Transcript:
Caroline Woods
Joining me now, Justin Bergner, portfolio manager at Gabelli Funds. Justin, great to have you here on this Monday.
Justin Bergner
Thank you. Caroline. Great to be on This morning.
Caroline Woods
So Justin, the S&P 500 is coming off its third straight losing week. But stocks are bouncing to kick off the week. How are you feeling about the market as we start this new week.
Justin Bergner
Sure. Thank you Caroline. I continue to see more things that can go wrong. The thing could go right with the stock market at today’s, relatively expensive valuations. The market has only pulled back 5% from its peak and seems to have shifted from a grind up since the October Nasdaq highs to a grind sideways as we started the year.
Justin Bergner
And now a grind down as the war in Iran has added increasing headwinds to a market already struggling with so-so employment data and weak ish consumer spending.
Caroline Woods
So let’s zoom in on what you think could go wrong. What are the biggest risks facing the market right now?
Justin Bergner
Sure. And the risks compound upon one another so they’re not truly independent. There are all sorts of negative feedback loops that can materialize. I think the biggest risk is private credit. We don’t really know the size of the exposure there and the ways in which it can spill over to the broader market. So for example, how much exposure to have investors have to potential losses that could come about if the software sector and the broader economy struggles?
Justin Bergner
How much have banks lent? Will investors respond to the gating of withdrawals and sell off other asset classes, such as public equities? So that would be risk number one. The second risk would be, I think, the inflationary impact of higher oil prices, negating a lot of the stimulus from the big beautiful bill. And then the third would just be the decreased flexibility of the fed to cut interest rates against softer macro data in this more inflationary environment triggered by the Iran war.
Caroline Woods
So the S&P 500 hit its lowest level of the year on Friday. But even so, it’s only down, what, 4% from its all time highs. How much more downside could there be for this market then.
Justin Bergner
Yes, that’s a good question in midterm election years Caroline. The market has historically pulled back on the order of 15%. I think what’s different this year to the market’s benefit is the fact that the one big, big, beautiful bill stimulus is coming in the second year of the presidential cycle versus typical stimulus in the first year of the cycle.
Justin Bergner
So that may cushion, any sort of blow that would be based on normal midterm corrections, complicated by some of the current dynamics we’ve discussed. And then the AI infrastructure spend remains strong. But it would seem that if there’s no easy exit to the Iran war in the coming weeks, a further sell off in the market to the tune of a total 10 to 15% might be necessary to, you know, trigger the U.S. from ending its efforts in Iran.
Caroline Woods
It doesn’t sound like you think the lows are in for the year, but what about the highs for the year? What’s your price target for the S&P 500?
Justin Bergner
Sure. So consensus earnings forecast for 2026 on the S&P standard about $305 per share. So we are currently trading at about 22 times that number. I wouldn’t be surprised if the market ended the year where it started close to the 7000 level with a year end rally as we come out of the midterm election, as we’ve historically seen.
Justin Bergner
With that said, I, as I mentioned at the beginning, I do think there’s more that could go wrong than could go right. At the current market level. So that would be probably my best estimate, but with more downside scenarios and upside scenarios. Vis-a-vis that near 7000 and the S&P for the year.
Caroline Woods
So it sounds to me like you expect some near-term pain, but ultimately, if we close the year higher than where we are now, that’s not a bad thing, right? So, you.
Justin Bergner
Know, it’s not a bad.
Caroline Woods
Year. Bullishness for me.
Justin Bergner
Yeah. Thank you. No I mean the midterm election years have historically been an opportunity for investors to buy on pullbacks. And I think we would look to do the same selectively. I think given the cyclical risks, investors are well served by focusing on names with secular stories, usually high quality names with secular stories and increasing position sizes or starting new positions for names that fit that criteria.
Justin Bergner
Amidst you know, a current correction that may be developing to the tune of 10 to 15%. So that’s what we would be looking to do in this market.
Caroline Woods
Give us some of those quality names with secular stories. What would you buy right now and what are you waiting to buy on a dip?
