Do markets even need rate cuts with strong fundamentals?

Recent inflation data has complicated the path ahead for the Federal Reserve, with the timeline for interest rate cuts unclear. Kestra Investment Management CIO Kara Murphy and Spear Invest Founder and CIO Ivana Delevska join Market Domination to help investors navigate the bigger picture amid uncertain economic conditions.

Murphy points out the strength in the market despite Fed expectations: "Economic growth has been stronger, corporate earnings have been stronger. What we're finding is that there's some really good fundamental underpinning for the strength in equities, so yes, it might be a bit of a disappointment that we don't get the Fed rate cuts, but the fact is the economy just doesn't need it."

Delevska claims the market can reach new heights thanks to a shift to earnings: "We cover the technology sectors specifically, so we didn't like some of the more cyclical areas like semiconductors, you will see explosive growth, because earnings have really been under pressure, anywhere you look outside of AI. Then on the softer side, you're not going to see as being earning surprises, but those companies have really struggled to keep up their high-growth numbers. I think that is going to really change as we get into the second half."

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

This post was written by Nicholas Jacobino

Video transcript

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JULIE HYMAN: Surprising inflation data this week has complicated the path ahead for the Federal Reserve. It's now becoming a question of if perhaps, not when interest rates-- interest rate cuts will come in 2024. And we're looking at how to navigate the big picture with the Yahoo Finance Playbook. Joining us now, Karen Murphy, Kestra Investment Management CIO and Ivana Delevska, Spear Invest founder and CIO. Ladies, Thanks so much for being here. Appreciate it.

KARA MURPHY: Thanks for having us.

JULIE HYMAN: Kara, let's start with you. And yes, we've had the hotter CPI print, a little bit more reassuring perhaps on the PPI front. But if you're looking at the possibility that at the very least, cuts are going to get pushed back, we might not get as many. We might not get any. How do you think about then positioning, if that is the case?

KARA MURPHY: So if you think about where the market's been so far this year, we have the S&P 500 up about 10% so far this year. And in the meantime, Fed expectations for cuts have gone from seven cuts at the end of last year to what? One or two today. Normally, you would think that would take a lot of wind out of the sails of equities.

But as that's happened, economic growth has been stronger. Corporate earnings have been stronger. So what we're finding is that there's some really good fundamental underpinning for the strength in equities. So yes, it might be a bit of a disappointment that we don't get the Fed rate cuts. But the fact is the economy just doesn't need it. And so stocks are doing just fine on their own and don't need that little bit of extra help from the Fed.

JOSH LIPTON: And, Ivana, bring you in here as well. It's interesting, Ivana, because there was a point where I remember Apollos Torsten Slok says no cuts this year. And there was a point where Torsten kind of almost seemed like he was on an island. But we've had this drumbeat now of more economists and strategists kind of joining that camp. Ed Yardeni this week said now, no cuts. That's his base case. Can the market move higher even if we get no cuts this year?

IVANA DELEVSKA: I think it can. I think the focus is going to shift to earnings as we get into the second half of the year. And we see earnings that really bottomed last year. And we're going to see a pretty significant inflection as we get into the second half especially with comps getting significantly easier in 4Q because 4Q of 2023 was a very difficult quarter.

JOSH LIPTON: Can you quantify that, Ivana? What kind of corporate profit growth are you looking for? Well, it really depends by sector. We covered the technology sector specifically, so we didn't like some of the more cyclical areas like semiconductors. You're going to see explosive growth, right, because earnings have really been under pressure anywhere you look outside of AI.

Then on the software side, you're not going to see as big earnings surprises, but those companies have really struggled to keep up their high growth numbers. And I think that's going to really change as we get into second half. So it really depends like on the different-- even within sectors-- the different sub sectors, I think broadly for the economy.

I think we're much more positive on commodities. I think those have bottomed, and we're seeing those prices inflect in the second half. So all of those companies are going to see pretty strong earnings, I think depends on the sector. But broadly speaking, we see it across the board.

JULIE HYMAN: And, of course, we're about to start getting earnings for this current earnings reporting season tomorrow morning. We got a bunch of big banks. And so, Kara, as you look at these sectors and look at earnings growth that we should expect, I know that Ivana is tech-focused. You look pretty broadly here, so where are you looking for that growth to come from?

KARA MURPHY: So I think we agree in that there are a lot of tailwinds heading into the second half of the year. And we've only just started to see corporate earnings inflect. I mean, if you remember corporate earnings bottomed in the third quarter of last year. So we're only a couple of quarters into this resurgence.

Now, we do think that having a quality bias, given some of the continued headwinds with higher interest rates having that quality bias really helps. We also expect it to continue to broaden out a little bit. This has sort of been a theme we've been talking about. It's been happening very slowly, right?

So last year was so dominated by the Magnificent Seven. But we're starting to see some mid-caps and smaller cap names start to participate in this. And I think we'll see that continuing as we continue to see growth in the broad economy.