The highly anticipated March CPI (Consumer Price Index) report is set to be released Wednesday, with markets anticipating how this data will impact the Federal Reserve's interest rate cut outlook. Morningstar Chief US Market Strategist David Sekera joins Yahoo Finance Live to share his insights on the path forward.

Sekera emphasizes that the market will be closely focused on the shelter inflation component of the CPI report, as this metric has been a key driver in keeping inflation "running hotter for longer thus far this year." However, he notes that shelter and rent metrics are starting to fall, indicating that shelter inflation should cool over time.

Despite this, Sekera believes that overall inflation can reach 2.2% this year and that the Fed is in a position to cut rates as soon as June. He anticipates the Fed will continue cutting rates at "every meeting over the course of the rest of the year," with the Fed funds rate falling to a range of 4-4.5%.

Regarding investment strategies, Sekera warns that "what's worked for the past 1.5 years is not gonna be what's gonna work going forward." He advises investors to adopt a more defensive approach as the market is currently "stretched."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

Editor's note: This article was written by Angel Smith

Video Transcript

JARED BLIKRE: All right. Major indices muted ahead of key inflation data out tomorrow. Traders are hoping to get a clearer picture on the timing of rate cuts from March's CPI data. As of this morning, investors are narrowly split on if the Fed will lower rates in June. To break down the risk to the market if inflation comes in hotter than expected, we have David Sekera, Morningstar chief US market strategist. Thank you for joining us here.

Just your overview, 30,000 feet, what should we expect tomorrow from this inflation print, from the-- and also the data that we see below the headlines, inside the headlines?

DAVID SEKERA: Well, specifically, we're looking for 3/10 of a percent on month over month basis specifically for core CPI, that's where US economics team is really going to be focused on the number for tomorrow. And even within the CPI print, we're really focused on shelter. Shelter, of course, being what's kept inflation running hotter for longer thus far this year.

But I know when we look at real-time shelter or rent metrics, those are coming down. So that should come down over time as well. And in fact, we're only looking for inflation to be 2.2% this year. We look for inflation to slow even further next year. So we actually think the Fed's going to be in a position to start cutting here in June.

SEANA SMITH: David, we were talking about at the top of the show how the CPI print really seems to set the tone for the markets, investors paying close attention to any improvement or lack of improvement that we could see within this report. What do you think the equity reaction is going to be? Are we going to see a big spike to the upside if, in fact, maybe CPI improves slightly, but it's not too much in terms of really moving the estimates of that first rate cut?

DAVID SEKERA: As long as it's coming in line with expectations, or even slighter better than expectations, I think we're going to start seeing the market turn around. I know if you look at some of the metrics as far as when the Fed is going to cut, it's getting pushed back further. Last I've seen, the market is now starting to doubt whether or not we have that June cut.

But our US economics team has been holding firm. We are looking for that June cut. In fact, we do have a little bit of an out of consensus view that they're looking for the Fed not only to start cutting in June, but to cut every meeting over the course of the rest of the year. So we're looking for Fed funds to get down to 4% to 4 and 1/4% by the end of this year. And I think you also have to look at the economy too.

So you know, rate of economic growth is definitely slowing. We're only looking for 1.8% GDP here in the first quarter, and then we're expecting the economy to slow in the second quarter to just below 1%. So we're not looking for very strong economic growth, so I think it's that combination of it's moderating inflation, slowing economic growth, that's going to give the Fed the room that it needs to start moving.

JARED BLIKRE: So I'm looking at your sector breakdown in your notes, and I notice that you're bullish on real estate and utilities, interest rate-sensitive sectors, and then not so much on industrials and technology, two of the best-performing sectors since the-- in this latest upturn.

DAVID SEKERA: Well, and I think to give you a little bit of context, we also have to just look where the overall market valuation is. We're not yet in overvalued territory, but the market is starting to feel pretty stretched here. It's trading at about a 3% premium to our fair values.

If I go back to 2010, it's only traded at this much of a premium or more only 14% of the time. So when I think about investment strategy for this year, you know, what's worked for the past 1 and 1/2 years is not going to be what's going to work going forward in our view. So I think investors need to start looking at some more contrarian types of plays.

When I look at some of the Mag-7 stocks, those are now in fully valued, if not overvalued territory. So if you look at something like real estate, real estate is probably the most hated sector on the street right now, that's where we do see a lot of plays going forward. Personally, I'd still kind of steer clear of the urban office space, but those more defensive real estate plays, definitely look very attractive to us.