twenty four percent or so twenty

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<v Speaker 3>three to twenty four percent down to less than eleven

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<v Speaker 3>excluding what is expected for Nvidia, So it is it

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<v Speaker 3>is obviously the poster child, but that has been the

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<v Speaker 3>support for the tech sector, which is the overall support

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<v Speaker 3>for a higher valuation level. If you look around the world,

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<v Speaker 3>one of the mistakes that investors make is they do

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<v Speaker 3>valuation comps country to country, region or region without taking

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<v Speaker 3>into consideration what are the underlying drivers of the local economy.

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<v Speaker 3>And when you have more of an information tech based economy,

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<v Speaker 3>that is support of all LSEQL of a higher valuation backdrop.

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<v Speaker 3>The last thing I'd say is inflation as a backdrop

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<v Speaker 3>for valuations is important, maybe not coinstantly. The sweet spot

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<v Speaker 3>in terms of historical valuations being supported at a higher

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<v Speaker 3>level has been in and around that two percent inflation zone.

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<v Speaker 3>We're obviously not there yet, even if we're directionally heading

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<v Speaker 3>in the right way.

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<v Speaker 1>Liziane, what are some of the the sectors that screen

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<v Speaker 1>well for you and your team here?

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<v Speaker 3>Yeah, so we relaunched Schwab sector views at the beginning

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<v Speaker 3>of the year after a two year hiatus for a

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<v Speaker 3>whole variety of reasons, and we haven't had any change

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<v Speaker 3>in terms of the sectors on which we have outperform

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<v Speaker 3>ratings since the beginning of the year. So it's financials, materials,

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<v Speaker 3>and energy. Obviously a very cyclical bias in terms of

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<v Speaker 3>where our outperforms are. The two underperforms are reates, maybe

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<v Speaker 3>no surprise given the problems in commercial real estate, and

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<v Speaker 3>then as we already touched on consumert discretionary, the rest

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<v Speaker 3>are in that neutral category.

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<v Speaker 2>Well is how do you manage a bull market across

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<v Speaker 2>the kitchen table selling main go away that didn't work out?

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<v Speaker 2>There was a great chart. I don't know if Young

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<v Speaker 2>Gordon added at Schwab, but you know, it's like we're

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<v Speaker 2>getting back to you know, two thousand and six, ownership

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<v Speaker 2>of equities sixty some percent, whatever the number is, it's

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<v Speaker 2>really great. We're all in on this market. How do

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<v Speaker 2>you manage the emotion of a bull market on a

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<v Speaker 2>kitchen table over a beverage of.

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<v Speaker 3>Pace, You know, Tom, that's an interesting question because you know,

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<v Speaker 3>household exposure to equities is a behavioral measure of sentiment,

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<v Speaker 3>for lack of a better word. But you've got attitudinal

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<v Speaker 3>measures of sentiment. And one of the interesting things that

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<v Speaker 3>has occurred in the last couple of years really in

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<v Speaker 3>this sort of post COVID bear market cycle, is that

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<v Speaker 3>you get much bigger swings in the attitudinal measures of

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<v Speaker 3>sentiment than you do in the behavioral measures. So if

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<v Speaker 3>you look at just AAII American association of individual investors,

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<v Speaker 3>you can see pretty big moves in a very short

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<v Speaker 3>period of time, up in percentage of bowls, up in

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<v Speaker 3>percentage of bears depending on the new year term wiggles

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<v Speaker 3>in the market. But you haven't seen much movement in

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<v Speaker 3>that invested exposure piece of it. So I think that

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<v Speaker 3>there is some complacency out there as measured by the

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<v Speaker 3>behavioral measures, but those attitudinal measures are swinging much more

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<v Speaker 3>quickly in this environment.

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<v Speaker 2>What do you see at Schwab What is cash doing well?

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<v Speaker 3>I think for a lot of investors, cash is earning income,

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<v Speaker 3>so you've got income and fixed income. Again. That's why

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<v Speaker 3>I push back on this notion that the six trillion

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<v Speaker 3>dollars in money market funds is just sitting there ripe

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<v Speaker 3>to jump into the equity market. I think that's probably

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<v Speaker 3>fairly sticky, and I think it's great comfort, particularly for

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<v Speaker 3>more conservative or older investors that had to stretch for

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<v Speaker 3>yield and move out the risk spectrum, to not have

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<v Speaker 3>to do that. You've got implications for within the equity side,

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<v Speaker 3>especially areas like dividend stocks that will increase in attractiveness

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<v Speaker 3>depending on what yields are doing. But I think a

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<v Speaker 3>lot of that that sort of cash money is fairly

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<v Speaker 3>sticky because it's earning a nice yield.

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<v Speaker 2>At this point, Lizzen, it was great having your assistant

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<v Speaker 2>Kevin Gordon on, but you know he failed in one.

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<v Speaker 3>Oh he's more than that. But yeah, I love that interview.

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<v Speaker 3>Well done.

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<v Speaker 2>We were coming out of it and I said to

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<v Speaker 2>him casually, I said, let's play some Nickelback. He did

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<v Speaker 2>know who Nickelback was. The young Lawd did not know

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<v Speaker 2>who Nickelback was.

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<v Speaker 3>I taught him, well, he knows who led Zeppelin is,

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<v Speaker 3>so you.

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<v Speaker 2>Better know that if it was to catch a paycheck.

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<v Speaker 2>Lizzie Saunders working with the great Kevin Gordon and Schwab.

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<v Speaker 2>Thank you so much. I can't say enough