Fed rate cut speculation is a 'parlor game': Schwab's Sonders

As Nvidia prepares to report its first quarter earnings this week, Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Morning Brief to discuss how the bullish AI sentiment is driving the broader market (^DJI,^GSPC, ^IXIC).

Sonders calls Nvidia a "poster child for the AI boom," adding that it is the best performer within the "Magnificent Seven."

"I think it's important we know the bar is set high, so I think an extrapolation problem could develop, but whether that starts tomorrow is hard to say," Sonders warns. She says there has been "much more dispersion" within the Magnificent Seven. However, she still expects a larger-cap bias to exist within the market.

With the Dow Jones and Nasdaq recently hitting record highs, Sonders points to three sectors that are outperforming ratings: financials, materials, and energy. On the other hand, she says that real estate and consumer discretionary are underperforming while everything else is neutral.

As all eyes are on the Federal Reserve's next interest rate move, Sonders calls the speculation of a rate cut a "parlor game."

"Data dependency means that it's going to depend on the data. I think 'patience' is the word of the day," she says.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl

Video transcript

The chip giant accounting for over 36% of the NASDAQ gains this year.

So for more on how bullish A I sentiment is really driving the broader market we wanna bring in Liz Anne Saunders, Charles Schwab, chief investment strategist here to talk that and a lot more Lizan, it's great to see you.

So just talk to us just about how important, how significant or maybe not these earnings reports are uh from NVIDIA after the bell tomorrow.

What that really means in the context of the broader market?

Well, keep in mind as you guys know, I don't, I don't cover NVIDIA as I don't cover any stocks.

I don't do anything with individual stocks but obviously as a poster child for the A I boom, not to mention the best performer within the magnificent seven.

I think it's important we know the bar is set high.

Um So I think an extrapolation problem could develop, but whether that starts tomorrow is, is hard to say.

But I I think psychologically at at a minimum, it it's important for the uh profile of those types of companies as well as for the market.

Li what do you make of the market participation right now, we've been waiting for this broadening out.

We are starting to see that a little bit, especially when you take a look at that sector action.

So then maybe is the market going to be OK?

Not really specifically just focusing on NVIDIA but really just moving beyond some of those larger cab tech names which the market has been so focused on.

Yeah, I mean there is still a mega cap bias within the cap weighted indexes.

But you've got had much more dispersion particularly developed within the magnificent seven which last year they were not the seven best performers, but you only had to go down to about the ranking number 60 within the S and P 500 to capture all seven of those names.

Now you've got a couple of significant laggards obviously with, with Tesla, Tesla and Apple.

So now it's more the fab four.

But in the past month, you've had this sort of stealthy leadership pick up in areas like the Russell 2000.

Some of that is down the quality spectrum.

And I think more a function of of kind of smaller speculators out there.

But I do think that there is an opportunity, I think active is now operating on a more level playing field with, with passive with the return of the risk free rate.

There's price discovery again, fundamentals reconnecting to prices that said II I still expect in general there to be a, a larger cap uh bias within the market for those who are, you know, counting down the moments until the opening bell here this morning, Liz Anne and trying to figure out if they are deciding to take profits at some of these new highs that we've seen, whether that's in the dow, whether that's in the NASDAQ and where to reinvest that into where are some of the top areas that are ping your interest right now?

Yeah.

So uh we have um something called Schwab sector views.

We relaunched them early this year after about a two year hiatus because of just the unique aspect of this cycle, massive sector related volatility that couldn't be explained by fundamentals factors, having more consistency in terms of where leadership resided and didn't.

But we relaunched sector views earlier this year with three sectors with outperform ratings and that hasn't changed since the beginning of the year.

So that's financials, materials and energy.

So clearly a cyclical bias within uh the the sort of group of of sectors and then the two underperformed ratings that we have are real estate or res and consumer discretionary.

Everything else would be in that neutral or market perform category.

But then when we talk about the likelihood of rate cuts, the timing of rate cuts, what do you, what are you anticipating up until this point?

And the fact that we are starting to hear even more from policymakers maybe saying it makes more sense to wait at this point.

Given the conflicting data that we've got.

Now tell me the data and I might be able to tell you when the fed starts, you know, cutting.

Yeah, I think it's, it's such a parlor game of, well, I think it could be July.

I think it's September.

I think it's once or twice without there being backup in terms of, if you think they're going to start sooner rather than later, what is that based on?

What's the math associated with base effects in the core PC?

What the month, over month readings have to be the combination of the labor market data because I think the, the two parts of the fed's dual mandate are in sharper focus right now versus last year during the tightening part of the cycle.

It was clearly just inflation.

So data dependency means that it's going to depend on the data.

II, I think patience is the, is the word of the day.

I'm not sure the fed is going to regret that as much as they probably regret transitory.

But um I, I, you know, every, everybody that is out there in the, you know, Federal Open Mouth Committee suggests that they're not there yet with the biggest bears putting some of their pride aside more recently, Liz, I, I wonder what are they finally coming to grips with here with this market right now and some of the projections towards year end well, you know, as you know, we don't do year on price targets.

Iii I have sympathy for, for strategists that have institutional client base.

Ours is individual investors that, that have to go through the, the sort of dog and pony show of those year end targets.

You know, IIII I know you're probably talking about Mike Wilson at Morgan Stanley for whom I have great respect and, and he actually has said, been pretty consistent in saying some of what I just said, the very unique cycle that we are in right now and how uncertain the environment is in terms of data releases and trying to get a grip on.

Um the fact that we've got response rates down, some of the revisions across the spectrum of economic data have been much bigger than usual.

And it's hard.

In addition, you know, the cap waiting that we talked about already masks a lot of the churn going on under the surface.

So the NASA as as an example, obviously up 10% in the last month or so, only had about a 7% maximum drawdown this year.

But the average member within the NASDAQ has had more than a 30% drawdown this year.

So a lot of churn under the surface and I think it makes the job of those strategists that have to do year end price targets is if anybody can pinpoint that uh quite difficult in this unique cycle, certainly, uh I'm gonna get Federal Open Mouth Committee printed on some of the uh Yahoo finance swag t-shirts that we get fired up here at Liz.

Thanks so much Liz Anne Saunders, who is the Charles Schwab Chief Investment strategist.

Thanks so much Liz Anne.