BMO Capital Markets Chief Investment Strategist Brian Belski joins Yahoo Finance Live to discuss the overall state of the markets and where he sees the S&P 500 heading in the remainder of the year.

Video Transcript

SEANA SMITH: Joining us on the phone, we want to bring in Brian Belski, BMO Capital Markets chief investment strategist. Brian, it's great to talk to you again. I know you've been bullish now. Dow up 9.5% over the last month alone. How do you think this sets us up as we get ready for the final month of the year?

BRIAN BELSKI: Well, Seana, it's so great to hear your voice. You're never supposed to apologize when you start speaking publicly, but I couldn't get my video to work. But that does not dissuaded--

SEANA SMITH: Well, we love having you, so thanks for jumping on the phone, Brian.

BRIAN BELSKI: Sorry about that, I got dressed up and everything. No. Listen, you know, the market is like a coiled spring. There are so many bearish, bearish, bearish, bearish prognostications, bearish institutional clients. The clients, from our perspective, that are doing quite well are the high-net worth clients that we speak to in between my bearish meetings with institutions because they've had some cash, and they've been able to put some to work here.

But I think the market is going to continue to kind of climb higher. I do really think that there's a good shot that we're going to be well above 4000 at year-end really driven more by sentiment unfortunately than anything. And I do think that inflation is starting to show signs of rolling over, which has always been our call. It's just all about timing. It's difficult to time the market and difficult to gauge and diagnose the "stickiness," quote, unquote, of inflation.

So these trends are beginning to happen. Marcus got a year-end melt up. We also have the previous report was talking about a Santa Claus rally. I think Santa Claus is alive and well. And then lastly, recession, you know, what recession? Everybody keeps talking about recession. And to us, it's almost a moot point, quite frankly, because the stock market is already down 25% to 27% from the highs. Then we're going to have recession we had the inverted yield curve. When and if we have a recession again it's a moot point.

DAVE BRIGGS: Look, unless we see Twitter proof that you're dressed up, I'm going to go with the shorts and a t-shirt, and that's why you're not on video, Brian. No one's buying it. But when you talk about inflation, how much further do you think the Fed has to go? Or are we talking about another full point? And how far can they drive inflation down? We talked to several guests yesterday. They cannot get it below 4%.

BRIAN BELSKI: Of course, they're saying that. They can't get it below 4%, just like we were never going to be below 2%. Just like-- just like the first quarter of 2020, Briggsy, we're going to go to zero interest rate. It's all this reactionary type of conclusions that people are making. I think that inflation is slowly going to be shifting lower. Is it going to go back up 2 or to 2? It's going to take a long time to get there, meaning a couple of years.

But this is all a process or, as they say in Canada, a process, just typically because we have been at this zero free money thing and declining interest rates for all intents and purposes since 2007. So if you've been in the business 10 years or less, you know nothing but this. And so I think what's going to end up happening is we're going to return back to old style, old time hockey investing, kind of like when I learned the market in the '80s and '90s, ex the bad music. You can pick which decade had bad music. I'm not going to comment on that.

DAVE BRIGGS: '90s.

BRIAN BELSKI: [LAUGHS] Yeah, bingo. But you can move forward from that in terms of stock picking. So if I wasn't running money, so if I wasn't running money, I'd run six equity portfolios, real live money in three-- six in Canada, three in the United States. If I wasn't running money, I'd be neutral-- everything, neutral, all sectors, and just pick stocks. And I think that's the best way to approach really the next two to three years minimum.

RACHELLE AKUFFO: And Brian, I want to ask you because, obviously, history can be a good teacher here. And in your notes, you talk about the S&P 500 logging a 10.9% gain on average in the six months following the end of tightening cycles. How do you position yourself for that right now, though when we don't know exactly when the tightening cycle is going to end?

BRIAN BELSKI: It's a great question. Thanks for asking. I mean, I think we're heading into kind of a prolonged period, where, on average, quite frankly, even though the tightening cycle might be over on average relative to the last three years, rates are going to be higher. So I think the go-go growth names are going to be still kind of on the sidelines in terms of leadership.

I think we're transitioning into, not just value, I think that's too simplistic. I think it's going to be value plus growth at a reasonable price plus more high quality, where operating performance, great balance sheet, great cash flow is going to be predicaments of-- not predicaments-- but elements of how you want to pick stocks going forward. I think that's you're going to have to own to combat kind of this new regime of interest rates in the economy and what can happen with inflation.

SEANA SMITH: Brian, how does all this set us up for earnings? Because third quarter it's been OK so far, but the bar, we know, was set very low. In terms of what we are expecting the forecast, do you think they have further to fall when it comes to this quarter and then, of course, when we look out to next year?

BRIAN BELSKI: Seana, they probably do. But if you take a look at with respect to some of the charges coming forward and tech companies have actually been very aggressive cutting people, so they're probably going to take extraordinary-- or extraordinary charges and just continuing operations type charges heading into the fourth quarter. So continuing operations income, I think, could actually be pretty good.

But remember, we're not going to see fourth quarter year-end earnings till January, February. That could be when the potential next shoe drops. I don't see like everybody else sees that we're going to see a 20% drawdown in earnings. I simply do not see that from everything we look at, from the 500 stocks, in the S&P 500, to the 400 mid-cap, and the 600 small cap on the S&P indices. We don't see strong signs of earnings, massive earnings deceleration. In fact, we see earnings stabilization, cash flow prowess in very strong balance sheets, which I think are going to help from a fundamental perspective to keep earnings not go down 20% like everybody thinks.

DAVE BRIGGS: Yeah. Brian, is it the case as Jared Blikre said earlier that, really, we've just lowered the bar so far that it's just become easy for these companies to step over, perhaps, as in the case of Best Buy, American Eagle, Abercrombie, you name it?

BRIAN BELSKI: Well, you know, we've been in a under-promise, overdeliver type of scenario, really, since the Great Financial Crisis, but that entire trend started in 2000, 2001, following the tech wreck. Now, some of the names that you just mentioned are probably not secular type of growers or secular models, I mean, especially some of those retailers. But I think going forward, we have lowered the bar. It's now, I think, that bar to be.

But again, given the under-promise, overdeliver type nature of corporate America, they've been very conservative in their forecasts and in terms of how are going to guide going into the fourth quarter. And I'm guessing that the guys is not going to be great, but people, given the sentiment and given what's happened to the markets all about inflation and interest rates, when the Fed comes out post the next inflation report and starts to say, maybe we're not going to go 100, maybe we're only going to get 75 total, I think that could also help buoy the market higher.

DAVE BRIGGS: Brian Belski, nice to hear you. Next time, we'll see you, right?

BRIAN BELSKI: Yeah. 1,000%.

DAVE BRIGGS: All right. Good to have you, my friend.