We're in a period of very uncertain recovery, expert argues

Laton Spahr, SS&C ALPS Advisors President joins the Yahoo Finance Live panel to discuss the latest market action, as the Nasdaq slips into negative territory.

Video Transcript

AKIKO FUJITA: Well, a record number of companies have beat earnings estimates so far in this earnings season. About 87% of S&P 500 companies reporting better than expected results, according to Refinitiv. That is above what is the historical average of 65%. But we haven't necessarily seen significant pops on the back of that.

Let's bring in Laton Spahr, SS&C ALPS Advisors President. Laton, it's good to talk to you today. I'm curious what you have made of the results so far. Is it a matter of expectations just being so low that we're now playing catch-up with this momentum? Or is there real strength in a lot of these companies that we've seen, largely because of the reopening?

LATON SPAHR: Yeah, I'd say it's a little bit of both. It's real strength, and it was management teams guiding conservatively, right? We're in a period of very uncertain recovery. So as we saw the year start, management teams, you know, laid relatively low expectations coming into the end of the first quarter. So as they've reported, revenue surprises are off the charts. I mean, one of the best quarters we've ever seen in order of revenue surprise.

Earnings surprises have been pretty good. And what we've seen, though, is that the reaction to those surprises by the stock prices has been pretty muted. So I mean, it's a simple, set the bar low, exceed it. Investors knew this was going to be a good quarter, though. The cyclical recovery is staring us in the face. The next two quarters look really good.

ZACK GUZMAN: Yes, so that shifts attention back to 2022. And that's going to be I think key. And that's probably why we haven't seen these big pops. But when you think about what could happen with the Fed and interest rates rising, I mean, when you put everything together, it doesn't sound like there's a lot of reasons to be excited for 2022. But talk to me about your expectations on what investors should be bracing for.

LATON SPAHR: Yeah, there's certain parts of the economy that I think have so much pent-up demand heading into 2022 that we're still looking at a very good seasonal period. I know, you know, there's always a plethora of articles about the sell in May, you know, the seasonality of the summer months slowing down. You know, the fact is, we're recovering off of this base rate from last year, where the next two quarters are going to be fantastic.

You know, the Fed, last week, we saw Chairman Powell reiterate his dovish stance. I think they're a little bit behind the curve when it comes to the job market tightness. But they're not going to do anything here in the second quarter to take the punchbowl away, to use that cliche. In the third and fourth quarter, you know, I think we get a little bit of verbal guidance from them, talking about what tapering could look like. I think that's in reaction to a very tight labor market that may surprise some people.

And then, you know, 2022, yes, there will be some talk about what tightening looks like. But we're in a world where anything close to modern monetary theory is gaining some acceptance. And, you know, in that framework, it's more about taxes pulling back some of the spending than it is interest rates. And I think the Fed's playing that same game.

AKIKO FUJITA: Laton, what do you mean when you say the Fed's behind the curve when it comes to the jobs market? What specifically are you seeing that leads to that?

LATON SPAHR: Yeah, so we look at small businesses, and there's an NFIB survey that surveys for jobs hard to fill. And we're at all-time highs. So they're having a very, very difficult time finding skilled and unskilled labor. There was a great article in "The Economist" this weekend that talks about McDonald's offering $50 just to show up for an interview.

And when you put that in contrast to what Chairman Powell was saying last week, where he said there's still a lot of slack in the labor force and he doesn't see anything causing wage inflation in the near term, what we're hearing from companies and what we're seeing from the Fed are different. And we tend to look at the emergent phenomenon of companies first. So that's these top-down views oftentimes are the ones that are behind the curve. And what we're hearing from companies is labor is really, really tight.

ZACK GUZMAN: Yeah, we've heard that from a few people now. And it's something we're going to be watching moving forward. But Laton Spahr, appreciate you coming on here to chat with us today. Be well.