Stock market falling into ‘choppy waters,’ strategist says

Truist Chief Market Strategist Keith Lerner joins Yahoo Finance Live to discuss the risk of recession and precautions for investors in emerging markets amid the Russia-Ukraine conflict.

Video Transcript

JULIE HYMAN: Given the recent volatility that we have seen, given that Goldman Sachs downgraded GDP growth-- if I can, I would love to ask you about the vibe right now, for lack of a better word. What kind of psychology are you hearing from clients right now amidst what's going on with commodity prices and, of course, with the Fed decision coming up next week?

KEITH LERNER: Well, first, Julie and Brian, great to be with you. Brian, if I do use the bulging bicep in one of my papers in the future, I'll be sure to give you attribution for that as well. Great. Yeah. No doubt. And the vibe is great to be on with you, as always. Really great to end the week with you all. As far as the sentiment in general, it is relatively negative. I mean, folks, they're going outside, they see gas prices moving up. They see grocery prices going up.

And then of course, the crisis overseas is just heartbreaking in itself. So I think the overall sentiment is somewhat negative. And I was just looking at one of our indicators this morning, as far as the weekly survey from the AAII sentiment survey. And over the last two months, that survey has averaged less than 25% bullishness, which-- this is really extreme. We've only seen that kind of a handful of times over the last 30 years.

I will say that if there's any good news from a contrarian standpoint, when you look out 12 months when you see these type of readings, markets tend to be up with a very high probability. That said, I think in the short term, our view is that we're more in a choppy waters, a range bound market on this as people adjust to what's happening, especially, as you mentioned, with oil prices.

BRIAN SOZZI: Keith, what do you think is priced into the market here?

KEITH LERNER: Yeah. Well, you mentioned there earlier about recession risk. Normally during a recession, markets fall mid 20%. So when we're down 10%, 12% for the S&P 500, as an example, you're at least pricing in 30%, 40% of recession odds already. So for the markets to move down substantially from the recent lows, that recession risk will have to go up. Our view at this point is that global growth is certainly going to be weaker. In the US, we do expect the US economy to be a notch lower. But we still put recession risk as relatively low. Again, I mean, I definitely think the range of outcomes widened.

But we also have to remember we had some pretty good momentum into this invasion. You look at the jobs report last month. And then you just mentioned before about COVID trends. Remember, that's all we were talking about in the last few years. Those COVID trends have improved quite a bit. Even with the higher gas prices, people want to go out and travel. Brian, I was out in Disney about two weeks ago. The place was slammed. And people are paying up because they feel like they wanted to break out and enjoy themselves right now.

JULIE HYMAN: Yeah. I definitely have seen evidence of that out in the wild, so to speak, as well, Keith. All of that said, though, what I'm really curious about, and something that Brian and I have been talking a lot about this week, is margins for companies and what's going to happen to them because of what we're seeing with commodity prices. We've seen already these companies raise their prices for consumers quite a bit. So you have to wonder how much room they will have to do so even as they are getting pinched by these higher prices.

KEITH LERNER: No, it's a critical question. We think margins stay relatively healthy but are likely to have peaked. What was interesting last year, as a lot of companies have been saying, hey, we have this inflation and our prices are going up, all that was still, as far as earnings, were still moving higher. So they were able to push that forward. So far this year, earning trends have remained very resilient. So we're seeing forward earnings estimates for the market at a new cycle high.

And the entire contraction in this market this year has been just fear and P/E contraction. What we suspect is because of those high oil input prices that earnings will still be somewhat resilient but be much more moderate. Remember, we kept having earnings surprises the last two years. We're likely to see that at a much more moderate pace. But I will say we've also seen one of the biggest P/E contractions over a short period of time that we've seen over the last 30 years. So some of that, in our view, is reflected in the current valuations.

BRIAN SOZZI: Keith we're reflecting a little bit here this morning on the two year anniversary of this, in fact, becoming a pandemic era. How has your job or role of strategists changed the past two years?

KEITH LERNER: You know, Brian, every year in the market you have to have a dose of humility of what you know and what you don't know. But we talked prior to the show. I mean, I took over my position in the financial crisis. So there's always concerns. There's always something that we haven't been through before. But we really stick with a very disciplined process and follow our indicators and really let that lead even in times of uncertainty. That actually helped us add equities very early into the pandemic and be much more overweight when there was a lot of uncertainty.

And we're still going to go to those indicators and use a weight of the evidence approach. And if anything, I think the last few years just has actually reinforced to us the discipline process, but also going back to corporate America about corporate America's ability to adapt and adjust when we have all different types of conditions. And that's reflected in these earnings that hit an all-time high during the pandemic.