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Tech earnings expected to grow into 2022: strategist

John Hancock Investment Management, Co-Chief Investment Strategist Matt Miskin, joins Yahoo Finance to discuss growth outlook for tech stocks, and Bitcoin’s reliability as an investment.

Video transcript

Joining us now for more on the markets is Matt Michigan, John Hancock Investment-- Investment Management co-chief, investment strategist Matt. Good to see you this morning here. One of the themes right now is a lot of folks on the street or, in fact, cutting their GDP forecasts for the year. Given that, I mean, should stocks still be trading at record highs? And what should you be doing with your portfolio?

MATT MISKIN: We do see a decelerating growth environment. And we think that the first quarter was really the peak. The end of the first quarter was really the peak in the economic growth rate.

But it doesn't mean that a recession is around the corner. We're still going to be growing at likely mid single digits here into the third quarter. And then as we get into next year, yeah, we think it's more like low single digit growth environment that we used to have in past cycles.

We believe we're in the middle of the cycle. And in terms of investor positioning, we would tilt more into quality stocks as we go into 2022 in the back half here. What we mean by quality is higher return on equity, better margins, stable earnings. Those are the kind of businesses we would gravitate towards as the economy goes into a more normalized growth rate into next year.

- Hey, Matt. It's Julie here. So do big tech companies qualify? Meet those various criteria. You're just talking about, of course, it's going to be a big week for tech earnings. And I'm curious if you think it's a good idea to own them, in what proportion, and how do you think they're going to do.

MATT MISKIN: So we are overweight or recommending an overweight to the technology sector. They are absolutely within the quality factor. In fact, it's the largest sector within the quality factor. If you ever want to check it out, it's just the MSCI USA quality index is one way to look at it.

These companies are throwing off cash. They've got great margins, great balance sheets. And is COVID lingers around likely longer than we thought. Just even a couple of months ago here in the COVID world, where we're likely going to not be reopening to the same extent. We're going to be relying heavily on technology.

And so earnings estimates this year for the technology sector, or sorry, for this quarter are up 20% year over year. The overall S&P is right now tracking about 100% earnings growth.

So technology not seeing the booming earnings growth. But a lot of the cyclicals are. But as we go into next year, the cyclical companies are going to have a harder time growing those earnings. We think tech is going to be better able to grow earnings sequentially from here. And we like that sector going into 2022.

- So then, Matt, as you think about obviously what was a huge rotation into more cyclically oriented areas of the market value. However, you want to kind of slice that pie. We all know the trade that took hold in November really through around March or April.

What's the status of that rotation? As we've seen tech kind of pick up the slack, do you think that you know the cyclical rally can have another leg in the second half of this year? Or these dynamics are outlining. You sort of saying we might be back to the Fang market of the late 2010s.

MATT MISKIN: Yeah. We wood trim some of the value side. We still like industrials. You know, low interest rates, a flattening treasury curve. Industrial companies like the lower borrowing costs. And you know, you kind of talked about some of them in the aerospace and defense side. You've got machinery. You've got transportation.

If we get an infrastructure bill, that can help in industrials. But we would be more selective. If you look at financials, they're going to struggle with a flattening yield curve, low treasury yields. We've got a Fed meeting this week as well.

We think the Fed's not going anywhere because the yield curve is so flat at this juncture. So you've got to be more selective on that value side, the cyclical side.

Another sector that's often under covered on the value side is actually health care, which is not cyclical. But it's trading at a 20% discount to the overall market on a forward PA basis. We like health care as well on that value side. So health care industrials, we still like on that side. But we would lean more into quality into the back half. Tilts a little bit further away from the cyclicals after such a huge jump in economic growth coming into this year.

- That crypto looks like it has hit a short term bottom. What percentage of your portfolio should be in crypto?

MATT MISKIN: We think that traditional asset classes still provide better risk adjusted returns. And I look, you know, at short term bottom will be interesting to see. I mean, we were downtrend here June. Or really peaked on April, May, June.

We hit about 29,000 on-- on Bitcoin. I thought that was the break because, I mean, it was a cliffhanger right around $30,000.

Now you're getting this pop. And I mean, they had a conference last week about pumping or talking about Bitcoin. You know, to us, what's driving the 10% jump this morning.

If you have no idea why something jumps 12% in the morning, and you're searching for clues on that, it's not a great fundamental investment strategy. So we still would look at more traditional asset classes. I mean, you talk about some of the benetech.

Yeah. In technology. You've got either credit cards. You've got PayPal. You've got other businesses that can have some element to that. And is a growth side engine of it. But otherwise, you know, that's as far as we would take it in terms of adding it to a portfolio.

- That's sort of on a related note. How are you thinking about the role of the retail investor in this market at this point in terms of their ability to push around not just crypto, but of course, smaller stocks? But bigger stocks too for that matter. Have you changed how you think about the retail investor how you factor what they're doing into your decisions?

MATT MISKIN: We haven't. But it definitely shows up day to day in it. To us, it's just not about getting whipsawed. And you know, if you see copper this morning is one that is jumping out, and it's hard to see kind of the fundamental thesis as much on some of these even on the commodity side that get all of a sudden these big jumps across cross asset.

And I think you just have to have that in the back of your mind that, hey, there is a big retail presence now. They are pushing a lot around a lot of capital. There's a lot of liquidity around.

And it really because the Fed's likely to remain super accommodative for-- for some time here, that is something that's going to be there. But we wouldn't overplay. It make sure the fundamentals support the investment thesis. Watch that.

Because just as fastly-- passes hot money can come into an investment, it can come out just as quick. And so when these things are pushing around, we wouldn't overplay it. Make sure you've got the fundamental thesis intact. And to us, right now the US equity market with the earnings and the fundamentals there, that remains our biggest allocation within a global balanced portfolio and really our highest conviction call.

- Got it. Matt Miskin, good to see you. John Hancock Investment Management, co-chief investment officer. Good to see you, Matt.