As earnings season kicks off this week, investors are closely watching Wall Street’s next big test. Piper Sandler co-chief investment strategist Michael Kantrowitz joins Catalysts to share his market outlook (^DJI, ^IXIC, ^GSPC).
Kantrowitz emphasizes that the key question is “when will breadth improve in the equity market.” He highlights two significant periods of breadth surge: late 2022 “when inflation started to come down” and the end of 2023 “as the Fed [Federal Resereve] pivoted.” However, he cautions that for investors to maintain a bullish stance on equities, “you have to think breadth’s going to continue to improve,” noting that earnings will be the primary driver of this improvement.
“Each cycle’s a little different, with this cycle there’s still a pretty big focus on inflation coming down and the Fed cutting rates,” Kantrowitz tells Yahoo Finance.
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This article was written by Angel Smith
Video Transcript
Well, Michael, given the, uh, high bar that has been set this earning season, are you cautious on the upside?
Just given the fact that the reaction that we could see for these reports that even do exceed Wall Street expectations?
Yeah, I, I think you know, the big question for investors has been, you know, when will breadth improve in the equity market?
And I think we’ve already had two surges in breadth, uh, already one in 20 the beginning at the end of 2022 as inflation started to come down the second surge in breadth at the beginning or the end of last year as the Fed pivoted.
And from here to get wildly bullish on equities here, you have to think bread’s gonna continue to to improve.
And the likeliest catalyst that’s gonna come from is earnings.
We don’t think that’s gonna happen, though, uh, instead, we’re actually seeing breadth for earnings.
The earnings backdrop deteriorate.
So if I was, you know, very bullish at the beginning of this year because I still thought there was a lot more upside from lower interest rates and the Fed eventually cutting.
Uh, I think we’ve priced that in so far.
So I don’t think PE S are going any higher from here.
And it’s really gonna be about companies earnings.
Uh and so I think, you know, And that’s why we’re starting to see not only relative outperform of large cap growth stocks, but absolute outperforms.
The equal weighted S and P 500 has been down in the last five or six weeks while large cap growth has continued to go up.
So we’re not wildly bullish because we’re kind of moving along this, uh, evolution of a slowdown and it’s going to become, I think, even more narrow as we go forward.
Michael, I want to end on the macro with you because I know you expect unemployment to continue to drive higher.
You call it softy locks.
When does that start to become a significant problem for this economy?
Yeah, well, that that’s the top question.
Uh, we get from clients.
So what we do is we we What we did last week is we threw it back to clients and said, Well, at what level of the unemployment rate are you gonna get nervous?
Because when you can look, you can look throughout history, and there is no magic number where payrolls or the unemployment rate or initial claims hit, and the market just all of a sudden turns over each cycle is a little different with this cycle.
There’s still a pretty big focus on inflation coming down and the Fed cutting rates.
Uh, and and we think the unemployment rate will continue to move higher.
But at the same slow pace.
It’s been moving higher, give or take about 10 basis points a month.
And and so we think that level is closer to 4.5% at the low end, Uh, and the average client, or the most popular answer from clients, was 5%.
I don’t know if we can see a A another 90 basis point increase in the unemployment rate without a broad sell off, but I don’t think that’s an issue right now as we sit here today.
All right, Michael Kantrowitz, always great talking to you.
Thanks so much for taking the time to join us here this morning.
Piper Sandler’s co chief of investment strategist.
Thanks so much, Michael
