Markets undergoing ‘massive change in rate expectations,’ strategist says

Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer joins Yahoo Finance Live to discuss the January jobs report, the Fed's plan to hike rates, navigating market volatility, and the outlook for the 2022 stock market.

Video Transcript

BRIAN SOZZI: All right, let's stay on the markets here and bring in Peter Oppenheimer, chief global equity strategist at Goldman Sachs. Peter, really great to get some time with you here. Your take on the jobs--

PETER OPPENHEIMER: Thank you.

BRIAN SOZZI: --report, do you think-- do you think it supports a bull case in the market or a more bearish take?

PETER OPPENHEIMER: Well, it's an interesting question, because, obviously, there are two sides to the pressures here. On the one side, you've got a stronger economy and more evidence of that, which is pushing people to expect faster, more aggressive rate rises. But on the other hand, if it's being justified because the economy is strong, that's got to be good ultimately for stocks. And I think we would take the second interpretation more seriously.

It's important to emphasize that there's been a massive change in rate expectations over a very short time. I mean, as recently as June of last year, the market was pricing no rate rises this year in the US and maybe one at the end of next year. Now the market's pricing close to 10.

But overall, the economy remains pretty robust. And as long as the economy is still growing, then profits will grow. And although we've seen a D rating in the equity market as interest rates have increased, we'll still get a gradual trend in equity markets higher.

JULIE HYMAN: Peter, it's Julie here. We have had a little bit of a bounce off the lows. I was just looking at the numbers for the S&P 500, for example. It's up about 5% from its low on January 27, where it closed. I guess, where is fair value for stocks right now in the United States, given this scenario that you're outlining, where the economy is relatively strong and the Fed is raising rates?

PETER OPPENHEIMER: Well, bear in mind, though, we still have negative real interest rates. And even as interest rate expectations have increased over the course of the next year or so, in real terms, interest rates are still going to be very low. And therefore, on a relative basis, overall equities don't look that expensive.

Now, there are certainly parts of the equity market which reached very high valuations, particularly some unprofitable companies which had seen elevated valuations in an environment of a zero level of interest rates. And these have adjusted downwards very quickly. But for the index as a whole, I think we're getting closer to fair value.

And we should also bear in mind that many other stock markets in the world have much lower valuations, in line with or even lower than their longer-run averages. So what we're really seeing in this adjustment is the companies that have the highest valuations, often long-term growth companies, which are most sensitive to derating as interest rates rise, seeing their valuations come down the most. And the market is beginning to differentiate very much across different companies according to how they're doing in terms of earnings and their outlooks. And I think that's a relatively healthy thing.

BRIAN SOZZI: Peter, it was your note a couple of weeks ago that I would say brought a lot of calm to the markets. You told folks that we might see a short-term recovery in stocks. And by and large, we have seen that.

But look what we have seen this week. We've seen shares of a PayPal rocked on a disappointing quarter and outlook, same deal over at Meta. We saw now today a better-than-expected jobs report that is sending expectations higher for rate hikes. Do you think the grounds are now set for another noticeable pullback in markets here over the next week?

PETER OPPENHEIMER: I don't think-- I can't tell you in the very short term. There's a lot of technical issues as well, of course, in the market. But over the medium term, I think the critical issue is whether the excesses of valuation in pockets of the equity market are unwinding. And I think that's happened relatively quickly.

And alongside these rising interest rates, there's still an economy, which is growing. And if the economy is growing and we have slightly higher inflation, that's going to sustain profit growth. And equities can make some reasonable returns.

We don't think there'll be the same kinds of returns as we were seeing in the last cycle, when valuations were generally pushed up on the back of ever lower interest rates. That's not likely to be repeated. But we do think that we can form a base around these sorts of levels, and with reasonable economic growth see profits drive equities moderately higher overall.

JULIE HYMAN: Peter, when you talk about these corners of the market where valuations had gotten high and now we're seeing reratings downward, we were showing tech stocks as a group. I think it's fair to say that's probably one of the areas you were alluding to, or at least parts of tech. Is that more reasonably priced now? Is it time for investors to come in and look at that group?

PETER OPPENHEIMER: Well, I think it's less about looking at whole groups now and looking more at idiosyncratic risk, really looking at specific companies. For a long while, we've been arguing that the intense focus on growth and technology alone, disregarding other parts of the market, would not prove to be the right strategy as we emerge from the recession. And, actually, a lot of value-orientated places in the market, which have generally underperformed for many years, would look more interesting in a world of higher interest rates and inflation, things like energy stocks, for example, banks, and many in more traditional industries. And we are seeing that happening as the market starts to shift its focus towards a cycle with slightly different drivers.

Now, we do think that there's some interesting valuations now in many of the growth and technology areas, where you've seen big setbacks for companies which have very strong positions, strong balance sheets, are cash generative, and have very good competitive positions in their marketplaces. So we would be looking selectively at parts of technology, but not technology at the exclusion of other things. We think people need to be more diversified geographically across different markets, and also across different industries.

BRIAN SOZZI: Great to get some time with you, Peter. Really appreciate it. Peter Oppenheimer, chief global equity strategist at Goldman Sachs, have a great weekend.