Earnings is an offesting factor to inflation: Strategist

Maxwell Grinacoff, BNP Paribas Equities Derivative Strategist joins the Yahoo Finance Live panel with the latest market action.

Video transcript

ZACK GUZMAN: Max Grinacoff joins us right now, BNP Paribas Equities Derivative Strategist. And Max, when we look at what we're seeing play out, just curious to get kind of your take on this rotation we've been seeing, but also the inflation fears, what you're making of maybe the market moves we've seen thus far.

MAX GRINACOFF: Yeah, thanks for having me on. Yeah, look, inflation is certainly top of mind for everyone right now. I've been in the business for a decade, and I've yet to see inflation essentially until last week. So it's been a bit of a surprise for myself and our clients alike. But what we ultimately care about is what is the ultimate impact to equity markets.

So we see two main risks. The first is whether higher inflation will ultimately guide the Fed's hand in terms of pushing up the timeline for tapering asset purchases or hiking rates. And this risk of a, quote unquote, "temper tantrum 2.0 scenario," as we've been calling it, is one risk we've been highlighting to clients since the start of the year. So, the risk for a broader correction in this scenario, we do think it would ultimately be more shallow, and call it short-lived in nature. But worth noting-- you bring up growth-- and we also see growth-oriented equities more at risk in this scenario.

So, hearken back to February of this year when yields really started to accelerate. And you saw something like the NASDAQ 100 down over 10% versus the S&P down less than 3%. So that's certainly something we've been watching. And a lot of discussion with clients has been around hedging their growth exposure via optionality in tech or growth-oriented ETFs in the ETF space, but also gaining exposure via that value growth rotation, which has been a good success story for us.

AKIKO FUJITA: Yeah, Max, I was going to ask you about that hedge. I mean, can you elaborate a bit more on what those plays are when you talk about these growth oriented plays or ETFs?

MAX GRINACOFF: Yeah, that's a great question. So we look as simple as something like very simple downside structures in tech or or growth oriented ETFs. But not even so much on the growth hedge side, but also the value growth rotations, like I said, is a strategy that we've seen play out significantly well since Q4 of last year, which is when we started pitching this strategy to clients.

And then, on top of that, we also look at it more from a sector perspective. So I want to talk about a second risk being inflation-- higher inflation in and of itself. So higher inflation leading to higher input costs and margin pressures for corporates is a risk that we've been hearing, especially post this last Q1 earnings season, particularly given the supply side driven, commodity driven reflation story that we've seen. And for that reason, we've actually turned even more bullish on value or cyclical oriented sectors like industrials or materials, who could actually stand to benefit more from this commodity driven reflation story that we've seen.

ZACK GUZMAN: Yeah, that's an important distinction there. And I wonder also, too, I mean, when we kind of build in some of these expectations into next year, it's kind of difficult to maybe plan some of these things out. But one thing that we do see, at least, marginal progress being made on is President Biden's infrastructure plan. And of course, Janet Yellen out, kind of selling the benefits of it today. But when you dig into that, how does that maybe impact another boost to some of those names and industries you're seeing tied to maybe industrials or kind of that push in infrastructure spending?

MAX GRINACOFF: Yeah, that's a great question. So I'll start off by focusing on the earnings story, and then I'll move into why we think via that story the infrastructure and sort of tax risks are very pertinent for us and our clients right now. So, you know, earnings is very much an offsetting factor to the macro risks, like inflation that I just stated, especially with equity valuations looking pretty stretched. I'm sure I'm not the first one to say that.

We just came out of a very strong Q1 earnings season. Corporates delivered strong numbers. The price action was pretty uninspiring, to say the least, especially in the growth or tech oriented space. But we think the reason for that is that forward guidance from a lot of these corporates was essentially don't necessarily expect this pace of earnings growth for Q2, Q3, and beyond. So ultimately, on our side, we think the delivery of realized backdated earnings is much less pertinent than upgrades or downgrades to earnings forecasts. So bringing up earnings forecasts, earnings are not just at risk due to higher margin pressures, like I mentioned before. But the real double whammy is the tax story.

So the Biden administration has, of course, proposed corporate tax hikes as a funding mechanism for the infrastructure focused Build Back Better plan. So one of our highest conviction themes for this year more recently, especially, has been this-- trading this infrastructure versus tax theme, so trading the contrast between names that lie within sectors and industries who we could see stand to benefit more from an infrastructure focused fiscal stimulus bill, and, again, contrasting against that names who could see more of a negative impact from corporate tax hikes, so those that have essentially the lowest effective tax rates post the Tax Cuts and Jobs Act passed by the previous administration.

ZACK GUZMAN: Yeah, we're going to get more into why Janet Yellen thinks that it's a net positive for the economy as a whole. But interesting to see how it's going to impact different players here. BNP Paribas Equities Derivative Strategist Max Grinacoff, appreciate you coming on here to chat with us today. Be well.