Big Tech sell-off not 'a long-term problem for the sector,' market strategist says

J.P. Morgan Asset Management Global Market Strategist Jack Manley joins Yahoo Finance Live to discuss stocks selling off, fourth quarter earnings for big banks, inflation data, and the Fed.

Video Transcript

ALEXIS CHRISTOFOROUS: --on a stick with our markets conversation. And welcome to the show, Jack Manley, JP Morgan Asset Management's Global Market Strategist. So Jack, once again, it's becoming a pretty familiar story here in 2022. It is tech stocks leading the way downward today. Do you think that tech stocks are getting a bad rap? Is the selling a little bit overdone for your taste?

JACK MANLEY: I think any time we see volatility like what's going on right now, things are always a little bit overblown relative to what should actually be happening. But at the same time, you look at what's going on with aggregate valuations in the market. And those valuations are being disproportionately dragged higher by technology and tech adjacent names. I think it makes perfect sense that some of these names have to cool off a little bit.

And then when you think about, perhaps, the trajectory of interest rates as we move through this year, you've got to look for companies that are able to generate realistic profitability. And for any tech company that just burns through cash without any sort of viable product, that's a tough sell this year.

So I understand the volatility. I understand the selloff. I do think it's probably a little bit overplayed. But I certainly don't think it is a long term problem for the sector.

- Well, Jack, I want to ask you about some of the bank earnings we've seen. Expectations were high. They're up 11% before earnings season started. JPM, Citigroup, and today, Goldman Sachs underwhelming. Part of the problem is higher expenses and particularly wage costs. Is that something-- is that a narrative that we will see throughout the fourth quarter earnings season?

JACK MANLEY: I think that is exactly something we'll be seeing across a number of different sectors this earnings season. And frankly, as we move throughout the course of 2022, that's a story that we're going to hear a whole lot about as well. One of the stories that we have to remember about 2021 is that the reason earnings growth has been so strong, was so strong, is because of pretty extraordinary margin expansion. We had companies that were just so lean in the aftermath of COVID.

Now, you're facing higher interest rates. You're facing higher input costs. You're facing a slowing economy. And to your point, you're facing rising wages. All of these things are going to put downward pressure on margins, put downward pressure on profitability. And it means that sector security selection, I think, are going to be extremely important this year.

ALEXIS CHRISTOFOROUS: So what about your outlook-- I want to get back to tech for a moment on tech earnings. I mean do you expect to hear on those earnings calls, lots of CEOs talking about how inflation and higher interest rates could crimp profits in the quarters to come? And if so, how are you positioning the portfolio?

JACK MANLEY: I think that's definitely something we should keep our ears piqued for, especially those technology names that don't necessarily make physical goods. Tech as a service maybe coming under a little bit more pressure than than a physical technology product, like a semiconductor, for example, or a personal computer.

But I do think the long term trajectory for technology is a very positive one. I mean, we may be facing some issues right now having to do with supply chain problems, having to do with valuations, with rising wages, with rising interest rates. But at the end of the day, I don't think anybody can ever look at you and tell you that technology is going to be less important 10 years from now than it is at the moment. This is a long-term secular story.

And so I think if you were an investor and you have a time horizon that's longer than, say, the next six months, you should consider maintaining that allocation to growth your equities, particularly tech and tech adjacent names, despite recent volatility and perhaps poor short-term prospects.

- There are a lot of market jitters happening at the moment. And I'm wondering what is behind that? Is it inflation? Or is it a misstep that the Fed may make? And if it is a misstep, is it because the Fed may move too quickly or too slowly?

JACK MANLEY: So I think that those two things are going to be very much related. I mean, we have hot inflation that stuck around a whole lot longer than we would have expected, certainly than we would have liked. And I think that that persistently hot inflation is sort of fueling the flames that has investors concerned that the Fed is going to be especially aggressive in 2022, more aggressive than we had initially thought.

And frankly, there are good reason to be concerned about that. We had a hawkish meeting in December. We had hawkish minutes for that December meeting released a couple of weeks ago. But what I do think we need to remember when it comes to interest rate policy is that the Fed doesn't always have to be moving. It doesn't always have to be reacting. And indeed, when QE is over, and it will be over by the end of March, I think Jay Powell as a consensus builder is going to look around and take stock of what's going on from a growth, inflation, employment, from a COVID situation.

And once he does that, he will then be able to judge what the best course of action is from monetary policy perspective. I know we're going to see rates rise this year. I am not convinced that they are going to rise nearly as much as market jitters would suggest.

ALEXIS CHRISTOFOROUS: Speaking of rates, we've got yields in the treasury market now at COVID highs. They're at their highest level in about two years. How much higher do you think they're going to go? And what's the effect on equity trading? ?

JACK MANLEY: Well, as we know, there is, generally speaking, an inverse relationship. The higher yields go, the lower equities go, particularly from evaluacion perspective. It's just easier to justify higher than normal valuations, which is a period where we certainly are right now when you're looking at lower than normal interest rates. And any time you see rates move higher, that Tina trade, if you will, that there is no alternative trade, starts to lose a little bit of traction because all of a sudden maybe bonds are a little bit more attractive on a relative basis.

Real yields, though, are still deeply in negative territory, about as negative as they've been in around 40 years. And so if you are looking to put money to work right now, I think a lot of what you have to do has to fall into the risk bucket. That could be equity investing. It could be alternatives in certain situations. Real assets, infrastructure, real estate, things like that, also a great way to generate yield, to generate return in a portfolio.

So on the margin, maybe equities a little bit less attractive given what's going on with interest rates right now. But I don't think this spells the end of the bull market that we're very likely in at all, frankly.

ALEXIS CHRISTOFOROUS: All right. Thanks for putting what's happening in the bond market and perspective for us. Jack Manley, JP Morgan Asset Management's Global Market Strategist.

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