Justin Bergner
Sure. So we approach investing from the value investment side of the spectrum. So we’re looking at quality value I should say. So the names that we’re looking at are names that can benefit from the, implementation of artificial intelligence. And we see opportunities there in a number of distribution names that have the opportunity to meaningfully reduce their labor overhead with the implementation of AI.
Justin Bergner
So those would be names like market leaders, Wesco in the electrical distribution space and Ferguson in the construction distribution space. We’re increasingly looking at some of the cable names, like Comcast, that may have the opportunity to use AI to reduce, headcount and customer service materially, which could boost EBITDA earnings and margins. And then lastly, you know, we recently got involved, at a modest clip in Airbnb, which we think is expanding its total addressable market and looking to offset, years of decelerating earnings growth with accelerating earnings growth as it taps new markets and gains share from some of the other online travel companies that are more, I guess, burdened by software concerns.
Caroline Woods
Okay. Yeah. Airbnb. Still down what, about 5% year to date? You mentioned some of the value plays within AI. What about some of the high flying AI names that could be considered a value now that they’ve sold off? Are you putting any money to work there?
Justin Bergner
Thanks. That’s a good question. I think there are. There may still be room to go to the downside there. Caroline, I, I continue to be concerned about the open AI ecosystem as Gemini and anthropic, you know, take share in a fast growing LLM market. And so it’s just a little bit, I think, too soon to get involved there.
Justin Bergner
We do own Amazon and Alphabet. We think both are well positioned to benefit, from the cloud and from AI and will be winners in their respective markets. But outside of those, I think, higher quality names. We’d like to see some of the more AI high fliers pull back more materially before we engage.
Caroline Woods
And what about outside of tech? Because we have seen this rotation into energy, staples, utilities, materials, even industrials, which I guess has pulled back a little bit. But, are you putting money to work there? Does that area of the market seem more attractive to you at this point?
Justin Bergner
For sure. Good question. We’ve had a modestly defensive orientation for a few quarters now. Again, based on this theme that more could go wrong than can go right. I think the market’s been trying to figure out if we’re going to rotate from growth to cyclical value or defensive value until a month or so ago, it looked like we were going to rotate to cyclical value.
Justin Bergner
Financials were strong and industrials were strong. Now financials are struggling with private credit concerns a narrowing to ten spread. And industrials are concerned that recent strong ISM data in the US and PMI data globally will retreat with the Iran war. So I think given our posture coming in modestly defensive overweight on the margin, defensive sectors, we’re going to stick with that.
Justin Bergner
And probably look to, build up in some of the other, more cyclical value sectors like industrials and financials. If the market pulls back further.
Caroline Woods
Going back to more going wrong than potentially going right. Oil is off $100 a barrel level. But we know it’s been flirting with that level. You know, the past couple of weeks. It’s trading around 95 right now. Even with oil at 85 though. What sort of damage could that do to the market if these higher prices hold?
Caroline Woods
And then what would a $100 a barrel mean and how would that impact your price target?
Justin Bergner
Sure. So very good question. I think you have to look at it vis-a-vis the stimulus from the tax refunds and the one big beautiful bill. The numbers vary, but I think the expectation was that the individual tax payer would get about 350 to $400 of stimulus. So with the gas price up, you know, $0.75 per gallon from a month ago, you’re basically spending, you know, $7 more per week on gas, about $350 per year.
Justin Bergner
So you’re starting to offset the benefit at least on a on a weekly basis of the one big beautiful bill tax refund. So to the extent that continues for a long time or becomes more like a $10 per week headwind versus $7 per week headwind, should gas prices get to and stay at $100 a barrel? I think that’s just going to negate a lot of the upside.
Justin Bergner
People were expecting from the one big beautiful bill, which was somewhat priced into the market. So again, relative to expectations or some downside, there.
Caroline Woods
The fed is in a sticky situation this week with these surging oil prices that obviously haven’t yet hit the inflation data that they track. What do you expect the fed to signal later this week? Do you expect any surprises from Jay Powell and company?
