Transcript:
Caroline Woods
Joining me now, Art Hogan, chief market strategist at B Riley Wealth Art. Great to have you back.
Art Hogan
Yeah, yeah. It’s so good to be back. It’s been too long.
Caroline Woods
It has. We’re glad to have you. Stocks are pulling back from those record highs today. Although those losses at this point are pretty modest. But aren’t you think this is a market that will power higher? How much higher can it go?
Art Hogan
Well a couple things. I think first and foremost, the fundamental backdrop is very supportive of this market, right where we’re, you know, in the second week of earnings and the earnings season has been much better than anticipated. And guidance continues to move higher for the calendar year of 2026. I think the second thing is that assumptions made about the duration of the war that Iran seems to are starting to stretch out a bit, and that’s the bad news.
So we’re kind of in a tug of war right now during the earnings season, where concerns over the war had taken a bit of a backseat while we focused on the micro company by company earnings reports. But they’re creeping back into our psychology, and we’re starting to hear things that push out the duration of this war. The closer we get to an exit ramp, the higher this market can go.
And if we find an exit ramp for this war in Iran, I think the fundamental backdrop would we be able to move this S&P 500 significantly higher that we are now talking about?
Caroline Woods
7670 600 by year end? What is it that actually gets us there though?
Art Hogan
What gets us here is the earnings growth. So the beginning of the year, the consensus estimate for earnings ESP 500 sat at about $312. It’s currently at $320. And that’s before we’ve even heard from 30% of the S&P 500 companies for the first quarter. And guidance has continued to move higher even as we’ve entered a war in Iran.
So I think that’s the biggest driver. So you can get that at 7600 with very little or no multiple expansion. It’s all on earnings growth. Now a great deal that obviously is coming from technology companies communication services companies. But the good news is for the first year and three, all 11 sectors in the Sp500 are going to show year over year earnings for US.
So it’s a very broad growth in earnings. And I think that’s why we’re seeing a broad application to work by investors into the market here.
Caroline Woods
In terms of headwinds, though, you mentioned the geopolitical side. This seems like a market that’s pretty much ignoring that side of things at least. Right now we have the S&P 500 actually inching closer to the flatline right now. So very close to all time highs. Are investors wrong to to kind of be disconnected from geopolitical turmoil.
Art Hogan
Yes and no. So yet the US part is if you go back to World War two and look forward, the market’s been higher 6 to 9 months after the start of every war since then. You know, going back to the Gulf Wars in the 90s. And just flash forward to that, the war with Ukraine. So the market tends to move and become a forward pricing mechanism.
I think the second thing to think about, obviously, the solid fundamental backdrop we were living in before the war started with gasoline below $3, the yield on the ten year, below 4%, we had, earnings growth of double digits for five quarters in a row and expectations for this year to be another double digit earnings per hour.
So those are all the positives I think the negatives is the longer you have higher energy prices, the more deleterious that is to the global economy, the less consumer spending power we have. And so it’s a function of duration right. So if our assumption is that we find the exit ramp to this in a month, then the damage done to the economy will be far less than if this is something we’re still talking about in the fall.
Caroline Woods
What’s the first sign that the path to 7600 is breaking for?
Art Hogan
A sign would be if you start to get degradation and earnings estimates, and we haven’t seen that yet. Now there are companies that are beating but not raising their guidance because of uncertainty over the war. And that’s okay. But if you start to hear from companies, especially companies that are, very dependent on energy, right? Think logistics, travel and leisure, materials, industrials.
And they start to cut their guidance for the balance of this year because of what we’ve already seen in higher energy prices. Then we’d have to re, configure that, that number and probably take that estimate for $320 down on the S&P 500 and use a different multiple, but right now we haven’t seen any of that degradation in the earnings estimates.
Caroline Woods
So every dip has been a buy recently. It seems to be the case. Do you think that’s still the playbook here or are we getting late in that trade. And what is the strategy from this point on.
