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There's still potential for market volatility: Strategist

Earnings season is crucial for setting the market's tone in 2024. While earnings results appear lackluster compared to previous years, is it still too early for investors to go all in on buying the dip?

"There's still potential for volatility here, so it's not too late to wait for a dip to get into the market, and certainly it's not too late to get into the market now if you know that you're going to be investing for the long term," Wells Fargo Investment Institute Investment Strategy Analyst Veronica Willis says to Yahoo Finance.

Willis comments on the defensive sectors she is favoring and what she is predicting from the Federal Reserve's interest rate cut timeline.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

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

Video transcript

AKIKO FUJITA: Well, continuing to continue their climb today as the AI euphoria that started last week spreads. We have big tech results out this week. And we'll be watching the impact they have on the market. Joining us now is Veronica Willis, Wells Fargo Investment Institute investment strategy analyst. Good to talk to you today. What's the one nugget you're watching going into what is a very packed earnings week?

VERONICA WILLIS: I think what we're going to be looking for today are-- we're still early in that earnings season, so there's not a really good trend in what's happening with earnings. And so seeing how many companies are beating those expectations, how many are meeting expectations, and who's falling short. Those companies that have really driven the rally, are those the same companies that are going to be beating expectations? And if so, is that going to make this rally more sustainable?

RACHELLE AKUFFO: And so, Veronica, we're seeing a lot of people wondering, you know, is now the time to buy the dip or is there another one to come? Because this rally, people are going to be wondering if these valuations really make sense once they pass through some of this earnings data. What are your thoughts there?

VERONICA WILLIS: I think there's still potential for volatility here, so it's not too late to wait for a dip to get into the market. And it's certainly not too late to get into the market now if you know that you're going to be investing for the long term.

There are still some uncertainties ahead, especially you all mentioned earlier in the program the market's expecting five to six rate cuts. That might be a little bit too aggressive. So if the Fed doesn't comply with that, that's going to be a source of volatility for the market. So there might be kind of a dip and an opportunity there to reinvest.

AKIKO FUJITA: Veronica, when you talk about the dip, where are the opportunities you're looking at right now? Any particular sectors that you think are really good value?

VERONICA WILLIS: Yeah. Right now, we're focused on some of those sectors that have a little bit more defensive characteristics. So we like energy, we like health care, we like industrials, and we like materials. We're expecting a bit of a slowdown in the first half of this year. So we think those four receptors are going to be best positioned to insulate portfolios during volatility and during a slowdown before eventually moving to be more cyclical later in the year.

RACHELLE AKUFFO: And obviously, you're seeing investors wanting to chase those yields, wanting to chase what they're seeing with big tech. You mentioned some of these defensive sectors here. What will be their turnaround point because they were already beaten up pretty severely last year?

VERONICA WILLIS: Yeah. I think the economic conditions have been a lot more resilient than I think we were expecting. And so some of those defensive types of sectors suffered while the economy was still doing really great. We're going to get that advance reading of the fourth quarter GDP later this week. Expectations are calling for that growth to still come in good, but definitely to be slower than what we saw for third quarter last year.

So we're already starting to see some of that slowdown of the economic growth. And I think once the Fed kind of makes clear what their path is when it comes to the timing of any potential rate cuts, there might be this aha moment for the markets where those more defensive types of sectors will really have their moment to shine.

AKIKO FUJITA: Veronica, what's the base case you're operating under in your investment when you talk about the timing for the Fed? Are you expecting a rate cut come March?

VERONICA WILLIS: I think March is a little bit too early. Even May might be a little bit too early. So thinking in the summer, maybe in the second half of the year, that might be when the Fed actually starts to cut rates. The economy has in OK. And a lot of the policymakers have spoken about being comfortable with where rates are because the economy has so far been able to withstand it.

RACHELLE AKUFFO: We'll certainly continue to track that. Appreciate you joining us this morning. Veronica Willis, Wells Fargo Investment Institute investment strategy analyst, thank you so much.