The market right now is siding with the Fed: Analyst

Dan Eye, Fort Pitt Capital Group Head of Asset Allocation and Equity Research joins the Yahoo Finance Live panel to discuss the latest in markets.

Video transcript

ZACK GUZMAN: I want to shift from literal plumbing to the financial plumbing. We're waiting for the updates there from the Fed tomorrow when it comes to that close eye there on inflation expectations, as well as potential tapering talk, though the expectation is not necessarily for that to come here at this Fed meeting.

But for more on how the markets might be bracing for things, want to bring on Dan Eye, Fort Pitt Capital Group, Head of Asset Allocation and Equity Research joins us right now.

And Dan, when we look at this, it's been interesting. We've been talking all day about where the 10-year is sitting right now and how inflation expectations have been coming down. What do you expect, though, for what that means for the market, given what we might hear from the Fed in tomorrow's meeting?

DAN EYE: You know, I think that's really an interesting dynamic between the hot inflation reports that we've seen and then this pullback in bond yields, inflation breakevens. I'd even put, you know, commodity prices in that category as well. We've seen, you know, lumber prices down 40% in the last month and a half or so.

So I think, you know, the market right now is really siding with, you know, the Fed's view that the inflation pick up that we're seeing right now is transitory. And you know, time will tell if that's correct. But you know, judging by market activity over the last month or so, we'd say that the market is siding with the Fed. And I think that's really evident in the outperformance that we've seen from growth stocks compared to value over the last four weeks or so.

AKIKO FUJITA: With that said, Dan, the expectation seems to be even if the inflation is transitory, we're going to continue to see that number tick up higher in the coming months. What's the hedge for you in terms of your trade? If you're anticipating it to creep up even higher, how do you position yourself?

DAN EYE: Well, I think we still have a very balanced and diversified portfolio with a significant amount of exposure to value stocks and the cyclically oriented equities as well. But you know, I don't think you want to make an all-in bet that the inflation readings or data is going to continue to move higher from from here and make a huge bet in that area, you know. We're not abandoning or moving away from our higher growth stocks, from our technology stocks either. So we think a balanced and diversified approach is the best way to play the current environment.

And I think, you know, just if we look at the the recent May inflation report, it was a hot report, but it was also the first report where we saw a month-over-month decline in headline inflation since October. So I think the market is looking at it as a sign that maybe we've seen somewhat of a near-term peak her in terms of the rate of change with inflation readings.

ZACK GUZMAN: And Dan, when we look at your specific picks here, interesting to see Broadcom in there. We talk a lot about semiconductors and how they're shaping up here, and a lot of the demand and supply bottleneck effects here from the pandemic. And when you look at Broadcom, what stands out to you as maybe why you would want to pick that stock over some of the other players in that space?

DAN EYE: Broadcom has just a really diversified exposure to what we view as very attractive end markets, like wireless, data center, and networking. We also like their enterprise software business, which is posting steady growth. And a significant amount of their revenue, more than 90%, is recurring. So very visible, which we like. And Broadcom just generates extremely attractive margins. They're a cash flow machine, which is allowing them to de-leverage their balance sheet and raise their dividend by double digit amounts on an annual basis, which we expect to continue. So we just think the stock offers a very attractive combination of earnings growth, free cash flow generation, valuation, and dividend yield that's hard to find

AKIKO FUJITA: And Dan, another stock you've highlighted in the healthcare space this time, Baxter International. This is an interesting one for me, because last year we talked so much about elective procedures being delayed. And obviously, there is a sort of a backlog, if you will, given all of the delays from last year. How big of a pick up are you anticipating on that front?

DAN EYE: Yeah. So that's that's a great point. And Baxter had a rough year in 2020 because of lower hospital admissions and, as you mentioned, the deferral of elective procedures. But we expect by the end of the year hospital admissions are back to pre-pandemic levels. We're already seeing a significant pick up in surgical volumes. So we think in 2021 Baxter gets back to their winning ways of double digit earnings growth, consistent margin expansion. The company has a very clean balance sheet which gives them a lot of flexibility and optionality to look at accretive acquisitions and to return cash to shareholders and trades at a pretty significant discount to its peers.

So we like Baxter in 2021, and we think they've got a long runway for growth.

AKIKO FUJITA: Dan Eye, Fort Pitt Capital Group, Head of Asset Allocation and Equity Research. Good to talk to you today.