Strategist breaks down debt ceiling default impact, earnings season, consumer spending

Oppenheimer Chief Investment Strategist John Stoltzfus joins the Yahoo Finance Live show to discuss the market view on the debt ceiling dilemma and its impact, inflation, Fed rate expectations, and trends on consumer spending.

Video Transcript

JULIE HYMAN: Well, as we've been talking about, we're fast approaching the date the US could default on its debt for the first time. Though, still seen as very unlikely, at least by market participants, it's dominated the headlines in recent weeks as that deadline approaches. Wall Street, however, doesn't appear that concerned. Over 70% of respondents in Bank of America's latest fund manager survey said they do expect the government to reach a resolution.

This as investors enjoy positive returns year-to-date, seemingly looking beyond the current day-to-day concerns. Let's get more on the impact from markets with Oppenheimer Chief Investment Strategist, John Stoltzfus. John, it's great to see you. You just heard what we were talking about with the Senator there.

The market thinks something is going to get resolved here. Does it matter how? In other words, if it's an 11th hour agreement, if it's the invocation of the 14th Amendment, whatever it is, does the market care how it gets done?

JOHN STOLTZFUS: Well, thanks for having me on, Julie. Always great to be on with you on Yahoo Finance. And let me just tell you, I think it does matter in the sense that they got to come to a deal, not a dramatic-- It can be an 11th hour agreement, but not one of these things where they get into a whole constitutional argument about whether it's the right thing to do or the wrong thing.

I think the reality is in the last 10 days or so, it began to be realized by the politicians on both sides of the aisle that whomever is tied or to whomever would be tied to a default of the US would likely be committing political suicide. And that's why I think we've seen the positive developments since last week where they're bringing in the team members of both sides to do carry on discussions, weekend discussions, day-to-day discussions, and then bringing in the chiefs to show that they're behind this effort.

So we feel remarkably confident based on all the worry that's out there that we're going to get a deal done. It might be an 11th hour, but they could even surprise us, because both sides do seem to realize, again, can we can't stress it enough and we wrote it about two weeks ago, it's political suicide, is what we believe, because there are constituencies. Lael Brainard over the weekend said, essentially, it would affect things like automobile loans, mortgages, retirees' paychecks, things like that. This brings it on home and politicians know one thing, if nothing else, they know how to get reelected, and that's serve your constituents, both sides of the aisle, is what we'd say.

BRAD SMITH: John, as we were just listening to the Senator from the Oriole state, he was lining up some of the areas where we could see cuts, even as a result of the negotiations that take place. And if there's anything that investors can extrapolate from those areas, defense, education, health care, energy, and how they might come up in future negotiations, is there any type of pivot or at least repositioning they should be considering, knowing that those are some of the sectors that could be hit in future negotiations as well, even aside from this debt ceiling debate?

JOHN STOLTZFUS: Well, I'd have to say this, it would appear that this time around, it's another take it to the limit one more time kind of event. I think it's beginning to get quite clear in Washington D.C. that these are issues, as I said before, it's these are felt on Main Street, what you mentioned. And when it comes to defense, the defense is recognized on Main Street because of our forces that serve around the world, as well as people, they watch the news and they see what's going on. I think if anything, both President Xia of China and Vladimir Putin, in his incursion into Ukraine over the course of the last year, and President Xia's support, as much as it's been supportive of Putin, essentially has awakened people to the fact that a military problem does exist. It's not just about trade.

JULIE HYMAN: Yeah. Most definitely not just about trade. And I should say also that the market action right now isn't just about the debt ceiling, it isn't just about geopolitics, it's about the Fed. And with that, I want to bring up some comments that we got from Dallas Fed President, Lorie Logan, this morning, that the economic data we've gotten thus far does not justify skipping a rate increase at the June meeting. I think that caused a little bit of early market consternation here. What do you make of that and what do you think happens in June?

JOHN STOLTZFUS: Well, Julie, we've been big believers that the Fed was would be likely to raise another time 25 bps in June when it comes out of that meeting. The economic data of late, particularly related to inflation, has shown that the Fed most certainly, its activities to remove hyper liquidity from the system and a period of free money, essentially, which is not good for anybody really. What they are essentially doing here is battling inflation and they've been remarkably successful versus all their naysayers have said they would fail in that they have cut the CPI, both the core, as I recall, and the headline number, just by about half, not quite half. And they've still got another half to go to get close to that 2% marker.

