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Wall Street strategists are becoming more bullish: Start of a trend or sign of a bubble?

Bespoke Investment Group Co-Founder Paul Hickey and BNP Paribas U.S. Economist Yelena Shulyatyeva tell Yahoo Finance Live what they are expecting in the markets over the coming months.

Video transcript

- As strategists are feeling bullish about the S&P 500 or at least, more bullish, less bearish, thanks to a better than expected earnings season. RBC Capital Markets is raising its year end price target for the index with the head of US equity strategy Lori Calvasina writing the more durable margins and investor negativity could actually generate more opportunity for equities in the year ahead. She's forecasting a 10% bump in the index.

Now, earnings this quarter did decline 2.1% from the prior year. But that fall is much better than what analysts were expecting the projected 6.8% drop at the beginning of the quarter. With the S&P 500 higher so far this year, is that upward trend going to hold steady or signs of a bubble that may soon burst? We're going to get back to Yelena Shulyatyeva, who is BNP Paribas US economist, and Paul Hickey, Bespoke Investment Group co-founder.

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Paul, I want to talk to you about "breath," my friend, because I know that is something that you have been watching closely. Yes, there is the earnings thesis, if you will, but there's also this idea that the big stocks have been dragging the rest of the market along. And in your latest note, you had some really great charts to illustrate this.

One of them showing that the largest stocks are up a lot, the smallest stocks have not done well, and again, have been sort of dragging along. What does that mean for the future returns here?

PAUL HICKEY: Well, so you see, like as you said, so the 50 largest stocks in the S&P 500 over the last three months are up 11%, 50 smallest are down 11%. So you just have seen this real dichotomy of returns. And immediately, whenever this comes up, people think back to 1999, 2000 when you saw a few tech stocks leading the market and the rest of the market was just slagging along, not doing anything.

So that's not the only time that that kind of disparity has happened. And when you look at other periods, there's not a very large sample size. But when you look at periods where the S&P say 100, which is 100 largest stocks, outperformed the broader index by a wide margin, what you tended to see going forward more often than not was tend to see the S&P 500 start to catch up to the larger stocks.

So in that respect, you tend to see not necessarily the largest stocks then pulling everything down further, you tend to see a widening out of the breadth of the market, which tends to-- which would suggest some positive things going forward here. So in that respect, I wouldn't put too much credence on the 1999, 2000 example, and I would just put more credence on some of these other examples that are highlighted in the chart you're showing right now.

- And for Q1, even as we think about earnings being better than expected, in many cases, it was better than what was feared as well by many analysts who were tracking already lowered expectations coming into this earnings season too.

YELENA SHULYATYEVA: Well, that also applies to economic data. So we continue to be surprised by how strong the data are, right, and coming in. And you just cannot see this rapid drop in economic statistics.

So to the point of the breadth, though, I would like to add that the US economy as well is experiencing the lack of diversification and growth. So like, you see growth is concentrated into services spending. So we all want to go on vacations after we were stuck at homes for such a long time. So we are spending on services. We're spending on going out to restaurants. We're spending on vacations, Disney World, all these things, so.

- Speaking for yourself.

[LAUGHTER]

YELENA SHULYATYEVA: Yes. But in any case, when growth is so concentrated to one component, to one driver, this makes the economy vulnerable to exogenous shocks. So if something happens along the line, right, some issue with debt limit or any other external shock, that will put the economy in a very vulnerable position. And I think that could push us over the edge and into a recession. But for now, things are looking brighter than we were expecting.

- Well, on a similar front, when we're talking about lack of diversification, not only have things been concentrated in the equity market in big tech. It's really been all about AI, Paul. And even more narrowly, you could argue a lot of it's been about Nvidia, right?

And you also, in your note, looked at the strength we've seen in chip stocks that you point out, it's not just Nvidia. Many of the other chip stocks have also been doing really well. But the outperformance of the Philadelphia Semiconductor Index versus the S&P 500 has been notable. Is it a leading indicator as it usually is, or is there just too much focus and obsession there right now?

PAUL HICKEY: I mean, I think there is some obsession here. You saw that yesterday in the market. You saw the semi stocks, you saw stocks like Broadcom open sharply higher and sell off. So a lot of these tech stocks sell off in the short term. So they've gotten ahead of themselves.

The tech sector is more overbought based on the short-term trading above its 50-day moving average. And it's been at any time since 2004, that was as of the end of last week. So it's been a monster move in the sector. So you need some of that froth to cool off and at least, pause and catch your breath.

But the semis have been a leading indicator of the broader economy and the broader market for several years now, and they have been outperforming and they are right near new highs in relative strength. And yes, Nvidia has been a lot of that. But as you brought up, Nvidia hasn't been the only stock. And most of the stocks in the Philadelphia Semiconductor Index are vastly outperforming the broader market.

So that tells us-- that gives us positive signals for the overall market going forward. And it's just one of several factors that keeps us positive on the market, even when you see some weak economic data in the form of leading indicators or weak manufacturing activity.

- And Paul, I also just quickly wanted to ask you. I mean, I think of you as the guy who looks at these sort of historical comparisons and analogs in the market. And everybody is bringing up the dot-com era. I also think of when everybody was obsessed with blockchain or even metaverse more recently, and then they didn't really pan out as hoped. What's the best analog for the AI bubble if it is a bubble, and what's going to happen?

PAUL HICKEY: That's a great question. I don't have necessarily an answer. But if you look at, say Google Trends searches for certain terms, you tend to-- AI has been just off the charts here. So again, I think it has a ways to be played out here. And there are some areas of froth, but I don't think we've seen nearly the level of froth in the broader market with AI than we have when we did in the dot-com in say, March, 2000. I don't think we're at those levels by any stretch yet.

- All right, Paul Hickey who was the Bespoke Investment Group co-founder, as well as Yelena Shulyatyeva who is joining us and sticking around as well, Paul. Thanks so much for joining us this morning.