The last trading week for the fiscal year's first quarter began Monday morning with US Equities (^GSPC, ^DJI, ^IXIC) trading lower. As the market enters the second quarter, Baird Investment Strategy Analyst Ross Mayfield and Pernas Research Co-Founder Deiya Pernas join Yahoo Finance to share tips for positioning for Q2.
Pernas elaborates on sectors he likes: "For companies that have a large amount of debt, for companies that have variable rate debt especially, and you find a lot of that in small cap space, that could be interesting, have to be very selective. There are sectors we continue to like, like renewables and AI, and I'm cautiously optimistic on the valuation of the broader market right now. "
Mayfield, however, signals investors move with caution during such bullish times: "The biggest short-term headwind is sentiment where investors are quite bullish. You can look at the surveys or options positioning –– there's just not a lot of fear out there, which is usually a sign that you can be due for a pullback. "
- Well, the final trading week of March on the quarter is underway. What is Wall Street expecting from the markets in the upcoming second quarter? We are looking at how to navigate the big picture with the Yahoo Finance playbook. Joining us now is Ross Mayfield investment strategy analyst at Baird alongside Deiya Pernas, Pernas Research co-founder. Deiya, let's start with you first. What do you have your eye on as you look ahead to the second quarter?
DEIYA PERNAS: I think that one of the items that we're looking at for the second quarter are rates starting to come down a little bit. I know we've went from an expectation of about 7 to 3. That being said, for companies that have a large amount of debt, for companies that have variable rate debt, especially-- and you find a lot of that in small cap space, I think that could be interesting. You have to be very selective.
There are sectors we continue to like like renewables and AI. And I'm cautiously optimistic on the valuation of the broader market right now. We do think-- we're probably due for a breather, but there's still many reasons for optimism.
JOSH LIPTON: Ross, let's bring you in, and get your big picture viewpoint first here, Ross. So, we've been in rally mode. Do you think that continues in Q2?
ROSS MAYFIELD: Yeah, I think the idea of a breather is probably right, you know. Something-- some orderly consolidation is probably in order. We've had a really historic, kind of, momentous five months here, but everything that we saw over the last four or five months is bullish over the intermediate term. So, continue to be bullish. Everything we've seen from a breath perspective from a momentum perspective.
But, again, a breather probably in order here at extended valuations. We've seen the stats on how low volatility has been, having had a 2% pullback in some historic number of days. So a breather, but bullish intermediate and longer term.
- Deiya, let's talk about some sectors that you're watching closely with that expectation of rates coming down. Certainly, when you look at something like wind and solar, renewables have been hit hard by the higher rates because of the high capital costs that come through. What do you like there? What's your expectation as you think about the rates coming down?
DEIYA PERNAS: So, when it comes to renewables, and when it comes to growth sectors in general, all we're really looking for are growth trends that we can have a high degree of conviction in. So, what matters for us is if we can say with confidence over the next three to five years if those penetration rates are still moving in the direction that we hope.
And with renewables, as you alluded to, a lot of those services and a lot of those products are debt financed. So, if you get an increase in rates, you're going to see a reduction in demand. And a lot of that has been sold off. Some of it has caught a bid in the last couple of weeks as you saw after the FOMC meeting. You saw a more dovish Jerome Powell.
But that being said, I think you need to look more towards the long term, and really we're still at the first and second inning of a lot of these renewable trends. If you look at solar, solar wind is going to make up around 40% to 50% of our energy source. As with respect today, it's only at about 10%. So, when you look at those trends in that perspective, I think you can gain a lot of confidence in those types of companies.
JOSH LIPTON: Ross, I'm interested, just going back to you. You sound constructive on the market, Ross. I'm just curious, you know, your list of worries, Ross. What would those be? Would it be valuation? A lot of talk about sentiment. Is it seasonality, some combination there?
ROSS MAYFIELD: Yeah, I mean, valuation not historically a great timing tool, especially if we're talking over the next three to six months Q2. So, valuation not a big near-term worry, especially as was mentioned with some of the growth trends. I think there's an ability to grow into the valuation in the market. Probably the biggest short term headwind is sentiment, where investors are quite bullish.
You can look at the surveys or options positioning. There's just not a lot of fear out there, which is usually a sign that you could be due for a pullback. But, again, the overall macro backdrop is so constructive that I think any consolidation or pullback would be something that would be considered viable. I mean, there are places in the market we like better than others.
But, overall, rates starting to head down. The macroeconomic backdrop is still pretty good. Earnings starting to inflect higher, revisions higher. So all in all, a pretty good backdrop. I think sentiment would be the one thing to watch near term. But, again, that's more of a tactical thing and not something that would worry me over the next, say, 12 to months.