Justin Bergner
I don’t expect any surprises, Caroline. I would expect them to be on hold for a while. I would expect, the policy statement in the press conference to perhaps suggest that should economic conditions, you know, worsen materially. Because of the added headwind of the Iran war, they would reevaluate their position. But I think the markets know that they’re somewhat between a rock and a hard place now.
Justin Bergner
And even when the new fed chair gets confirmed. So I think that the fed, is going to have to soothe the market with its words rather than its actions. If it’s able to do that.
Caroline Woods
Okay. This is a great time to transition to our rapid fire, this or that round. Are you ready to play?
Justin Bergner
Sure. Let’s do it.
Caroline Woods
All right. Quick questions quick answers here. Fed in 2026 one and done in December. Or are we stuck at these levels all year?
Justin Bergner
I think it’s one and done either in December or a few months before December.
Caroline Woods
Stocks grinding sideways or heading for a crash?
Justin Bergner
I think grinding down until you get closer to the midterm election and then perhaps grinding back up.
Caroline Woods
Okay, so the election factor by the uncertainty or wait for the results.
Justin Bergner
By I would say by the uncertainty closer in.
Caroline Woods
Portfolio portfolio stance, maximum diversification or concentrated conviction.
Justin Bergner
Moderate diversification.
Caroline Woods
The Iran conflict, short term volatility or a structural shift in trade?
Justin Bergner
More short term volatility, but with some lingering headwinds.
Caroline Woods
For oil above 100, temporary blip or a stagflation trigger.
Justin Bergner
Temporary blip.
Caroline Woods
Something we haven’t talked about. Ultimate war hedge, Bitcoin or gold.
Justin Bergner
Perhaps neither.
Caroline Woods
Inflation’s sticky at 3% or fast track back to 2%.
Justin Bergner
I would say closer to 3% than to 2%, but probably more in the 2.5 range.
Caroline Woods
2026 recession or a soft landing.
Justin Bergner
Soft landing. But it will probably feel like a recession for large swaths of individuals and sectors of the economy.
Caroline Woods
Like what?
Justin Bergner
I think for the consumer that is challenged on numerous fronts already, it will feel like a recession in 26, but I don’t think the overall economy is likely to go into a recession in this way.
Caroline Woods
What would be more surprising in 2026? A melt up to new highs or a lost year for equities.
Justin Bergner
At this point, a melt up to new highs for sure.
Caroline Woods
Is your highest conviction name for this year.
Justin Bergner
Sure. A name that we haven’t discussed. Belden. It’s a mid-cap company that makes networking products heavily for industrial use. That’s benefiting from a solutions approach and going forward, again, TKI will be a big beneficiary of a giant tick.
Caroline Woods
I what’s an unpopular opinion stock that you like one that the market doesn’t like but you do.
Justin Bergner
I would say at the present point in time, International Paper, the market liked it and then they got scared with all the headwinds. It was facing. The CEO Andy Silver, now is tremendous. And I think he’s doing the right things to surface value. But with the economic headwinds, it’s going to be, a rockier, improvement going forward.
Caroline Woods
Yeah, I’m down about 30% over the past one year. I see what’s one name the street likes, but you avoid.
Justin Bergner
I don’t know if the street loves this name, but I think the bounce in Netflix may just be a bounce in Netflix. Netflix is increasingly competing with YouTube for eyeballs and viewership time, and I think that’s the real competitive headwind. If and when Paramount Paramount closes Warner Brothers, that entity will be a stronger entity than each alone. So I just think the competitive dynamics are getting harder for Netflix, even though it’s a well-run company.
Caroline Woods
Okay. Yeah. I mean, it’s only up about 2% year to date, but the market likes it a lot more than they did earlier this year. So, best of both worlds there one word to describe market sentiment right now.
Justin Bergner
Lacking conviction. That’s two words.
Caroline Woods
All right. We’ll leave it there. Really appreciate your insights. Thank you so much for playing along and for giving us your picks.
Justin Bergner
All right. Thank you so much, Caroline. Pleasure to be on today.
Caroline Woods
That’s Justin Bergner, portfolio manager at Gabelli Funds.
