Financials and cyclical names expected to bring ’better surprises’: Managing Director

Dave Mazza, Managing Director, Head of Product at Direxion, joins Yahoo Finance to discuss earnings season expectations, inflation impacts on earnings, outlook on International and emerging markets.

Video transcript

ALEXIS CHRISTOFOROUS: Let's bring in Dave Mazza now. He is managing director and head of product at Direxion. Dave, good to see you. I'm curious what your expectations are as we gear up to hear from big companies starting tomorrow regarding their earnings.

DAVE MAZZA: Yeah, that's right. So right, now consensus expectations is to see year-over-year growth of 61% for the S&P 500, which, that's an incredible number, of course, on the back of an really incredible earnings season so far of this year. What's most interesting, though, if I look at the median stock, it's just 24%. So you can see the bifurcation.

This week is actually one of the areas where we expect to see maybe some better surprises coming from financials and cyclical names. Of course, financials, of course, were the darling for some time, but they've been trading sideways as [? Charlie ?] was mentioning for a little while here, because trading revenues are expected to actually be a bit weaker going forward. But because I think some of the names have ended up underperforming, it could be an opportunity for investors to step in, especially if the earnings are a bit better than expected.

ALEXIS CHRISTOFOROUS: Do you expect to hear a lot about inflation on those earnings calls and warnings about higher prices, especially for things like food, beverages, and gasoline?

DAVE MAZZA: If I was an analyst on a call, that would probably be a question that I would ask of every company, no matter what industry they're in. It's obviously most evident in some of the consumer names, especially on the staples side.

But that rising input prices and the continued supply and demand imbalances that we're seeing across the board are starting to play out. But what's really interesting is companies have been resilient through this. In some cases, they've been able to raise prices or they're warning that they're going to raise, and it hasn't hurt the consumer yet. So for the time being, companies seem to be in an OK position here.

Of course, we'll find out a lot more with the CPI print coming out tomorrow of just kind of how fast inflation has gone, especially on a month-over-month basis. But to me, that would be the big question mark that's still out there. And we're going to take some time to read through the tea leaves of exactly what impact that might have. I'm actually less concerned about what impact it could have this earning season or the next, but beginning to think about 2022 where actually earnings expectations are expected to come down a lot from where they were this year

ALEXIS CHRISTOFOROUS: So are you making any changes, modifications to the portfolio if you believe that inflation really could become more of a problem as the year goes on?

DAVE MAZZA: Yeah, it's interesting. I think the areas that most people were really glammed onto is energy, right, the correlation with energy stocks, especially oil and gas and inflation is very high. But really, at the end of the day, it's still dependent really on the price of oil.

Now there's bullish expectations for oil to rise up to 100 from some strategists out there, but that's, again, not necessarily my belief. I think we're going to actually be stagnated from the price of oil for some time as geopolitical tensions and the like work through.

Really, the areas that I'm looking at is selectively interested in some financials, again, that have been a bit out of favor, but actually kind of coming out of this earnings season might have some more clarity in that particular case. But also the area that has actually not seen much action, and there's some connectivity with retail trades and the meme stocks is this disruptive growth area. All the flows have gone back into the FANG stocks again.

So I actually view that as a bit negative from a market sentiment perspective if, again, we're just seeing mega-cap growth be the leader. But if some of these disruptive growth companies, especially in the cyber side as noted earlier and the cloud computing side, those are areas where I think we could continue to see some outsized surprises coming.

On average, companies have beaten expectations by 20% over the last four earning seasons. And there's nothing that shows me right now that, again, on average that can happen again. But I do think we're going to start to see some real bifurcation where some of these tech names are going to continue to have some outsized gains, coupled with some of the cyclical areas.

But really, the fact that the economy actually from a rate of change perspective may have already peaked, I think it's going to put some pressure on your industrials and your materials and parts of that cyclical space. And it's really going to begin this interesting mix where you have really tech continuing to lead the way, both large and small, coupled with financials potentially.

ALEXIS CHRISTOFOROUS: You know, we had a market strategist on earlier from Wells Fargo who was talking up emerging markets and European markets, saying that they are behind the US in terms of the economic recovery. And so there is a bit more of a runway there, if you will, for growth. Do you see opportunities there? And what are you doing with those parts of the world with your portfolio?

DAVE MAZZA: Yeah, it's interesting. In those areas, international and emerging, if you look at the average person's portfolio or institutional portfolios, if you haven't systematically rebalanced, you're going to be underweight there. So there's some real opportunities to add selectively.

However, it's still unclear just how fast some of these countries are going to be able to vaccinate their population, deal with the Delta variant that, again, is kind of rising up from a four year perspective. So to me, it's less cut and dry, that just because the valuations are so attractive, especially in Europe and even emerging markets, that's the area I'd want to deploy from.

So for the time being, still overweight the US. There's areas outside, especially in Europe, that is looking more attractive. But just kind of diving into EM because it's so cheap. Until there's some more clarity of exactly what economic momentum we're going to see there, it wouldn't be my first choice necessarily just looking for value.

ALEXIS CHRISTOFOROUS: All right, Dave Mazza, managing director at Direxion. Thanks so much for being with us today.