U.S. consumers ‘have the ability to spend through an inflationary cycle,' strategist says

Bernstein Private Wealth Management Co-Head of Investment Strategies Alex Chaloff joins Yahoo Finance Live to discuss the outlook of the market with the rise with inflation.

Video transcript

AKIKO FUJITA: Our next guest says earnings growth is going to continue to be the big driver in the markets, with results mitigating concerns about inflated valuations. Let's bring in Alex Chaloff, Bernstein Private Wealth Management's co-head of investment strategies. Alex, it's good to talk to you.

We're not right in the middle of the earnings results. But we've certainly got a big picture here from the big banks that have reported so far. What's your impression? And what are some things that have stood out to you?

ALEX CHALOFF: Well, while we are early in the earnings season, we've heard from big banks, it's a little bit of a back and forth between what's important to Wall Street and what's important to Main Street. And in some quarters, you get terrific earnings from the banks. And everyone says, well, that's not reality. That's Wall Street. That's not Main Street.

In this quarter, we've had good earnings. We've had good results, some weak guidance. But again, this is Wall Street. We'd prefer to look more across the entire spectrum of companies and look at the companies that have exposure to Main Street, that have exposure to the consumer.

I think today was a really big bellwether, frankly, that really showed that consumers, with $1.3 trillion of excess savings, have the ability to spend through this inflationary cycle. That's what's important.

BRAD SMITH: Consumers also monitoring very closely to see exactly where companies will either incur some of the costs as a result of the higher prices that they've got to pay on the production side or even as part of the workforces demanding higher wages as well as we know at this time in this inflationary environment. So the consumer is navigating this and trying to figure out where some of the efforts to curb some of that price inflation, where that will kind of mitigate the amount that they're paying, either at the pump or at the grocery store, and all of the different realms that they are contributing to this broader economy?

ALEX CHALOFF: Yeah, we try to separate out what-- I don't want to use the word transitory, because transitory is dead as a doornail, as established by the Fed. But what we try to do is separate out, what are the longer-term implications of inflation but things that will take a long time to go away. You raised labor costs, that's spot-on.

We have much more job openings than unemployed workers. It's going to take a long time to work through those 10 and 1/2, 11 million job openings. So we'd expect to see persistent pressures on the labor front as it relates to inflation.

Our view is that the supply chain disruptions, which have been pushing goods prices higher do start to come down as those kinks work through the system. But we can all, as consumers, expect to pay more, pay more for big ticket items. You're going to continue to see dealer markups on new cars. You're going to continue to see price pressure on the upside for used cars. You're going to continue to see long waits for dishwashers and refrigerators and these type of big ticket items.

And expect, as you said, to pay more at the grocery store for those everyday items. But again, we believe that consumer balance sheets are strong enough to withstand and spend through this cycle.

AKIKO FUJITA: Alex, you mentioned this conflict that we're seeing between Wall Street and Main Street. Obviously, investors like it when these companies say they're going to, in fact, increase prices because of their prices going up as well. But that's going to hurt consumers too. When you look at that push and pull, what are some companies that you think are really strongly positioned to ride out the continued price pressures? Procter & Gamble certainly getting a pop today on the back of what we heard from John Mueller.

ALEX CHALOFF: So you're absolutely right. It's not everybody. There will be companies that don't have the brand power, that don't have the differentiated product set to be able to withstand this inflationary pressure and not keep up with price increases. But one thing that's important to note is this is the first time we've had inflation in years.

So a lot of these companies haven't raised prices in five years, seven years, nine years. So even companies that are at the lower end of the value add spectrum will still be able to add something to their pricing to keep up with inflation. Really, the question is, who are the brand leaders who can really drive price growth? And that's a question. That's part of the reason why the market's a little wobbly today and for the last couple of weeks, is that's the question.

What are the companies who win from this cycle? And who doesn't?

BRAD SMITH: What do you believe that sets up for earnings growth over the course of the rest of this year?

ALEX CHALOFF: Well, we came into the year as a consensus expectations of 9% earnings growth. There's been a few calls for that to maybe be 7 and 1/2 or 8%. But that's less important whether it's 8% or 9% or % than the direction of any types of changes. If we can get through this quarter with, clearly, good earnings but some change in guidance without meaningfully disrupting our view of high single-digit earnings growth for this year, then the US market can do well this year.

Last year was a year of tremendous earnings growth. Actually, the S&P multiple did not expand at all, it contracted. It was about earnings growth. So it's reasonable to expect a cooling off in earnings growth. The numbers, the math just doesn't work where you can have two years of 30%-40% earnings growth.

So as long as we come in with a consistent number that's high single digits, mid to high single digits, even, we'll be fine this year.

AKIKO FUJITA: In terms of the numbers that we get this quarter mitigating, as you pointed out, concerns about inflated valuations, there's been a lot of attention, obviously, on the high-growth names, the big name tech companies, about whether, in fact, they can continue to grow at this pace as we see the rates rise too. We've seen a significant pullback. Do you think that's been a bit overdone, that we could see a little more support once we get those earnings results?

ALEX CHALOFF: Yes, it is overdone. And if you think about what the analogue is, it's 1999. These overpriced technologies, the dot-coms that had no earnings. This time, it's different. A lot of things in this cycle are the same as they have been in other cycles but not in the technology space.

The biggest names are profitable with tremendous earnings growth. And right now, the selloff in some of these names have provided very interesting entry points because these are profitable businesses with tremendous earnings growth.

BRAD SMITH: All right, that is Alex Chaloff, who's the Bernstein Private Wealth Management co-head of investment strategies. Alex, we appreciate the time here and the conversation on the day. We'll check back in in the future.