Economy is back to 'pre-pandemic levels': Analyst

James Liu, Clearnomics Founder & CEO joins the Yahoo Finance Live panel to discuss the latest market action.

Video transcript

ZACK GUZMAN: I want to shift over to the broader market, though, as we got the update on the labor market here in terms of private payrolls numbers coming in from ADP this morning, missing the estimates that economists had by a wide margin, almost by about half, if you do the math there. 330,000 private jobs added for the month of July versus the 690 expected. And for more on what that signals, not just for the labor market but for where we're at in this recovery right now, happy to bring back on James Liu, Clearnomics founder and CEO, joining us once again. And James, I mean, when you look at that number, what does it say? Because obviously we're probably expecting some chop as people react to the Delta variant, but-- but where do you classify that is kind of some steam coming out of this recovery?

JAMES LIU: Well hey, Zack, good to chat with you. Well to keep the backdrop to all of the market activity right now and all the economic data, is that we are back to pre-pandemic levels for the overall economy and for corporate earnings. And so what we would expect going forward is that we're transitioning from that initial recovery to a more steady state set of numbers. And so we are going to expect a lot of these numbers to start to come down and to moderate over time as that evolves.

And so we, across the board, we are back to pre-pandemic levels. But when you look at the labor market, as you're talking about, we're only about 70% of the way there. So there's a little bit more room to run. What that means for the overall market we think based on this data is that the overall equity markets are still highly valued, but earnings are expanding at a rapid pace and so we think the equity markets are still in the fine place.

However, on the side of interest rates, you know, Brian and you were just talking about some of the Fed comments. We expect interest rates actually to start to rise again. They've been falling since the end of the first quarter, but we think a more steady state rise in interest rates is more likely over the next two quarters.

AKIKO FUJITA: And James, on the earnings front, it feels like there's a similar thread regardless of sector here, which is that there has been a significant bounce back when you compare it to the same period last year. And yet, there's a big question mark going into the year end because of concerns around the supply chain. Whether it is the cost of goods going up, whether that's a shortage of chips. How does that change your outlook in terms of these companies and their ability to continue this momentum and the recovery?

JAMES LIU: Well that's-- that's right, Akiko, there are some uncertainties out there. All that being said, the current consensus estimate is that we'll hit about $190 for S&P earnings at the end of this year. That'll represent a 40% increase over the full year, which is just absolutely astounding and the numbers really have lived up to the hype so far.

Now, it may be those numbers come down to closer to quote, unquote, "only 10%" over the next two years, but those are still really spectacular numbers. You know, really the risk to that story are, like you mentioned, maybe there were more supply and demand disruptions that affect everything from semiconductors, to autos. Maybe there's even more inflation or supply constraints that cause prices to go up, but overall businesses are reinvesting and consumers are spending. So we think that there is still a really phenomenal earnings story to be told. And over time, that earnings story is what's going to pull valuations back down to Earth from the very lofty levels that they're at today.

ZACK GUZMAN: And James, lastly, I mean, when we talk about expectations, it is interesting to kind of see investors and CEOs kind of reacting to the timeline that the Fed has laid out as well. And JP Morgan CEO Jamie Dimon speaking on Fox Business not too long ago about his expectations on when the Fed might have to move. And he's saying, basically, that the Fed is going to start tapering once they begin seeing unemployment hit 4.5%. You know, thinking that it's going to be-- You know, that the inflation that we're talking about here is not transitory. It's a pretty big voice to be coming out on the other side of what the Fed's expectations. Are I mean, how serious do you see maybe the pull forward that we're continuing to talk about?

JAMES LIU: Yeah, that's really the big question. We are under 6% of the unemployment rate, you have inflation that had reached close to 5.5% on many measures across the board. So you know, overall, the fact that we are back to pre-pandemic levels and you think back to end of 2019, before the pandemic, you know, the Fed funds rate was coming down, but it was at 1.5%, not 0%.

And so we do think it's possible that some of that is pulled forward. And so what's likely to happen in the market is that we'll have these short periods of adjustment as we're trying to figure out, will tapering happen end of this year or early next year and when that first rate hike will be. Right now, most likely at the beginning of 2023. And these small periods of adjustment in the market, they'll be volatile, but that's probably healthier for the market than a big shake up if there's a big surprise out the Fed. The Fed obviously wants to help ease the market there and I think they've been actually doing a very good job of that so far.

ZACK GUZMAN: Yeah. So far the language there has been-- has been pretty impressive and kind of guiding. Of course, a change up at the top of the Fed here, whether or not President Biden wants to renew Jerome Powell's stint there. It could change things up. But James Liu, Clearnomics founder and CEO, appreciate you joining us today.