UBS Private Wealth Management Managing Director Rod von Lipsey joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ADAM SHAPIRO: And I know that you've been advising some of your clients, and you've told us in a note to us, that expectations for third quarter earnings, they've been coming down. And I know Wall Street likes to lower expectations and then surprise us. But help us understand why the surprise to the upside this earnings season could be crucial as to where we're headed over the next six months to a year.

ROD VON LIPSEY: Adam, you know, we're all taking a look at earnings season. And that's why the market really has not had any direction. There are so many questions out there. And I think that what we're trying to get investors to focus on is the fact that second quarter earnings were absolutely outsized and unbeatable-- things that we haven't seen since the Great Financial Crisis. And so we continue to come into this third quarter, and we're lowering expectations, because there's a lot of noise out there.

But we still believe that these earnings are going to be strong. We may not open up the earnings gift wrapper and find a new car, but we're going to find a pony in there. And we're going to find some good earnings, we're going to find some strong earnings, especially in market leader segments-- some of the things that Jared just talked about. We're seeing energy and financials doing very strong. We continue to expect them to be strong and carry the market forward in the coming quarter and into next year.

ADAM SHAPIRO: When we talk about energies, and I'll get to financials after this, but I'm going to call out one stock-- Royal Dutch Shell. If you got the b shares, you got the better tax exposure on that, and yet that stock has been flat. I was looking recently-- it's down from its high in 2018. When we look at energy today, understanding that oil now back above $80 a barrel, that would seem, to quote the Fed on other issues, transitory.

Because the trend before the pandemic with energy, especially fossil fuels, was a downward trend. Has that bottomed? Are we on an upward trajectory for a long period?

ROD VON LIPSEY: Well, listen, we want to take a look at not just the energy prices themselves, but we want to see what's going on in the industry. And we've been seeing support within the industry for those names and for those companies that are really focused not just on their current fossil fuel, but also thinking about positioning themselves and having a meaningful pipeline, to use that word, towards alternatives-- being able to bridge the transition from fossil to whatever comes next. And so what we're seeing is that there is some support and there's been some rewarding in the energy sector for those companies that are able to do that-- to be able to bridge that investment demand on both sides.

ADAM SHAPIRO: When we talk about financials, we're going to get the banks start reporting tomorrow morning. You're calling for the 10-year treasury yield to remain range bound below 2%. It was down a bit, as Jared was telling us, today. For an investor who's particularly interested in banks, what does that mean for future loan origination? Because we know that a lot of the bank analysts are going to be looking specifically at that as we move forward with financials.

ROD VON LIPSEY: I think there are three pieces to that revenue story underlying the banks. And you've talked about loans, which is a big piece. And loans have been somewhat muted for some of the major money financial center banks, because a lot of the stimulus has taken the requirement for investors and for borrowers to go out and borrow that money. So that's been a little bit weak.

And so that's going to translate into some of those numbers. But as we look forward and we see people getting back to work, mobility picking up, and that stash of money on the sidelines that they have not necessarily had to spend start to become deployed, we think that that will be a tailwind for banks. The other thing is that we see interest rates and that interest rate pressure going up, and the Fed talking about the taper word.

We also think that the net investment that banks are able to pick up from the deposit rates, that that net investment credit is also going to be a tailwind that will help these money center banks moving into the next phase. The one question, of course, is going to be everyone's going to look through and see how has sales and trading revenue been? Are we going to see a little bit of a drop-off in sales and trading activity? Perhaps. But when we're talking to our investors, many of whom are small business owners, we're seeing continued robust strength in the M&A business and think that that M&A business is going to continue to help and provide a tailwind into the next year.

ADAM SHAPIRO: As I wrap up with you, you talk about the tailwinds of what investors might be doing-- I know there's one index that charts over at TD Ameritrade what their clients are doing, where they're going. And when a lot of the big money was selling, those retail investors were buying. The retail investors will like something that you're pointing out, which is calling for the S&P 500 at 5,000 by year end 2022.

We've had guests on for whom that might seem a little bit overly optimistic. Can you make the case as to why you're going there?

ROD VON LIPSEY: Well, listen, I think the reason that we're going there is that it's a gradual process. And we are still not back to full mobility. Look how far we've gone and how much the markets have recovered just based on a goods process. Now, we're starting to see services take hold, and we're starting to see some consumption coming back into those types of things that really need to fill out and broaden out our economy.

As we mobilize, as we work off this backlog of goods and excess goods that we bought, there will be bumps in the road, and there are going to be some challenges. But at UBS, as we look through, we're looking at sort of 4,650 at the end of the year, 4,800 midyear, 5,000 year-end '22. We get to those numbers based on our expectation that we'll have a normalization in the economy, we'll continue to emerge, and we'll get back to buyers and consumers getting out there and starting to consume and take up services.

And again, going back to Jared's numbers, we're starting to see some of that in small caps and travel and leisure. We're starting to see some of that consumption come into the system. And so we're betting on the consumer.