Art Hogan
Yeah. Well the fires have certainly been prevalent in this market. I would also say that that rotation has been massive as well. So just think about how much technology was for sale starting last October. And artificial intelligence was going to disrupt everything. And we’re clearly going to see, companies being destroyed by AI. We’re certainly going to start to question CapEx and return on invested capital.
And all of a sudden, the first dip that was bought in this market was technology. The most oversold of the S&P 500 sectors. So I think that’s important. But along the way, there’s been a real intuitive reaction to this dip buying where it’s spreading out to those sectors that are less energy intensive. And we’re starting to see a bounce in things like health care and financials again, two underperforming sectors.
So there’s some symmetry to this dip buying. And it’s not just all in on AI in any given day. And it’s much a much broader approach. Yesterday was a perfect example of that. We had seven of the 11 S&P 500 sectors in the green. And that’s been a pretty clear pattern through this resurgence in markets. To get us back to where we were before the war started.
Caroline Woods
In a market like this, where do you need to be overweight right now to actually outperform?
Art Hogan
Yeah, I think technology is still the best of the best. If you look at the multiples that the technology sector throwing off five multiple turns below its historic average, it got down to seven multiple turns, at the beginning of the year when everything was for sale and technology. So obviously you need to have a waiting in technology.
But I think the sectors that can really outperform as we, as we start to exit this, war in Iran are financials, financials. So should certainly be doing much better than they are. They’re beneficiaries of active capital markets activity M&A activity. The IPO calendar looks robust. Less regulation in that. And the yield curve likely is going to be helping their net interest income.
In the third that I would throw in here that doesn’t get much talk is is health care. We’ve already started to see a lot of M&A activity by big pharma into biotech. And I think that’s just the tip of the iceberg there. So, all three of those sectors should be equally owned, I think. And and two of the two of the sectors away from technology that I think really have a lot of runway in front of them are both financials and healthcare.
Caroline Woods
But to your point, we haven’t seen this massive rebound in tech just recently. Is it too late to add that exposure to your portfolio if you’re not already in?
Art Hogan
Yeah, it depends on which side of that you’re looking at. And we usually use it to sort of break this down by, in simple terms, software and hardware. And we’re hard hardware has run the most. And that’s been going on since the fourth quarter of last year. And a lot of that has to do with memory and semiconductors.
Semi semi cap equipment companies, etc. just because of the massive demand for memory at the data center for large language model developers, software is still not recovered. Back to, you know, the beginning of the year levels and still trading at a multiple. So we’ve seen a bit of a bounce. But think about it like this. The IG view, which is that software ETF was from peak to trough, was about 45%.
Now it’s bounced about 20% but still sits at a multiple that we haven’t seen in years. So companies like Microsoft, for example, trading at a 24 multiple, which is for multiple terms below its five year average, because it’s going to be disrupted by you and I, you know, you and I by coding and replacing what we use windows for.
I just think it’s very overdone. So to me, I think there’s ample opportunity in technology. But right now I think the opportunity is better in software than it is in hardware.
Caroline Woods
Can you be more specific about where in software you mentioned Microsoft? Yeah, I certainly yeah.
Art Hogan
Microsoft. Yeah, Microsoft is a great example of that’s one of the largest of the of the software companies. But along the way, I think at the application level you have to ask yourself a question is, is are there software applications that are too embedded in the enterprise and in the consumer’s personal life to be disrupted in this place by artificial intelligence?
So the tip of the iceberg there, I would certainly say would be, Microsoft. But further along the way, when you sort of look at the companies like Salesforce that are that have been using artificial intelligence for the last five years, just didn’t talk about it and how embedded that is into the processes, especially at the enterprise level.
And certainly hard to replace. And, you know, the think about it like that and other certainly other software companies that are easy to replace and likely won’t make it, I think are things like, the, the, the ability, to do your taxes online is likely going to get a whole lot easier. So if you’re a software company that that’s your only game, you’re likely going to be disrupted.
