Quite a Few Interest Rate Cuts Could Be on the Way

All right. Well, joining us now to dive into what lies ahead in the second-half is Drew Pettitte, U.S. equity Strategist at Citibank. Drew, thanks for coming on the show here. What are your expectations for the second-half when it comes to stocks? So I'll start on the fundamental side. And honestly, I think it's ongoing earnings resilience and really strong fundamentals for the S&P 500. I know a lot of people are worried about the economy right now and in Main St. but we have to realize Wall Street's disconnected from that, especially in the last few years. So there's a lot of secular trends, AI being one. We can't talk about the market without talking about that theme. I think that's going to drive really good fundamentals in the second-half. And honestly, we're remaining positive even though we've had a really strong run run in the first half. Do you expect it to broaden out this rally beyond just AI, semiconductors and really specifically NVIDIA? Yeah, I think there's other themes that are actually working under the surface as well. So let's just be clear, There's a difference between broadening and leadership change. And honestly, leaderships been driven by companies that have strong earnings trends and upward earnings revisions, and AI is no exception there. But if you actually start looking at some of the consumer names as well, maybe not things but buying experiences or certain types of shopping experiences, you've actually seen certain consumer stocks do really well. Airlines have been taking off, Internet retailers still doing really well. So there are themes and more stocks under the surface that are working. So yes, broadening, but maybe not leadership change. Interesting. You mentioned earnings season that's going to kick off here and full force next week. What are the winners and losers that you expect to emerge from the second quarter? Look, I think it's the growth themes in the growth stocks are probably going to do well. I think you've seen really strong beats and raises there. I don't think the Q2 setup is really that onerous. Where you might get a little softness in the second-half is if we do have economic weakening, Q4 expectations might be a little bit harder. But honestly, I think the strong gets stronger at least in the near term. What are you seeing from the consumer and what could that tell us about the second-half? It's funny, it's will they spend on more than just experiences. So will the consumer broad now, will the consumer pull back in? Honestly to us, we're really focused on the themes, experiential commerce, Internet driven businesses. But maybe we could see durables kick in at least from a stock perspective if fundamentals bottom. That's another area where we're overweight, a little bit contrarian there. But honestly the S&P is driven by more than the consumer. It's more business spending right now. It's developing the next leg of technology that's going to be used within a lot of core industrial businesses. It's interesting that, Drew, we had seen toward the end of last quarter in the first half of the year, hedge funds taking some profits in some of these high flying technology names. Certainly the semiconductor saw a bit of a pull back there and NVIDIA down fractionally this morning. But we did have Sam Stovall, a guest and investment strategist from CFRA Research on Friday. He expects the pace of these games to slow with some volatility in the third quarter. Even though it sounds like you're still bullish on some of these growth names, do you think we could see some volatility ahead? Yeah. Look, I guess for Sam and I, we, we live on one side of the world. I think the buy Siders, the hedge fund managers, the active managers, I think it's just prudent risk management for them to take some of these gains on some of the high Flyers, especially in AII think they do probably redistribute them into some other AI plays that haven't moved as far and as fast. So yeah, that can create some chopping markets. I think it's really clear for my seat sentiments really high. It's just how do we break that when sentiments high when we have a lot of like high growth priced into the market already? Yeah, we could have volatility, but that's very normal. And I think a lot of both portfolio managers and and our strategists on the South side, I'll see that coming, especially with the election looming. Yeah, you mentioned the election. We saw the impact of French elections as they appear to be moving to the hard right and our debate debacle still very much in the news headlines. How do you expect the election to impact the rest of the way, that of this year? Well, it'll make comedy writers second-half a lot easier. But honestly, we got to see more of the nuts and bolts to policy come through. I think that's where the market's chopping sideways a little bit here trying to sort this out. You see some of the moves under the surface, but at a high level there's still a lot of puts and takes. We need some clarities. We need some clarity there and I think it'll take markets a little bit to digest that and really figure it out. So back to our earlier point, volatility ahead is expected and I think portfolio managers, the buy side are preparing for that. The markets usually like divided government that may be at risk here given the outcome of that election. A Republican sweep certainly seems a possibility. How would the markets react to that now on both sides speaking both the Republican sweeper, a Democratic sweep, there's actually market negatives on both sides. I, I, I know people don't really love that, that punt on this question, but if we get incremental change in government, businesses do react very well to that. That's very supportive fundamentally. But structurally, I'm not sure regulation is going to upend a lot of these structural trends we see in technology and efficiency gains. Corporates find a really good way to manage uncertainty and change. And I guess we're just bullish US corporates and we think they're going to figure that out. Here's a question for you. Certainly these large cap names Drew have performed quite well. I'm curious about the small caps. They have lagged. We are seeing some gains in small caps today, but not anything that would signal an out performance. Do you think that we might finally see some reprieve for some of these smaller names in the market, especially when we talk about breath structurally? No, no, make that very clear. You need the cyclical, you need Main Street to work and accelerate for earnings growth and small cap to inflect higher. You need rates to come down because these companies aren't as flush with cash like they're large cap peers. I think this is a very tough setup for small cap and the quip we usually make is why do you want to buy small cap stocks? You want to buy small cap stocks because you think they're going to become large cap stocks in the future. The problem is the large are getting better faster than the small companies are getting better. So it's hard to really buy into that kind of high level narrative right now. What's your take on the future for rates? How many cuts if you do anticipate cuts this year and next? And what would be that sweet spot, that target that could finally create some reprieve for small caps? So look at city economists are expecting a cut starting in September and I believe seven straight cuts the following meetings from there. To me that is a sweet spot for small cap to start working if the cuts are coming without the economy and the consumer aggressively faltering. So if we have cuts and a resilient economy, again, different from S&P 500 fundamentals, resilient economy, then small cap can work. You need the Goldilocks scenario for the Russell 2000 to really kick in. Can the Fed get inflation down to its target 2%? Ask our economists. Honestly, I, I do think they believe they need some labor market slowing from here. There are some kind of incremental signs they're seeing on, on the sides right now. They still project to slow down and unemployment to rise in the second-half. So it's, it's possible we could see inflation closer to target, you know, near the end of the year, beginning of next. Drew Pettit, U.S. equity strategist at Citibank. Drew, thank you.