So we think they're going to raise again and we don't think they're going to cut this year the way some people think. And we think overall, the market, while it has some of the best heard voices on Wall Street, we would say, are those who talk about cuts and things and expectations like that, we'd say the underlying trend is we think the market has a goal beyond and is looking to resolution of this debt ceiling business is looking for the Fed to continue to be very sensitive in activity, if we consider that it did raise 4 times in a row 75 bps, then dropped to 50, then these 25 bps cuts. This is likely to go on for a while.

JULIE HYMAN: OK. So John, just quickly then, say hopefully the debt ceiling crisis is wrapped up by the time we get to the Fed's meeting. Let's say they raise. What is that going to do the market? It doesn't seem like that is necessarily priced in right now.

JOHN STOLTZFUS: Well, the thing about it is I think the news from the Fed, at least up through the most recent hike, was expectations of a hike. And if you look at the performance of the S&P 500 sectors on a year-to-date basis it is not all technology. It's communication services, which is heavy and tech, up 29%. Information technology-- I can't believe this myself looking at it, but since the end of last year, is up 25%.

Consumer discretionary is up 17% and staples is only up 1.86%, which is a defensive sector. So the market is showing a remarkable confidence. It's also some of the developments around AI, of course, have boosted sentiment towards technology naturally, which was brutally oversold last year. And lastly, I know that we got to roll on this.

And related to consumer discretionary, the consumer has been remarkably resilient, not necessarily robust, and has become more cautious. But compared to where we might be in other cycles that were tightening cycles, we're doing remarkably well. And some of that may have just been the over-stimulation.

BRAD SMITH: Yeah. You mentioned the magical potion that AI has seemingly been over the course of this earnings season. Earnings season is wrapping up. So let's take a look back at what we've learned this quarter. Sure, we've seen more beats than misses, but that's not the real story here.

Among the 11 sectors of the S&P 500, only 4 are showing earnings growth, while 7 are seeing decline. And the consumer discretionary, one of the biggest winners this season in that sector with double digit earnings growth showing resilience in the US consumer. John Stoltzfus is with us, and for this earnings season scorecard here, John, what grade would you give it?

JOHN STOLTZFUS: I would say I'd give it a B plus. How's that? I hope I'm not too liberal a professor at giving it a good grade, but when I look at it, just think of it, when you've got an energy, which you would expect, double digits right now. I'm looking earnings up 13.73%, industrials up 20.36%, and consumer discretionary up 23.8.

Now, that's three very cyclical sectors and they're also, curiously enough, they're value-oriented and they're showing double-digit earnings in a tough environment. Wherein we saw oil prices roll back considerably, even with the OPEC Plus announcement. Oil is not, like, headed to the moon yet.

And so what we've got to say is, especially consumer discretionary and industrials, it shows an interest in fundamentals. And when we see the worst-- I'm looking here on my screen here. I think the worst performer is materials, which would essentially say, it's not about mining stocks at this point, really, if we look at it in terms of where the vote is coming from earnings results.

JULIE HYMAN: When I listen to the commentary for many of these companies, though, they do sound more cautious. And particularly, since we're in the midst of the consumer discretionary reporting season with Target, with Walmart, although Walmart is more of a staples, I guess you could argue. But the point is, a lot of them are saying people are still not spending on larger ticket items. They're expressing some caution. Do you think they're just sort of managing expectations lower or do you think, are you concerned about that kind of a slowdown in the second half?

JOHN STOLTZFUS: Well, a couple of things. One is we saw robust consumer activity as a result of all the stimulus during the pandemic and then immediately coming out of it. Then a shift from goods to services. And when it comes to the companies and how they position themselves, I can only remember most of last year, wasn't it the great headline all the time was 98% of corporate chieftains were saying that we were headed into a recession. But when they were asked about their own business, they tended to be cautiously optimistic.

And in this case, I think what they're doing is they're just trying to reduce expectations, as you say, offering an opportunity to surprise to the upside. But also, the reality is, there is a lot of uncertainty out there, but that tends to be what the market likes when people, the investment community market participants, on a broad basis have been overly negative. And we have been seeing some fairly hardcore bears of late, in the last few days, beginning to look like they're pivoting, if not exactly like capitulating.

BRAD SMITH: John, thanks so much for helping us break down and put a bow on this earnings season. I mean, of course, there's still a few more companies to come, some household names. But that is John Stoltzfus who is the Oppenheimer Chief Investment Strategist. John, always a pleasure to speak with you.

JOHN STOLTZFUS: Thank you.