Portfolio Manager on big tech earnings: Low expectations are 'the name of the game'

GuideStone Capital Management Portfolio Manager Brandon Pizzurro joins Yahoo Finance Live to break down what investors should expect from big tech’s earnings this week.

Video Transcript

AKIKO FUJITA: Let's bring in Brandon Pizzurro. He is GuideStone Capital Management portfolio manager. Brandon, it's good to talk to you today. Of course, a big week for earnings. We've been talking a lot about tech, but when you look broadly so far, roughly 86% of the S&P 500 companies that have reported posting positive earnings surprise for the fourth quarter. What stood out to you so far, and how much of this is really just about very low expectations?

BRANDON PIZZURRO: Yeah, good morning. Thanks for having me. I think very low expectations is definitely the name of the game. You know, when you think about just what a low bar they had to essentially step over, the bar was on the floor in order to show positive earnings impact. I think that's kind of a low thing that people should take into account that, hey, maybe this wasn't so difficult for them to do.

But like you said earlier, I mean, we have a big swath of the S&P reporting this week, a lot of tech, a lot of industrials. So it'd be interesting to see how things shape up. Financials last week really kicked things off, like they always do. Really saw some strong momentum out of there, but as you mentioned, the market seems to be turning a little bit around today.

ZACK GUZMAN: Yeah, and on that point of turning around, we did see, you know, financials leading off the earnings season per usual. But when you look back, I keep going back to this Bank of America note because it stands out to me in terms of the reaction to these earnings beats, just seemingly sitting up as the weakest we've seen since 2007, which, back then, when you kind of go back to a similar weak reception to earnings beats back in 2000, they highlight that the S&P 500 fell 13% in the three months after and noted that you did see kind of this rotation back to value from both companies.

So I mean, when you think about that, financials as a sector up about 3% year to date, how bullish are you on them maybe leading the next few months here in 2021?

BRANDON PIZZURRO: Yeah, great point. Kind of that asymmetry in response to the way markets are reacting. You know, they always won't give me more. When you have a good earnings beat, you want a bigger beat. And so, when you're seeing kind of that asymmetry where markets aren't rewarding those ups, and they might be punishing the downs a little bit more, that's something that can start to kind of cause a little bit more worry. People are getting exhausted.

In terms of kind of that cyclical rotation, we wholeheartedly agree that that is starting to take shape. Financials, we see a lot of the strong outlook there, not only from some of the banks that have reported, but more importantly, some the underlying industries within there, such as some of the bank-- some of the brokers, mid-tier banks, the regional banks. You're also seeing financials within insurance, seeing some of that kind of start to pop as well.

So there should be a lot more legs to go in this financials run. But you do see some of these breathers every now and then. And, you know, notwithstanding last week's strong notes from a lot of these banks, you can still see some turmoil.

AKIKO FUJITA: When you talk about the cyclical rotations that are happening, though, does that come at the expense of some of these growth names, particularly in tech? It feels like the conversation has sort of shifted from November until now, largely because when you look at the rally so far, there's more breadth to that, that it's not just about one or the other.

BRANDON PIZZURRO: Yeah, that's a great point. So I think it does kind of carve out some of tech's momentum. Tech seems to be here to stay. There's a lot of areas in tech that have certainly benefited. You know, I'm sitting in my house right now, as are many people around the country and around the world. And so, technology obviously is going to be an ever increasing part and presence of our already connected world.

But when you think about some of the exhaustion there, there are some names that have really continued to run. Obviously, we're getting a lot of tech names out this week. But how much further can they really go? I think a lot of people have baked in a lot of this expectation that tech is going to continue to evolve even more. But I think to a large extent, we've really pulled forward a lot of the growth that people would have seen over the next several years.

So, to answer your question, yes, I do believe some of that cyclical rotation will come at the expense of some of these growth names just taking a mild backseat after their just moonshot run.

ZACK GUZMAN: From a macro perspective, obviously, one of the biggest risks raised by investors in survey after survey we've seen has been on the vaccine front, and issues there are concerns around variants maybe reducing the effectiveness of the vaccines we've seen, or just the fact that vaccines will continue to be rolled out more slowly. When you weigh both of those things, how do you measure kind of maybe where valuations are sitting at here, as we continue to see-- today is a bit of a pullback, but overall, moving up.

BRANDON PIZZURRO: Yeah, you know, one of the things we talk about internally on our team is expensive can get more expensive. So thinking about just how expensive PEs and actually, a litany of valuation metrics can be, they do feel toppy. We're in the 90th to 95th to 100th percentile, depending on what valuation metric you're looking at. But things can continue to extend. You know, every single day, we're hanging on to what's going on with, you know, vaccine proliferation, virus spread, et cetera. You know, we had Merck out this morning saying that they were just going to cut short their vaccine trials.

And so, the market's going to continue to weigh in on that. One of the things we need to keep in mind, though, is that some of these new strains that's kind of that gray swan, not a complete black swan, but something that it's a known unknown. Just this over the weekend, I was reading that it might take up to six months to account or tweak a particular vaccine to account for a new virus spread, or virus strain rather. And so, that's something that we need to consider, that it's not going to be a quick turnaround if the efficacy of these existing drugs doesn't prove out to be what we expected them to over the intermediate term.

AKIKO FUJITA: And Brandon, we, of course, have the FOMC meeting kicking off tomorrow. You've highlighted here, among the headlines you're watching right now, overheating and inflation. What specifically have you been watching on that front? And are there any red flags that you see right now that are concerning?

BRANDON PIZZURRO: I think people's expectations for inflation remain moderately low. Increasingly, though, if you look at a lot of the sell side pieces, just general market commentators, a lot of the people you guys have on your show, I'm sure they're starting to talk about inflation a lot more. If you look at Google Analytics, people are starting to google inflation. They're just not familiar with what this inflation is because it's been something that's been elusive for quite some time.

But with all the fiscal stimulus being thrown at us and even around the world, the consumers are in a pretty good standpoint in terms of their savings. A lot of people, there's a lot of pent-up demand for whenever we can get on the other side of this, this epidemic that we've been facing. And so, there's a lot of potential spending. That, of course, can turn into a lot of inflation. And so, you've seen breakevens move higher. Tips have certainly caught a bid. Having some type of inflation protection in your portfolio certainly always makes sense to some degree. But especially now, it seems more and more evident inflation could be rearing its head.

ZACK GUZMAN: Yeah, Brandon, last one for me. We were just discussing in the prior segment kind of the expectations around that $1.9 trillion next wave of stimulus. When you maybe factor that into what the market could be expecting here, how bullish are you on that, you know, Biden will get that full number he's seeking here? And how might that actually impact, you know, the Americans' economic indicators, as we've seen in terms of unemployment and everything else, start to slow down a little bit here in 2021?

BRANDON PIZZURRO: Yeah, I mean, the average person is certainly in need of an extra boost and some assistance. Will we get the full 1.9? Probably not. Just like all these things go, these are always negotiations. So seeing that walked back a bit makes a lot of sense, just because that's how things tend to coalesce.

But you will more than likely see additional payments, some of the other things that the end consumer badly needs. One of the things I think that we watch quite a bit is that the average consumer-- we keep using the word "average." Well, a lot of those and kind of the top quartile of earners and net worth people, they continue to gather steam. And so, they're kind of skewing what those averages look like.

Now you see, like, average credit scores are up. Well, if you look at the underlying data, it's only because some of those at the very top end of the earning spectrum have increasingly better prospects than their net worth situation. So, by and large, the American people need something additional. It likely won't be that full 1.9. But we're starting to run out of a little bit of gas in the tank here.