Why markets are moving into 'positive environment for risk assets'

US equities have bounced back (^DJI, ^IXIC, ^GSPC) from their losing streak over the past several trading sessions. As the first quarter of 2024 comes to a close at the end of this trading week, markets could be on the path for a breakout quarter.

PGIM Quantitative Solutions CIO George Patterson joins Yahoo Finance's Market Domination the environment the Federal Reserve's interest rates have created for stocks, including small caps and meme trades.

"It's going to be a positive environment for risk assets," Patterson explains. "That said, we do see opportunities outside of the Magnificent Seven — or maybe the Magnificent Six these days — small cap, micro cap, our segments of the markets that have really been ignored or have not participated and there's still a lot of very attractive opportunities there that I think make sense for an investor with a medium-term horizon."

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

Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

JOSH LIPTON: With stocks rebounding after a few down days, it's kind of an unusual occurrence for the markets here. Again, the bullish start to 2024. So with volatility outside of mega-cap stocks remaining high, what's the best way to position your portfolio right now? Our first guest today is looking at areas beyond the Magnificent Seven to focus on.

Let's welcome in George Patterson, the CIO for PGIM Quantitative Solutions. George, it is good to see you. So, listen, the S&P 500, George, is on track here for its best first quarter since 2019. What do you think, George? We just kind of keep grinding higher here in the near to intermediate term?

GEORGE PATTERSON: Well, the overall economy seems to be holding up very well. The Fed has been raising rates or held rates high as we've heard. Inflation is moving in their direction. And for many years, for the last year, everyone was talking about a recession or a hard landing. A lot of that talk is really disappeared.

So I think it's going to be a positive environment for risk assets. That said, we do see opportunities outside of the Magnificent Seven, or maybe the Magnificent Six these days. Small cap, micro-cap, our segments of the markets that really have been ignored or have not participated. And there's still a lot of very attractive opportunities there that I think make sense for an investor with a medium term horizon.

JARED BLIKRE: Well, George, let's talk about some of those opportunities. And you can mention some specific names or areas among the small caps and micro-caps that you might mention. Of course, the Russell 2000 pretty far from a record high unlike the other indices. But it's been trying to break out recently. I'm just wondering if we get some momentum in the small caps and micro-caps, where are you going to look for that action to reside?

GEORGE PATTERSON: Well, small cap and micro-cap are very interesting. There's definitely a lot of newer higher growth companies. But there's also some companies that used to be large cap and have kind of descended back into the world of small cap or micro-cap.

So, you know, I think really it boils down to growth. I mean, people are paying a very big multiple for the top end of the S&P 500. And there still are some great growth opportunities further down in small cap or micro-cap.

For example, one of the sectors that we're very interested in and we see opportunities a bit more of the speculative nature, which is biotech. If you look at small cap biotech companies, there are definitely some interesting opportunities where there are positive drug pipelines.

And at the same time, large cap, mega cap companies have record balance sheets. They have a lot of cash. They're looking to get to market quickly. And there's a lot of ripe M&A opportunities in that segment of the market.

JOSH LIPTON: George, what do you make of some of the kind of meme like moves we're seeing in some parts of the market, George, right now? You just see some of the moves that have been going on. And you think of Reddit, you think of Donald Trump's media company. What are investors to make of that?

GEORGE PATTERSON: Listen, you just have to be aware that there are some stocks that get extremely driven by just short-term sentiment. And they're not looking at fundamentals. I think my view is that in the long run, this is kind of really what drives us at PGIM quantitative solutions.

You need to pay attention to fundamentals in the long run. And the short-term, you can get a movement away from fundamentals where something. There's a little bit of a herding either on the positive side or on the negative side. But long-term at the end of the day, what drives equity is earnings or expectations of future earnings.

So those expectations can be high. But at some point, you do have to actually deliver the earnings.