Recalibrated Fed expectations have ‘shaken the confidence of markets’: Strategist

Kate Moore, BlackRock head of thematic strategy for the global allocation team, joins Yahoo Finance Live’s Julie Hyman and Brian Sozzi to discuss the outlook for the 2022 stock market, prospects for growth, changes in the consumer, major investment themes, and digital transformation.

Video transcript

JULIE HYMAN: Let's talk about, though, what people in the market are watching for in those Powell comments, as well as what they're watching for more broadly. For that we bring in Kate Moore, Head of Thematic Strategy for the Global Allocation team at BlackRock. Kate, it's great to see you this morning.

Obviously, as I sort of alluded to earlier, the market seems to have woken up to the possibility, if not the likelihood, that we are going to get multiple interest rate increases this year. We've seen a lot of pressure on tech stocks, in particular as a result of that assumption. What do you make of all of this, and do you think-- How sustained do you think that process is going to be in the market?

KATE MOORE: Yeah, well good morning, Julia. So you know I was thinking a little bit about this yesterday, about how the equity market was expecting policy to unravel over the course of 22. And the expectation, I think, that was baked in was slow and steady normalization of monetary policy, accepting the fact that the economy is in excellent shape, that companies and consumers could absorb some slightly higher rates and less liquidity.

But I think what's really happened, not just in the last week, but going into the close of the year, is there has been this rapid recalibration of rate expectations, and that has really shaken the confidence of markets. You've seen those parts of markets that have traded-- trade-- at higher multiples, that are growth year parts of the markets, really de-rate and sell off meaningfully relative to the rest of the market. And

Yet, at the same time, some of those growth year companies that were trading at premium valuations, actually have the best fundamentals. Their earnings outlooks for the course of 2022 are some of the strongest. So you've had this fear and recalibration that the Fed is going to be moving much faster than the equity market participants were looking for at the end of last year. And I think it's led to this unsettled volatility in the market. I expect some of that to wash out over the course of the next month or two, but probably we're in for a little bit of a bumpy ride.

BRIAN SOZZI: Kate, so if confidence has been shaken, to your point, do you buy the dip here?

KATE MOORE: I think it matters what's in the dip, Brian. And this is really important, because there's some stuff that's been sold off more recently where fundamentals don't look as great. And then there are some companies that, as I mentioned before, that have really good earnings profiles, that have really strong free cash flow through the course of this year, but were trading at premium multiples to their peer group, to the other industries, to the rest of the market, and were really suffering from that multiple contraction as the accelerated rate hike cycle gets priced in.

So I guess they're saying there's some great stuff that you should be picking up right now, and other stuff that I think you have to be a little bit more cautious on. In particular, I would say it might be time to start hunting around in the tech and software space, some of those areas that have been disproportionately punished in the first six trading days of the year.

JULIE HYMAN: Kate on this front I was taken, in particular, in your note to us, what you called expensive tech stocks. But you had quotes around expensive, which I thought was funny because obviously a lot of people have pointed to the high valuations, relatively high valuations, of these stocks. How do you define expensive? What's worth it to you when you're looking across the tech sector and seeing historically high PE multiples, but maybe these stocks still have room to run, no matter what their valuations are?

KATE MOORE: Yeah, that's right, Julia. So valuation is a part but not necessarily the starting part of my investment process as a thematic investor. I'm looking for companies, and industries, and ideas that have real durability. Something where the overall addressable market is growing, where management teams are in the fast rivers, and whether it's innovation and a step change in terms of either behavior or growth in the space. And I think those types of investments deserve a premium valuation to the market, instead of just taking a few pennies here and there each quarter in terms of earnings. We're talking about dynamic change.

And I think we can stomach higher multiples for those fast-growing-- whether it's software, or systems, or consumer companies-- as long as the prospects for their growth are strong, not just in the next quarter, but I'd say like two years out. So I think this expensive tech concept-- and everyone keeps on talking about expensive and unprofitable tech-- but some of these companies deserve it. If the rate of growth is 3x what it is in other industries, well, they deserve a premium multiple.

BRIAN SOZZI: I think Kate, if anybody-- If anything, we were reminded of this week or as kick off this year is that sometimes you have to get outside of the day-to-day action, the markets, and just do focus on the long term. And to that end, what are some major investment themes you're looking out for over the next decade?

KATE MOORE: Yeah, Brian, it's a good point. And I will admit, just as much as anyone else, those first five trading days last week, I felt a little bit of anxiety. And I had to remind myself that not only is it a long year, but it's a long investment career, and it's important to really stay focused on these longer term trends.

There are few things that I'm very passionate about in terms of the thematic space at this point. Really excited about some of the consumer disruption and transformation that's happening, whether it's on the platform or the way consumers are interacting with financial services. So I'm really looking for changes in the consumer, digital transformation.

I mean one thing that companies have told us, universally, as they've gone into 2022 is that they're going to increase their spending on technology. Their budgets in that space are increasing and so that's very good for software and systems providers, and people who facilitate better business and increase efficiency of companies across industries. So I see a lot of digital transformation, a lot of spend on tech.

And the third thing I have to say in this, we probably talk about this a lot, is around climate. But there are tons of really interesting companies in the electric vehicle supply chain. We're getting more and more coming to market, but there are great opportunities globally on that space. And it's not just the carmakers in the EV space, for example, it's the battery makers, the lithium producers, the chip makers. So those are three of my favorite themes: disrupting the consumer, the digital transformation, and really thinking about climate and ESG opportunities around the globe.

JULIE HYMAN: And Kate, just quickly, I don't know if you then take the counter side of that. In other words, are there themes that you want to avoid this year on the flip side?

KATE MOORE: Yeah, I want to avoid companies, I was mentioning before, that have very slow trend growth rates. These are companies either within an industry that have not made the significant investments they need to in order to be competitive, or they're in industries that, frankly, are not going to benefit from what we think is going to be a strong cyclical growth environment. And so I would say some stuff in the consumer staples side, a little bit less exciting at this point. I think there's great opportunities industrials, and maybe less great opportunities industrials, so I think we would like to separate those out.

And in general, I would just look for those companies that have made these smart investments, as I was saying before, in software and systems that are going to allow them to really capitalize on better growth, and also withstand some of the inflationary pressures that have been sort of front and center of mind.

JULIE HYMAN: Lots of usable info. Thanks so much Kate, appreciate it. Kate Moore, Head of Thematic Strategy for the Global Allocation team at BlackRock. Really great to catch up with you this morning, appreciate it.