Stocks (^DJI, ^GSPC, ^IXIC) trade higher following February's record closes. BlackRock's Global Chief Investment Strategist Wei Li joins Yahoo Finance Live to discuss market drivers on Yahoo Finance Live.
Li says markets have "significantly repriced" on rates, showing persistant "stickiness." However, risk assets continue to deliver "strong returns" as earnings results remain robust. Fourth quarter earnings are coming in "more than twice as strong," aided by tech mega-cap gains.
However, Li remains Neutral on broader markets, with valuations still "above pre-pandemic levels." As rates rise, Li explains that multiples must fall; instead, they have expanded. "That doesn't quite add up," she says, unless the market records widespread economic productivity beyond AI.
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
AKIKO FUJITA: Well, US markets, all three major indices in the green right now to kick off a new trading month. Stocks coming off of the best February in nearly a decade with both the S&P and NASDAQ hitting record highs this week.
To break down areas investors, may be overlooking, we've got Wei Li, BlackRock global chief investment strategist here. Wei, it's good to talk to you today.
Looking at where things have tracked this week, we got a lot of economic data that essentially points to inflation still being a little sticky, especially, on the services side. But some resilience in the economy. How is that? Or has that changed your view in terms of the outlook at all?
WEI LI: What is really interesting-- good morning, Akiko-- is that, so far, this year, markets have significantly repriced on the rates side. So beginning of the year, markets were looking at six cuts. And now, just three cuts, because of the inflationary pressure.
So for example, in January, the CPI print, as well as PPI print, and also, the PC print yesterday supporting that as well, showing some stickiness. But despite the fact that markets have repriced on the rate front towards the hawkish direction, risk assets sentiment has been positive. Risk assets have delivered strong return, because earnings are very strong.
So on the one hand, we have rates. On the other hand, we have earnings. And when it comes to valuing risk assets, it's essentially discounting future cash flow. Rates being the discount rate. And future cash flow being earnings.
So earnings, Q4 earnings are coming in more than twice as strong versus expectation at the beginning of the reporting season driven, mostly, by the Magnificent Seven, which is why we continue to have a concentrated market rally.
And we stay-- within BlackRock, we stay overweight US equities with a preference for the tech sector for this reason.
AKIKO FUJITA: Yeah. Wei, let's hone in on that, and take the trade aside. You are neutral when it comes to US stocks minus the Mag Seven there. What is it that you see right now that puts you in that position?
WEI LI: Well, when neutral, the broad acting market minus the AI theme, because if we look at valuations in the US, valuations, the S&P 493, they are still at a level that is above pre-pandemic levels. So in terms of forward PE, it is above pre-pandemic levels. And this is in the context of rates having risen significantly.
So, typically, when rates go higher, multiples needs to come down. And yet, multiples have expanded for the S&P 493. So that doesn't quite add up, unless, we see meaningful economy-wide productivity gain, which can be boosted by AI. But we're still in early days.
So because of considerations around valuation, but also cognizant of what AI can do for the broader economy, when we balance out the two factors, which is why we are neutral on the broader x tech part of the US equity market.
But when we add the strong conviction of AI theme, including tech, including communication services into the [INAUDIBLE] actually makes, we then have an overall overweight for US equities.