As investors await Tuesday's release of the February Consumer Price Index (CPI), Rockland Trust Chief Investment Officer Dave Smith appears on Yahoo Finance Live to discuss expected inflation data. We will share our outlook for the stock market based on the following.
Smith acknowledged that the past two CPI statistics have exceeded expectations. But he remains optimistic, noting that last week's jobs report showed lower-than-expected wage growth: “This was a harbinger of what could happen tomorrow.” He believes it would be “good” for the economy if the result matches expectations of 3.1%. Nevertheless, Smith warns that “there are always hidden risks.”
Despite the economic uncertainty, Smith points out that the S&P 500 (^GSPC) is already “trading at a fair valuation” that factors in risk. But with the possibility of a Federal Reserve rate cut looming, Smith suggested the market “needs a higher valuation.” Multiple prices are available. ”
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor's note: This article was written by angel smith
video transcript
Rachel Akuffo: Now, stocks have fallen since the week after the equally weighted S&P 500 index posted its seventh consecutive week of gains. Investors are turning their attention to inflation trends on Tuesday, looking for hints about what to expect at the Fed's March meeting.
To learn more about this, we speak to Dave Smith, Chief Investment Officer at Rockland Trust. I'm glad to see you this Monday morning. So the main drivers of the volatility that we're seeing are the Fed and AI.
So, starting with the Fed, obviously, we're going to see some key inflation results coming out this week, like CPI on Tuesday, PPI on Thursday. What are the expectations?
Dave Smith: Well, the predicted CPI number for tomorrow is 3.1. Good morning, Rachel. And we'll be watching it closely. Obviously, we got the employment data last week. And that data includes a measure of wage growth. And wage growth has actually been slower than expected, which is a good sign.
In fact, the last two prints on the CPI over the past two months have exceeded expectations. So we hope that last week's results are a harbinger of tomorrow's results. And expectations will be reflected and the actual results will be very close to expectations. And if that's the case, I think that's a good thing.
Rachel Akuffo: And Dave, you still think there's a pretty good chance of a soft landing. But you also know that the biggest risks to the soft landing story may be the ones we haven't considered yet. How do you invest with that in mind?
Dave Smith: Well, that's a great question. There are always invisible risks. The known unknown is what comes at you. The last example was the pandemic. I don't think anyone predicted there would be a pandemic in 2020.
And you never know what's going to happen on the other side of the pipe. There are some available on the market. I have been investing for clients for his 34 years. And there was never a time when I could sit across the table from a client and say, “There's nothing to worry about.'' There's always something. And what we know today is true.
But you also always have to worry about something happening that no one expected. A black swan, so to speak.
Rachel Akuffo: This is true because there are many considerations, some risks beyond the Fed's control, and geopolitical concerns with China, Ukraine, and even the Middle East.
But do you think the market has a good measure of how things are priced at this point in terms of some of the risks that are priced in right now?
Dave Smith: i will do it. That means the S&P 500 is trading at about 20 times forward P/E. And this is within one standard deviation around the long-term mean. So I would argue that it's on the high side of fairness. But that's not a terrible thing, especially considering the fact that the Fed is targeting interest rate cuts at some point in the future.
Lower interest rates mean that, all else being equal, the price-to-earnings ratio should be higher. So I think you could argue that the S&P 500 is trading at a fair valuation. And if multiples remain constant, future S&P 500 earnings estimates will be in the low double-digit percentage range for calendar years 2024 and 2025.
And that's a very solid backdrop for stock market returns.
