Fed cuts are on the horizon, 'even if they're pushed off', says BNY Investments' Jake Jolly

Get to our market panel, Lori Caldesina of RBC Capital Markets and Jake Jolly of BNY Mellon Investment Management. Guys. Welcome, Lori. So looking at this software move today, names like Adobe, Salesforce, even on the smaller end, Asana quite a bit higher. Makes me wonder how vulnerable is this broader market to a moment of AI disillusionment since AI is so much the story with I think you say the median forward price to earnings ratio of the 10 biggest stocks is near 30. It is it recently got as high as I think 29.8 times and it hasn't really been able to break above that 30 times level if you look at recent highs kind of post pandemic. So we've got a trade that's generally full in terms of valuations. If you look at the mag seven names as kind of a proxy for either the AI trade, you know, or kind of the high flying mega cap growth stocks that ones also seen, you know, tremendous earnings growth if you look back. But if you look forward, you're seeing pretty healthy growth rates, but they're decelerating and losing their advantage relative to the rest of the market. And if there's something I've learned in my 2 decades on Wall Street, when you've got expensive valuations and you've got decelerating growth rates from astronomical levels, it's really, really there. There's just not a lot of margin for error. And I think that's what we're starting to see with some of these reactions. Well, that being said, still, Jake, you say even if there's no decisively good news coming out soon, the overall market can keep creeping higher if we're just muddling through. Why? Yeah, I think that's right. I mean, when we look at the macro backdrop and that's really what my team focuses on, this is still a backdrop that I think is generally supportive for, for risky assets and equities because you know, we're going to see moderating growth, but it's going to be positive. We think it's very unlikely to be recessionary. We think that those cuts from the Fed are on the horizon even if they get pushed off a little bit. And I think maybe most importantly, when we look at the earnings backdrop, the earnings picture I think is broadly pretty positive. You know, we are, you know, I think seeing some of that weakness at the at the top of the market and some jitteriness coming from that. But when you look at the, you know, other 493, I think there's a lot of positive momentum there. You're seeing, I think that broadening out in the earnings picture. And I think the sooner we can get to a place where we're not playing sort of the monetary policy guessing game, we can really focus on fundamentals. I think the market will come to appreciate the fact that we're still have positive growth. We're going to get some easing on the horizon. And generally I think that's going to be pretty positive for this market. Now that might take a few quarters to play out, but I think the set up here is, is still relatively positive into 2025. I guess we'll have to see how the fundamentals look by then a couple of quarters from now. Laura, you also say you're not bearish. Yeah, but you call yourself a tired bull, a tired bull and and I'm someone use the term aggressively neutral to me recently. And I think that's a great phrase. Look, the reality is it's not just about whether you're growing, right. If you actually look historically at the economy, zero to 2% GDP, the stock market usually goes down in that kind of environment. Markets don't like sluggish growth. You really need to transcend the 2% GDP environment kind of getting that 2 to 4% or higher sweet spot to see stocks go up. And I think the the problem we've got right now, right, is we've got the squishy consumer. We're hearing, you know, some of that from some of the earnings reports we've had today. The evidence just keeps piling on week after week. And well, you know, I'm not in the recession camp by any stretch. I do think there are a lot of powerful consumer buffers. I do think the consumer is pretty darn mad about inflation and doing something about it. And so we've got to work through that. And if you look at GDP forecast for next year, they're still sitting at about 1.8%. And if you look at this year, they're sitting around 2-3. They've actually gone down a little bit recently. We haven't seen them move up. If you go back to February and March when we were having all the this excitement in markets, you were seeing a quick ratcheting up of GDP expectations. So, you know, all this sort of squishy consumer labor backdrop easing a little bit, maybe the Fed cuts a little sooner, that all comes against the backdrop of a squishier kind of tailwinds dissipating on the economic front. It's a tough environment for stocks to navigate. And we're about to find out how Nike did with it. Jake, I want to finish with you and actually ask about bonds. Inflation uncertainty has had them in limbo, you point out. But for people who aren't trying to time the market and get total return, they're really focused on the yield in their portfolios. You think they're going to be mad in five years that they locked in here. I think they're going to be mad if they missed it. You know, this is a very high yield, you know, broadly speaking, market environment for bonds. And you know, when you think about what we experienced throughout the 20 tens, you know, getting to today and you know where the tenure is, you know, it's still a very attractive entry point. Now I think, you know, if you think about the last year, there's been a lot of frustration because everybody said, oh, you know, this is the time to extend, get out the curve, really lock in that, that duration. And you really haven't gotten a lot of bang for your buck because we've had so much inflation uncertainty. But I think, you know, now the confidence level that we're going to start an easing cycle is just much higher. And even though we're not expecting, you know, an aggressive rates rally in the near term, I think it's still a very attractive entry point for for high quality bonds. And you know, when you think about this a couple of years down the road, I think you're going to be happy that you you lock that in and built it into your portfolio because you know, we think out these things in the total portfolio context. And we do think that bonds are going to start to play that ballast in the portfolio that they have historically. That's not to say that you know, equities aren't going to outperform, but we think that the bonds is really going to provide that stability that it has historically.