Stocks have had a volatile week, with markets fluctuating on hot inflation prints and rate cut outlook adjustments. Prime Capital Investment Advisors Director of Investments Will McGough and Ziegler Capital Management CIO and Senior Portfolio Manager Dan Skubiz join Market Domination to discuss their market outlooks as earnings season begins.

McGough explains that markets are currently focused on earnings growth rather than multiples expansion. He notes that valuation multiples are in the low twenties, leaving limited room for further expansion. To drive market growth, McGough emphasizes that earnings growth "needs to come through" this earnings season.

Skubiz attributes the market's weakness to uncertainty surrounding the Federal Reserve's monetary policy path. He observes "choppy trading" since the hot March CPI print, which casts further doubt on the rate cut outlook, leaving the market "aimless right now."

Both experts believe small-cap stocks have potential upside. Skubiz acknowledges that large-caps have been outperforming small-caps, but still sees "a space for small-caps." McGough agrees, noting that small-caps "look attractive from a valuation standpoint."

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

This post was written by Angel Smith

Video Transcript

[AUDIO LOGO]

- First quarter earnings season kicked off this morning with a slew of big banks reporting results. What should investors keep in mind for the weeks ahead, and how could those reports impact your portfolio? We're taking a look at how to navigate the big picture with Yahoo Finance playbook, and we're joined now by Will McGough. He is the Director of Investments at Prime Capital Investment Advisors, alongside Dan Skubiz. He is a Ziegler Capital Management Chief Investment Officer and Senior Portfolio Manager.

I just want to start with a big picture overview. And let's get to you, Will, first. Where you put on your macro hat, we've had a lot of data this week. We just started, kicked off earnings season today. What do you think? Where are we?

WILL MCGOUGH: Thanks for having me on. And where we're at today is earnings consensus expectations are 9% to 14% earnings growth. We're coming off of 2023 when earnings did not grow and we saw multiple expansion. And with multiples already in the low 20s, they can't really expand higher without some other factors coming into play. So we really need to see earnings growth come through this earnings season and that's what we'll be watching to see if it's going to lead to higher prices throughout the year, as we saw in Q1.

And I want to bring also, listen, Dan, I want to get your thoughts as well here. Just your big picture thoughts here, Dan. Listen, we can chalk up the weakness today to bank earnings. But we've been chopping around here. What's driving this, Dan, in your opinion? Is it, we're rethinking and repricing the Fed's path, is it geopolitics? What do you see playing out in the market?

DAN SKUBIZ: Well, I think it's mostly, you come into the year and the market's expecting seven rate cuts. And then we get a CPI report like we got on Wednesday, not the greatest CPI reports previously, although Powell talked those down. But now we're looking at maybe two rate cuts this year. There's even if we get some re-acceleration inflation, maybe we don't get any.

And so I think that's what the market's trying to grapple with right now. And you see the choppy trading since Wednesday. We had a big down, down day on Wednesday, it was up yesterday, and now we have another big down day. I think the market's just aimless right now trying to figure out exactly where we're heading from an inflation perspective.

- And Dan, let's stick with you. When we break it down large, large cap versus small cap. I understand from your notes, you like the small caps a bit better. They've broken to new 52-week highs recently, although they've been chopping around this week as well. What do you like about the small caps?

DAN SKUBIZ: Yeah, Jared. I mean, we're long suffering small cap managers here. And think large caps have been outperforming small caps for quite some time. And we can talk about the valid valuation discrepancy between the two. But I think investors have pretty much thrown out the small caps from their portfolios. We've been saying for a while that I think there's still a place for small caps, and I think that there is an opportunity for them to outperform, especially with a lot of the trends that we're seeing, especially getting into some of the CapEx opportunities within the United States, as small caps are more US dominated.

And so I think when we look forward, there's still, the Russell 2000 as an index is a lower quality index, 45 ish percent of companies in the Russell 2000 are, don't make any, are unprofitable. So we think that this is really a nice time for active where active managers within the small cap space have done a lot better than the benchmark and are a lot more set up to benefit as we go forward.

- Will, bring you back in here. You agree you see opportunity in small caps?

WILL MCGOUGH: Yeah, yeah. I really like what Dan is saying. So Dan's a bottom up stock picker. He has the ability to add value in this type of market in a sector or style like small caps. From a big picture lens, which is where I sit, you've definitely got all of the talking points, the media, everybody is all over the small caps in 2024. And when liquidity starts flowing one direction, you want to be on the side of that liquidity.

And so with the Mag Seven being, again, over like high 20s, PE S&P being about 21 small caps underneath that, they look attractive from a valuation standpoint. They have room to run if the market's going to continue to go higher. And so from an asset allocation standpoint, I do think small caps make a lot of sense. And then also utilizing an active approach in small cap makes even more sense with that allocation at this point.