S&P 500 reaches record high as technology stocks jump

Yahoo Finance’s Alexis Christoforous discusses the latest market moves and tech outlook with Ellen Hazen, Portfolio Manager at F.L.Putnam.

Video transcript

ALEXIS CHRISTOFOROUS: Let's stick with the markets now and bring in Ellen Hazen, portfolio manager at FL Putnam. Ellen, good to see you. Would like your thoughts on just what we're seeing right now in the tech sector. I mean, there seems to be a love-hate relationship that investors are having with this sector. They seem to be in love with it today, but what are you advising clients at the moment with regards to big tech?

ELLEN HAZEN: Thanks for having me, Alexis. We are looking at trimming some of the big tech names. If you look at a combination of the performance that they had in 2020, with so many of the stay-at-home beneficiaries being in the tech sector, as well as the fact that the market is beginning to rotate away from large cap growth, as we know and we have been seeing ever since the vaccines got approved last fall, and you combine that with two other factors-- number one, the valuations of many of the tech stocks have gotten to be fairly elevated over the last six to 12 months, and then in addition to that, we see a likelihood of increased regulatory scrutiny on their business practices, which we believe can curtail the multiples of the tech stocks.

So we still think they're very high quality. They generate a lot of free cash flow. They have good margins. But between the valuations, the regulatory environment, and the rotation that we've been seeing toward small cap stocks and toward value stocks and toward cyclical reopening stocks, we think it's time to take a little bit of money off the table.

ALEXIS CHRISTOFOROUS: Let's talk a little bit about earnings season, which will quickly be upon us in just a couple of weeks here with Q1 earnings. What are your expectations there? Because they've got a lot to live up to. I mean, the bar's pretty high, right, compared to last year's levels?

ELLEN HAZEN: So Q1 earnings, as we look at it right now, the expectations are for revenue to grow about 7% for the S&P 500 stocks. And we're going to see significant operating leverage, with earnings growing closer to 20%. We saw that happen in Q4, too. Revenue came in stronger than expected at Q4, but the real star for Q4 was operating leverage, where you saw earnings grow much faster.

And we see accelerating operating leverage not only in the first quarter, but also into the second quarter. And we think that the market and investors are underappreciating the degree to which companies are keeping a tight line on the cost front. And so we think that not only will revenue surprise positively, but earnings are likely to surprise positively as well. And this goes especially for those cyclically exposed sectors like materials, financials, industrials, and of course, energy.

ALEXIS CHRISTOFOROUS: I'm curious what your outlook is for the fiscal year for the stock market. We had a guest on earlier, a strategist from Franklin Templeton, calling for a correction, a 10% drop in this market over the next six to nine months. Would you agree with that?

ELLEN HAZEN: So the market, as defined by the S&P 500, is already up nearly 10% for the year. And that would be a good return most years. Certainly in prior years, a 10% pullback has happened fairly frequently, and we would not be concerned if that happened. I think that trying to predict six or nine-month movements in the market can be very difficult, because all sorts of unanticipated catalysts can happen that can drive the market down.

So would we be surprised to see a 10% correction? No, not at all. But we also wouldn't be concerned, because the underlying economy looks very strong. And as I mentioned before, the operating leverage and revenue growth should be pretty strong in the S&P.

So if there were to be a correction, we would take advantage of that as a buying opportunity. And given how strong the market has already been year to date, we wouldn't be surprised to see some kind of pullback. But again, trying to predict three, six, nine months is really difficult, and we prefer to look longer term and to just use short-term volatility as opportunities.

ALEXIS CHRISTOFOROUS: You talked about those small cap stocks a little earlier. They really have been shining lately. And emerging markets were getting a lot of attention, too. Has that changed recently? What's your outlook for EM and RU? Do you have big exposure there?

ELLEN HAZEN: We have been selectively buying some emerging market stocks and some emerging market exposure for our clients. Having said that, though, it really is country by country. And the reason for that is that so much of their overall economic growth during 2021 and 2022 is going to depend on what happens with COVID and the pandemic in those countries. And the countries' results have varied widely, with China, for example, having responded fairly well, and some of the Latin American countries not looking so good at the moment in terms of pandemic numbers.

So we do think that emerging markets can benefit, particularly if the dollar continues to weaken, but we would be selective. And we're being selective for our clients as well.

ALEXIS CHRISTOFOROUS: In terms of headwinds for the market, I mean, it was the virus, the pandemic, for a long time. That seems to have changed, the sort of leadership and the headwinds, if you will. Do you think that higher corporate taxes and Biden's tax plan could indeed be a headwind for the stock market?

ELLEN HAZEN: So the last numbers that I checked would indicate that if the tax plan goes through as initially proposed, increasing from 21% to 28%, that it could crimp S&P 500 earnings by 10% to 11%. Of course, there will be a lot of negotiation, and so it's unclear whether or not that will be what happens in the long run. And so that would be about one year's worth of earnings, or put differently, one year's worth of stock price appreciation. So if we do see the corporate tax rate go up, and companies are not able to avoid taxes as they often have displayed the ability to do so in the past, it could certainly be a headwind for the market.

ALEXIS CHRISTOFOROUS: All right, Ellen Hazen, portfolio manager at FL Putnam. Good to see you. Thanks for being with us.