This week has been a whirlwind of market movers, as earnings season continues, the S&P 500 (^GSPC) is on pace to close Friday above 5,000, and Federal Reserve officials continue to comment on the relationship between inflation data and future interest rate cuts.
Thornburg Investment Management Co-Head of Investments Ben Kirby joins Yahoo Finance to touch upon all of these major topics, focusing on if there could be new market catalysts on the horizon for stocks.
"We want to see how are companies progressing on a fundamental basis. So, again, fourth quarter looks pretty interesting," Kirby says, stating the previous three quarters of earnings were negative for the most part. "The other big topic is really the Fed and interest rates. I think the Fed should maybe get a Nobel Prize for the way they've managed the interest rate moves and the inflation move over the last couple years."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
- Let's broaden out talk more about the latest market moves as we count down to what may be another historic close. We want to welcome in Ben Kirby, Thornburg Investment Management co-head of investments. Ben, thank you so much for being here. I want to start with this big round number that we're looking at in 5,000. How do you think about these numbers? How important are they when it comes to strategy, but also to investor sentiment?
BEN KIRBY: Hi. Thanks for having me. Look, I think it's more important to sentiment than it is to reality. It's a big round number. But what probably matters a lot more is valuations and earnings growth and sustainability of that earnings growth. So I think we're a lot more focused on that. And on that front, stocks are relatively extended, perhaps not extreme, but getting relatively more extended this year and increasingly last year as well.
- So Ben, it sounds like when you look at this rally, you're seeing some red flags here then?
BEN KIRBY: Yeah. So the big round number is the market cap weighted S&P. The equal weighted is nowhere near an all-time high. And that's interesting. So the Magnificent Seven is maybe narrowing. Maybe it's the Magnificent Four at this point. I think Tesla's maybe not in there. Google hasn't been great this year. Apple hasn't been great this year.
So the market leadership has gotten more and more narrow. But if you take a bearish view, maybe that's a bearish signal. On the other hand, again, the equal weighted, there's still a lot of interesting rocks to turn over out there, interesting valuations.
- And even in that narrowing, the market keeps making new highs, Ben. So at least thus far-- maybe it's a forward signal. But thus far, it has not proved to be an obstacle. But where is that next leg of growth going to come from if, indeed, you do think it's going to come. And we've been coming off a strong earnings season. But now we're going into a lull period where there are not as many companies reporting.
BEN KIRBY: It has been a pretty good earnings season. So if you want to look at earnings, they were actually negative in the previous three quarters. And then finally in the fourth quarter, we had positive earnings on a year-on-year basis for the quarter. And more companies beat expectations and revised up for growth. So that's a bullish sign. It's fairly broad based in terms of the sectors that have been outperforming from an earnings standpoint.
So as fundamental investors, we really look a lot at that. We want to see it-- how are companies are progressing on a fundamental basis? So again, fourth quarter looks pretty interesting. I think the other big topic is really the Fed and interest rates. And I think the Fed should maybe get a Nobel Prize for the way they've managed the interest rates moves and the inflation move over the last couple of years. They've caught a lot of flak. But actually, here we are. Inflation has come down a lot. And the Fed could cut rates or they could choose not to cut rates. They actually have the flexibility right now, which is really powerful.
- And Ben, it sounds like given the high marks there you're going to give to Jay Powell, it sounds like are you in the camp then, Ben, you think, though, it's rare and tricky, he's engineered the soft landing?
BEN KIRBY: It's rare and tricky. It seems like at the moment-- again, inflation continues to come down. The job market remains strong. Wages continue to go up. Growth is positive again. Look, there were a lot of naysayers all of last year.
Every quarter going into a recession. As recently as last fourth quarter, there were famous pundits saying we may already be in recession right now as of last fourth quarter. And they were dead wrong. What actually happened was growth was accelerating, not decelerating in the fourth quarter. So I think there's some cause for humility from some of the market participants who have been speaking against the Fed. Actually, we're in a pretty good spot. We could still have a recession. I don't think we can rule that out. But at the moment, it looks like the soft landing is a lot more likely.
- Ben, all of that said, you actually are looking at international stocks to provide some opportunity right now. Why is that?
BEN KIRBY: It has a lot to do with valuation. So valuation is interesting. On a next 12 month perspective, valuation really doesn't matter that much. But on a 3, 5, 10 year perspective, the starting valuation for risk assets is a huge driver of your forward returns. So where the S&P is trading at 21 times earnings, you can look at Europe, Japan, emerging markets. They're all at significant discounts. Call it 20% to 30%, even more in some cases. And that discount is wider than it normally is. So as the US market keeps powering forward, a lot of strength in the economy, but let's look outside the US for some diversification and some lower valuations, which probably argue for higher future returns.
- And Ben, I'll get you out on this. When you look overseas, when you look internationally for opportunity, would you include China there?
BEN KIRBY: China's a bit of a special case. Yes, international opportunity there. China has some challenge with the property market. They have an increasingly authoritarian government, which seems to be clamping down on a lot of private enterprise. So as a capitalist, I really want to see my companies have good governance. And I want to see them be able to grow and not have those economics taken away from them by the government, as is happening in China in many sectors.
So China's one I think you have to be very careful and selective whenever you go into the market. But again, Europe is kind of getting off its back after some pretty slow growth. Japan looks pretty strong. And other parts of emerging markets have a lot going for them as well, given where they are in the rate cycle and the growth cycle also.
- All right, Ben. Thank you so much for helping us kick off the show today. Really appreciate your time and insight.