While Consumer Confidence data for March came in lower than expected, markets showed little to no reaction. Morningstar Portfolio Strategist Amy Arnott joins Yahoo Finance Live to discuss why this underscores the importance of diversified portfolios.

Arnott describes the lower-than-expected consumer confidence as "a little blip," emphasizing that the economy remains strong despite these numbers. She advises investors to "focus on the long term," saying the main concern should be inflation, which she calls a "big question mark" as rate cut uncertainty heightens.

She notes that if rate cuts don't materialize, they will "weigh down" the market, which is why she advises investors to focus on "portfolio diversification." Arnott explains that which asset class will outperform "in any given year" is unknown, making portfolio diversification crucial. For that reason, she recommends avoiding being "overexposed" in areas like technology and broadening out to sectors such as small-caps.

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

MADISON MILLS: As the market rally also continues, how should investors be thinking about their portfolios? Joining us now to weigh in is Amy Arnott, Morningstar Portfolio Strategist.

Amy, thank you for being here. Talk me through your reaction to these numbers, because the market seems to just be sloughing them off.

AMY ARNOTT: Yeah. I think it's a little blip. It might be slightly lower than people were expecting. But, overall, the economy is still doing really well. I think the big question mark is really inflation.

And if we continue to see inflation moderating and the Fed goes ahead and cuts interest rates later this year, that would definitely be a positive for the market. But, overall, I think our advice to investors is to try to stay focused on the long term and not get too distracted by the day-to-day news headlines.

SEANA SMITH: So Amy, you're focused on the long term, Not getting distracted here by some of the day-to-day volatility that we are seeing. But when you take into account some of that uncertainty out there and exactly what that could mean, ultimately, here for the market. If the market doesn't get three rate cuts, you mentioned the fact that is, obviously, optimistic here what the market wants to see. What happens if we don't get three?

AMY ARNOTT: I think if rates remain high, that would probably weigh down on the market a little bit. But I think it all goes back to the reason for portfolio diversification. You never know which asset class is going to outperform in any given year. So that's why we always advocate having a diversified portfolio, make sure you're not overexposed to technology stocks, which have, obviously, been huge drivers behind the market's returns over the past year or so.

We do think that the technology sector, overall, is now probably slightly overvalued. So we would advise investors not-- to make sure that they're not overweighted on technology stocks at this point, and also consider diversifying into other areas like smaller cap stocks, which we think have much better valuations at this point.

MADISON MILLS: Amy, I want to build off what Seana was saying, because if the Federal Reserve's moves are not going to be the reality check for this market, even if knowing that we don't know what the Fed is going to do, what could be the reality check to pull back some of this momentum?

AMY ARNOTT: I think one of the reasons tech stocks have done so well is because the underlying earnings growth has been so strong. So a lot of people say there's a tech bubble. But I think the valuations are high. But so far, the earnings growth and revenue growth has been there to support those valuations.

If something happened to any of the big seven, that they didn't generate the earnings that the market is expecting, you could definitely see valuations compress there.

SEANA SMITH: Amy, when it comes to some of that opportunity there, we certainly have seen more of a broadening out, more participation from some of the underperforming areas of the market of last year. When we talk about that leadership, who do you see leading this next leg of gains? And is it going to be some of those names that have started to outperform, when you take a look at financials, when you take a look at industrials, even materials, at some points?

AMY ARNOTT: I think that's-- depending on overall economic growth, you could definitely see some of those sectors as well. But as I mentioned, we try not to focus too much on short-term market performance. So we're really focused on looking for sectors and companies that have strong underlying performance, strong competitive advantage, and are trading at a discount to our analysts' estimates of their fair value.

SEANA SMITH: All right. Amy, great to talk to you here, Morningstar's Portfolio Strategist. Thanks.