Profit season usually pushes the stock market up: Binky Chadha


Deutsche Bank’s chief global strategist Binky Chadha joins Yahoo Finance to discuss the state of the markets amid the pandemic and how the COVID Delta variant may affect U.S. stimulus efforts.

Video transcript

MYLES UDLAND: Let’s stay in the markets, talk a little more about the setup here as we look to wrap up this first real full week of the earnings season, let’s call it. We are now joined by Binky Chadha, Head of Global Strategy at Deutsche Bank. Binky, great to see you on the program. Thanks so much for hopping on it.

I want to start with a note your team posted, which I wrote about two weeks ago. This idea of ​​how fast the cycle is moving and which sectors of GDP are now above their pre-crisis trend. And I’m just curious how you think the future of this recovery will look for the markets given the extent of the recovery we have seen in the industry so far?

BINKY CHADHA: Yes, I think you know, the key message we want to get across is that if you look at very general aggregate measures of economic activity and look at, for example, GDP, which is probably the most common measure. most popular of the activity, you know, you have to conclude that in the first quarter we were still around 1% of pre-COVID levels and most importantly, if you look in relation to the GDP trend, because of course the GDP grows over time, you know there is still a four percentage point gap, and that suggests that you know, the recovery phase to get back to the trend still has some way to go.

And sure, you know, the cycle doesn’t end there, we’re going to the other side of the trend and all of that suggests you know, the recovery has a lot, a lot more to do. But what’s very, very unusual this time around, and it’s really a function of the speed and makeup of the recovery, you know, something that doesn’t happen one, two, three, even three years down the line. a recovery is that various components of GDP, particularly on the goods side and part of investment, are well on the reverse side of the trend.

And what does this have to do with the stock markets? If you map the same kind of way of thinking about things where we’re at versus the trend, in 53 sectors of the S&P 500, you know, the somewhat surprising and pretty strong conclusion is that about 2/3 of the S&P 500 by market the cap is well, well above the trend. And about half of that 2/3 or about 1/3 of the S&P 500 is actually in terms of activity levels is about five standard deviations above the trend level.

Now, that doesn’t mean we’re definitely going to switch. This certainly means that the growth and growth in earnings and the level of activity are likely to – the levels of activity are likely to slow down.


And you know, what I would say looking both from the bottom up and from the top down, you know the way the market price is currently set is kind of we’re in the early stages of the recovery. . I mean, if you look at the multiple of the S&P 500, we sort of trade 24 times. It’s normal for multiples to be high early in the rally, but you know, a closer look at the industry level of the S&P 500 suggests that most of it is actually much later and multiples and valuations should. be much lower.

You can see that some parts of the S&P, especially the parts that are below the trend, the parts that are basically sort of the trend that you know, are declining as the market normally does. And when you break the trend, the market assigns them a lower multiple. But for the market as a whole, I would say the profits are already high and the market is trading at high multiples over high profits. So this is not a good combination for the future.

BRIAN SOZZI: And there you saw the opening bell this Friday morning on Wall Street. Xponential Fitness rings the bell, owners of Pure Barre, Rumble and many other fitness studios. Some of the hottest tickers on Yahoo Finance right now, Snap, truly a booming quarter, with Facebook enjoying the good quarters of Snap and Twitter. Twitter’s third trend ticker on Yahoo Finance. DiDi is still under pressure given potential regulatory concerns, with Intel, of course, too, the hottest ticker on the site right now after earnings. Binky, why – we got into the week the market sold aggressively. We saw stocks recover, why do you think the market came back as fast as it did?

BINKY CHADHA: So, you know, we’ve been arguing for a while that you should basically be looking for a big and bigger pullback as basically macro indicators of peak growth. This is what has happened essentially on each rework for about a year. And if you look at things like ISMs, they’ve peaked, but you know what we’ve really seen is kind of a pullback or reassessment of growth or where we are now. in the cycle, we see the pullback occurring primarily across all asset classes.

And really, the S&P 500 and the NASDAQ were the exceptions. And here I would say that basically, you know, the US 10-year yield probably overshot on the downside and as it did, you know, it kind of had an impact, you know, the technology that was basically, you know, pretty battered. So this combination kind of, you know, saw us come back up.

But I would say we are in the middle of the gains. Profits, you know, usually see the market go up around 2%, and there’s never really – you know, we could go up less, we can go up more but we don’t really, we never really saw a big pullback during earnings season, you know, unless there’s some sort of clear external exogenous catalyst like we had some time ago with the Chinese devaluation and others. But other than that, I mean, it’s clear that the earnings have been very, very market-friendly. And we are in the thick of the results season and so it is currently still favorable.

JULIE HYMAN: And Binky, what do you think of the Delta variant right now and its effect or lack of it on your growth forecast? I mean, it looks like the data we’re getting is that people get vaccinated, they can get it, but they’re not likely to be hospitalized or become seriously ill, but we are seeing, of course, places that recede on reopening. Is this going to have an effect on growth?

BINKY CHADHA: So, you know, this is another version of what we saw where basically we had this divide between the goods side and the services side. And you know, we’re basically waiting on the services side for you to know, go deeper, basically the reopening and resuming process. So, you know, that might slow some down, but I would say you know, as far as commodities go, I mean every lockdown has had, you know, some kind of more modest negative impact. And so from a market point of view, I think the market is going to basically keep looking through things.

You know, on the economic activity side, our economists basically consider the risks to the outlook to be fairly balanced right now, but remember that in recent months the main issue was really the upside risk to the recovery. , which as you know, as we talked about about earlier, happened much faster than most people expected. And so you know, some downturn in cyclical trading, you know, some pullback like we’ve seen 10-year yields, a lot of commodities. So I think it has an impact on composition rather than a larger impact on market activity.

MYLES UDLAND: All right, we’ll stop there. Binky Chadha, Chief Global Strategist and Head of Asset Allocation at Deutsche Bank. Binky, always appreciate the time. Have a good rest of your summer. I know we’ll talk soon.

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