So things of that nature. But to me, I think it’s the large embedded enterprise level software companies that will likely survive this and still look very attractive.
Caroline Woods
So Salesforce is down 8% today. You’d be a buyer here.
Art Hogan
Yeah, Salesforce gets beat up every single day. They’ve stopped making massive acquisitions. They’re they’re focusing on what they’re good at. And the multiple is trading out right now really feels as though it’s it’s going away because someone’s going to replace it with something that, you know, artificial intelligence can do instead. And it just feels as though that’s such a huge overreaction.
And I would argue that large embedded enterprise level software companies are only to get better and more productive and more helpful to the to companies, and likely will be better coming out of the end of this. But right now we’re in that SAS up up apocalypse where everything software related has been for sale. And I certainly think that story is well overplayed.
Caroline Woods
Okay. And just finally, what are you avoiding right here? You mentioned that you like financials health care tech. What are you staying away from?
Art Hogan
A couple things you have to be careful of. I think in the near term, first and foremost, I think one is that the, the, safe harbor sectors, like the consumer staples, which, you know, obviously made a great deal of sense when there’s a lot of uncertainty over a war. But they got built up to a multiple level on average.
That was about ten multiple turns higher than where they normally trade. So if you look at the staples as a sector, they were trading about 24 times, next 12 months earnings. They usually trade about 15 or 16 times. So somewhere in the middle of that probably is reasonable. But there’s still more worth of 20 times I just be careful with the safe harbor assets when things get better and we saw that for a couple of those days where the, you know, the Nasdaq is up a couple of percentage points and the only thing down is things like energy and, and consumer staples.
And to a certain extent, the dollar and gold. Now, another thing to think about that I wouldn’t throw the baby out with the bathwater on is energy. Obviously, the sector has had a very good year, but it’s having a very good year in an environment where it never reflected the high point of the, increase in the price of oil and getting back to pre-war levels, of energy prices is probably going to take, you know, at least a year, if not more.
So in between there. I think all of the energy companies, especially the fully integrated nationals like Exxon and Chevron, are going to have a very profitable year. So I think energy will likely sell off from its peak, but be a great buying opportunity on any dips. And I think that’s one of the things you want to think about, especially companies like Halliburton, that have to participate in the rebuild of all of the infrastructure and oil production infrastructure that’s been destroyed during the war.
So I just think I wouldn’t throw energy out, even though it’s been the leader during the war. Let it pull back a bit, and I think there’s going to be an opportunity there. The last thing I would offer up is broadly speaking, I would rather be in consumer discretionary now than in consumer staples. And for the reasons I stated before, away from that, I think that, I think that there’s a plethora of opportunities.
One of the biggest concerns I have also is that when you sort of say, oh, you know, you shouldn’t be in tech, you shouldn’t be in and communication services because people just think about the Max seven. There’s probably 25 or 30 artificial intelligence related names that don’t fall into that category. They’re creeping higher. So I think there’s great opportunity there as well.
Caroline Woods
What’s the number one name on that list that’s not mag seven?
Art Hogan
I would have to say Broadcom. And in real terms it’s obviously not a secret to anybody. But you know we talk about that. But Mac’s having like it’s a monolith which it’s not. And Broadcom is doing a lot of things getting a lot of contracts. They are must have in that an AI data center build out.
And clearly it that’s been reflective in some of the gains that we’ve seen in it recently. But I still think there’s a lot of opportunity there. And it just doesn’t you know, it doesn’t there’s no way to get a good acronym and try to slip a B into it. So it just hasn’t fallen into the the easy artificial intelligence darlings bucket.
Caroline Woods
But it’s up 120% over the past one year. So still you can still.
Art Hogan
In a real low base. Yeah. Yeah. You know it’s it’s interesting. So like if, if we went to a speed round and I said which would you rather. And it was Broadcom or Nvidia in the here and now I would say Nvidia because it’s trading at 24 times multiple. And you know has gross margins north of 70% and grew its earnings probably 50 or 60%.
