Earnings estimate cuts are just beginning, strategist says

Nuveen Chief Investment Officer Saira Malik joins Yahoo Finance Live to discuss the state of the stock market, inflation, consumer spending, fears of a recession, energy, and the outlook for the economy.

Video transcript

BRAD SMITH: --continue the conversation. And joining us now for a deeper dive in the markets after what has been a rocky first half of the year is Nuveen chief investment officer, Saira Malik. Great to have you here with us. For whatever bear market rally we may have seen from, what, last Thursday through Friday, June 24, we've seen to kind of slip once again here. And so, from your perspective, how low could we go, perhaps, here on the markets? And what are some of the areas that investors should continue to be wary of right now?

SAIRA MALIK: Thanks. There's three areas to watch to determine whether we're seeing a bear market rally or the market's bottoming. And that's inflation, earnings, and valuation. Just today, with inflation, we are starting to see signs of it moderate. But the issue is that we're also seeing what we'd hope to see as a shift in spending for the consumer from goods and services.

But it looks like the consumer is now shifting away from both goods and services. And that's an issue. It leads us to our key risk for the second half for equities. And that's earnings and whether they're going to be the next shoe to drop. I think with the consumer weakening, fears of a recession, and the fact that estimates really haven't come down, we're worried about companies' forecasts for the second half of this year.

The valuations are a better story, with the S&P multiples down over 5 points year to date. We're looking at average historical valuations for the markets. But given all of this together and the fact that we have so much data showing that a recession may be coming, that was more likely a bear market rally that we saw. And we don't think the S&P has bottomed at this point.

JULIE HYMAN: Saira, it's Julie here. It already feels like the shoes are starting to drop or maybe some slippers. I don't know what the appropriate analogy would be, right? You know, we got Bed, Bath & Beyond, and we've been talking about this, especially with consumer spending. Bed, Bath & Beyond, RH now coming out, Target coming out. It's especially been concentrated in that area.

But we also see a lot of the tech companies, especially startups, starting to cut jobs, which, presumably, we'll see maybe some feedthrough effects to some of their earnings as well. So it feels like that the earnings are starting to come down in terms of estimates and outlook. How much more do you think we're going to come down in the second half?

SAIRA MALIK: I think this is just the beginning of earnings estimates cuts. Last quarter, we saw it begin with Walmart and Target missing numbers. And then this is starting to bleed, as you said, into more companies. If you look at the first quarter of this year, companies generally beat earnings. I think the prints this quarter for Q2 will show companies beating earnings again on a more moderate basis.

It's going to be, going forward in the second half, the companies that don't have the pricing power to overcome inflation are going to be at risk. And then earnings are going to be at risk. And that's the E in the PE. We've already seen valuations compressed. Now we have to wait for earnings to probably get cut. And at that point, we'll be more at the bottom. Now the silver lining with inflation, of course, is that eventually, the Fed could take their foot off the gas when it comes to rate hikes. But we're just not there yet in terms of timing.

BRIAN SOZZI: Saira, are you in the camp that says this market, the bear market can't end until we start to sniff out that the Fed is likely to start cutting interest rates?

SAIRA MALIK: We're generally in that camp. I think the bear market can't end until inflation shows consistent signs of moderating. Now the Fed may not be talking about rate cuts at that point, but we need to see more consistent data. PCE is one data point today, but on the other hand, we're going to get ISM tomorrow. And we wouldn't be surprised if that misses consensus, another sign that the economy is cracking. And so that's not going to be great news for the markets.

JULIE HYMAN: And Saira, you sent us some ideas for what to do in this environment, which I thought were really interesting. And one of your ideas you were looking at was Valero, which kind of stuck out to me as an interesting one in the energy sector-- a refiner, mostly. So talk to me about why that might be an attractive play for people right now.

SAIRA MALIK: We like energy for three reasons. One is, supply should remain tight. Demand should continue to pick up. We're not even at 2019 levels of demand yet. And the key for energy stocks is producer discipline. Producers are returning cash to shareholders. It's more of a focus than just pulling barrels out of the ground. And so this is going to keep the cycle tight. We like refiners because they tend to be a laggard. They're more leveraged to the rate of barrel growth going forward. It's less so than just oil prices. So we think Valero is well positioned. They're also a bridge to cleaner technologies going forward. So all of this, we think, is positive for Valero.

BRAD SMITH: I thought it was also interesting that you were pointing out software, and specifically, Salesforce. I mean, CRM shares have gotten hit hard since November. And just in this past quarter, we've seen them move lower by, I believe, about 22%. And so what is the case for why people should be looking? Or should-- what should they look at within software, more broadly?

SAIRA MALIK: We like these less popular growth stocks. They're certainly not in favor at this point, but on the selective basis, companies with quality fundamentals, like Salesforce with the shift to digital, we think this is a buying opportunity for these companies. Not companies that are in highly competitive spaces, dependent on advertising, which likely will decline in a slowing economy, but companies that are helping their clients grow revenues. And in a world where margins are generally at peak levels for companies, to grow earnings, you're going to have to focus on revenue growth. Salesforce is a key partner for companies in order to help them grow those revenues because of their software.

JULIE HYMAN: Saira, good to catch up with you. Saira Malik, Nuveen chief investment officer, thank you so much for your time this morning. Appreciate it.

SAIRA MALIK: Thanks for having me.