Verdence Capital Advisors CIO Megan Horneman joins Yahoo Finance to discuss the upcoming PCE reading and the overall landscape of the stock market.
"I think you can draw comparisons to any different bubble that you see. It doesn't necessarily have to be the Dot-com [bubble], I think people are trying to draw a comparison to the Dot-com bubble because it's technology and this is technology again," Horneman says on market conditions. "But, look at the way that some of these names or their valuations and the run-up and compare this to any other bubble. Yes, I think they are looking bubble-like. I think there's room for, I guess you could say, valuation correction here with some of these names."
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SEANA SMITH: Let's take a look at the major averages, because they are still mixed here right after the open. Now, investors eagerly awaiting some more key econ data that's out later this week. One of those is another reading on inflation, where investors are going to be parsing through that report looking for any clues as to when the Fed could potentially cut rates.
Now, to break it all down for us, we want to bring in Megan Horneman, Verdence Capital Advisors, chief investment officer. Megan, it's good to have you here. So it looks like, at least, for now earnings giving investors enough of a reason to stay in the market, to stay optimistic about where things stand.
That inflation print, though, that we'll get later this week, how should investors be bracing or positioning themselves ahead of that print?
MEGAN HORNEMAN: Well, we got that surprise print in the CPI. The PCE is a little bit the composition is a little bit different. So it may be a pleasant surprise for investors. But what we're seeing is there still is inflationary pressures in the economy. Even if you look at house prices that came out today.
I'm on a year-over-year basis. Home prices are rising again. And this is concerning because this filters into that sticky inflation component of the owner's equivalent rent and shelter in that CPI. And that's something the Fed is definitely watching.
Coming into this market, what we've seen is this momentum-driven rally around AI and technology. This is something that you have to be cautious of. Valuations are getting pretty lofty in these areas. So we're a little bit more defensive with our equity positioning.
MEGAN HORNEMAN: And so that's what I was just about to ask, Megan. If we continue to see persistent or stickier than anticipated inflation, especially in certain pockets here on the services side or even in housing, specifically, as well, as you were mentioning a moment ago. How does that adjust the portfolio strategy?
So we came into this year with the expectation that we didn't think the Fed was going to be able to cut as much as the market was pricing in. We are neutral, our global equity exposure because we do think we're towards the end of that tightening cycle. We're not in the beginning stages.
So you want to be in this market. But you don't want to be significantly overweight when the expectations we think are just way too unrealistic. I don't think the Fed is going to be able to cut interest rates until, at least, the second half of this year.
And I don't think we're going to get-- I think at the beginning of the year, there was seven of them priced in. I think now, there's four or five. I even think that's a little bit more aggressive.
So when the market starts realizing that's not a possibility, I think there's room here for some volatility.
SEANA SMITH: You talk about volatility there. Megan, there certainly is a debate that's forming that has really been brewing now for quite some time, when it comes to some of those tech valuations and the massive run up that we've seen in a handful of names, is it right to draw some of those bubble comparisons to what's happening right now back to the dot com bubble? Or, I guess, how are you looking at the current valuations of some of those leading names?
MEGAN HORNEMAN: I think you can draw comparisons to any different bubble that you see. It doesn't necessarily have to be the dot com. I think people are trying to draw a comparison to the dot com bubble because it's technology, and this is technology again.
But look at the way that some of these names or their valuations or the run up and compare this to any other bubble. Yes, I think they are looking bubble-like. I think there's room for some, I guess, you could say valuation correction here with some of these names.
BRAD SMITH: What are some of your top picks that you see, opportunities for in the market right now, Megan?
MEGAN HORNEMAN: So as I mentioned, we're neutral our global equity exposure versus our benchmark. But when you look at the US large cap market, even value and growth are both expensive. But from a sector perspective, be a little bit more defensive.
Health care, consumer staples, over consumer discretionary, there are some of the areas we would focus on. Once we get closer to, I guess a Fed rate cut. Once we get a little bit more clarity around the economy, there's areas that have really not participated that we want to get some exposure to.
So looking at small and mid-cap stocks. These have really trailed this large cap momentum rally. And those are some areas that we'll look at to invest for the long-term.
BRAD SMITH: You mentioned earlier. And we'll end on this that you don't see a cut until the second half of this year, most likely. How many cuts would investors be apt to price into their portfolio at this juncture?
MEGAN HORNEMAN: That's a tough one right now to say I think, because the inflation situation is still so unclear. But I'd say we're looking at beyond the summer, maybe, two or three rate cuts at the most.
BRAD SMITH: Megan, always a pleasure to get some of your insights and analysis. Megan Horneman, who is the Verdence Capital Advisors chief investment officer. Thank you so much.