In this quarter they’re going to report at the end of the month. So but I think Broadcom you just you know even though it’s up 120%, you have to think about the fact that in the longer trajectory of the artificial intelligence revolution, they’re going to be a key component in everything everybody does.
Caroline Woods
Okay. You mentioned a speed rally. It’s a perfect time to pivot to our rapid fire game of this or that. You know, this game. Quick questions, quick answers. Are you ready?
Art Hogan
Are you back.
Caroline Woods
Here we go S&P above 7100. More room to run or getting stretched.
Art Hogan
More room to run. I think there’s ample opportunity for us to continue higher.
Caroline Woods
By the breakout or wait for consolidation.
Art Hogan
I think you can buy the breakout. People get nervous about buying at all time highs. Unfortunately, if you did that, you wouldn’t make much money over the last 20 years.
Caroline Woods
Cash, deploy it or hold it.
Art Hogan
I think it’s time to deploy it. If you have a large cash balance and you’ve been waiting for the dust to settle, remember the dust never settles at risk.
Caroline Woods
Or play it safe.
Art Hogan
I think you can at risk here. Playing it safe is likely going to be sold off. I think the safe harbors are going to be sold, and I think riskier assets are going to be bought.
Caroline Woods
Low tech leadership, reliability.
Art Hogan
Leadership. And that’s always going to be leadership. It had been for sale since last October. It’s now catching a bid. Wait till you start hearing some of the reports next week.
Caroline Woods
Remember quick answers, although you do speak quickly. So I guess you check that mark up. Our earnings headwind or tailwind.
Art Hogan
Significant tailwind and guidance that having already gone up usually goes down by 2% before this earnings reporting season started. It’s gone higher.
Caroline Woods
And better by after earnings ServiceNow or IBM.
Art Hogan
So oh such a great question. I have to go with IBM. I think IBM’s quarter was misunderstood.
Caroline Woods
Tesla or Texas Instruments.
Art Hogan
Texas Instruments by a long shot. And it’s just starting to get its mojo back and had a very important.
Caroline Woods
Southwest or American.
Art Hogan
American, unfortunately. I love southwest, but American’s got a, I think, a better, longer term, platform to rescue them.
Caroline Woods
Better dip to buy Nike or Lululemon.
Art Hogan
What a great question. Lululemon stealing some money from Nike right now to be the new, CEO. I think they’re both great dip buying opportunities. I personally would go with Lululemon before Nike is I.
Caroline Woods
Infrastructure play Nvidia or GE or Nova.
Art Hogan
Two great companies and given all of us trading at a multiple, that is actually so much higher than Nvidia, you have to go with Nvidia 32 years.
Caroline Woods
Biggest market driver from here earnings fed or oil.
Art Hogan
Earnings I’d like to say oil but but I don’t think it’s going to be for much longer. So earnings it has to be.
Caroline Woods
One stock you’d buy today. There.
Art Hogan
They’re like once like a buy today. I would have to say right off the top of my head that TJ X. And I’ll tell you why. It’s the perfect stock for the environment we’re in right now with the choice for consumer.
Caroline Woods
So one stock you’d avoid today.
Art Hogan
I, I think such a great question I’d avoid Tesla I don’t know what they’re going to do with this IPO. And if they’re going to combine and there’s a lot of noise around that. So Tesla is one that you might want to take a backseat on.
Caroline Woods
It’s one word to describe the current market.
Art Hogan
Cautiously optimistic. That’s hyphenated. So that’s one word.
Caroline Woods
And finally your S&P 500 price target by year end 7600.
Art Hogan
And I think that’s a easily achieved conservative target. If in fact we get out of this war before July 4th.
Caroline Woods
Art Hogan Chief market strategist B Riley well always a pleasure. Thanks so much.
Art Hogan
Thank you so much for having me.
Caroline Woods
If you enjoyed this interview with Art, check out our full street talk with George C. He explains why this could be a sell in major.
