Transcript:

Caroline WoodsJoining me now, Sam Stovall, chief investment strategist at CFRA. Sam, always good to have you. Thanks for being here.

Sam StovallGood to talk to you, Caroline.

Caroline WoodsSo, Sam, stocks are pushing higher despite weak seasonality. We still have geopolitics in the mix and what some might say are stretched valuations. What is this market seeing that bears still aren’t Sam.

Sam StovallWell what this market is seeing is surprisingly strong earnings right now. The Q1 S&P 500 earnings growth is more than twice what was expected at the end of March. According to S&P capital IQ. Wall Street was expecting a 12.5% gain, in S&P 500 earnings in Q1. Now the estimate is more than 25%, and we have added, five percentage points to the full 2026 estimate with ten of the 11 sectors, seeing upward revisions to estimates.

Sam StovallSo that is going a long way to also proving what history has hinted in that, since last April was the second best month for the S&P 500 since World War two. History says that of the top 25 Aprils. We then had an additional 2% rise in May, with the market rising nearly 90% of the time.

Caroline WoodsOkay, I want to get into that in just a second. Talk about seasonality, but let’s stick with earnings. Is corporate America actually stronger than expected or do you think the bar is too high now?

Sam StovallWell, see I think it could be too high if we continue to have concerns regarding oil prices, but it seems as if Wall Street is just chomping at the bit, to buy back into the market and to act on any hint of good news as it relates to the Strait of Hormuz, lower oil prices, etc., and expectations for employment remain fairly strong.

Sam StovallAnd inflation remain fairly contained, particularly in the core area. So I would tend to say that, you know, right now earnings estimates are certainly optimistic. But right now they have been justified.

Caroline WoodsNow going into the seasonality piece, we’re heading into what would typically be historically a weaker stretch for stocks. You had mentioned that there could be some chop. How should investors or how much should investors actually care about that right now?

Sam StovallWell, I like to tell people about things that they might worry about, in a sense, to help talk them off the ledge, to stop their emotions from becoming their portfolios. Worst enemy since World War two. During midterm election years, the selling made period posted an average decline. And if you go back to 1990, when you were looking also at sector level data, the market was down nearly 2%, falling in price more than 55% of the time, with both sizes, styles and ten of 11 sectors in negative territory.

Sam StovallSo yeah, historically the May through October period. And let’s face it, it’s a six month stretch with most of the weakness occurring in the August and September timeframe. But I like to then remind investors that from October 31st of midterm election years through October 31st of the year after, the S&P never declined and it gained an average of 16% in price, 20% on a total return basis.

Caroline WoodsSo if investors are nervous right here with the market at all time highs, is this about trimming risk or is it just about rotating into other areas of the market?

Sam StovallWell, right now if you’re going to be rotating, you’re going to be rotating into strength because taking a look at where the strength is right now, it’s still in communication services, industrials and technology, and certainly not in the defensive areas of health care, consumer staples, etc.. If you did think, however, that the market was likely to perform a 180 turnaround, then history does say you want to embrace healthcare and staples, because those two combined posted an average increase of about 5% during midterm election years and outperformed the market.

Sam StovallNine out of nine times.

Caroline WoodsIf selling May plays out. I want to own healthcare and staples, but then when that seasonal weakness passes, where do I rotate next?

Sam StovallWell, once this weakness of May through October has played out, not surprisingly, investors rotate from first to worst, meaning that they move out of the defensive areas that held up the best in the weak May through October period, meaning staples, health care, utilities and gravitate toward the more cyclical areas that tended to have been beaten up during that week time frame in particular, information technology, industrials, financials, materials, those tended to be the groups that performed best in that 12 month period from October 31st to midterm election year through October 31st of the year after.

Caroline WoodsSam, I’m curious, though, because you yourself have said use history as a guide, but it’s not gospel. I’ve taken that from you. Do you think that this is market that will ultimately have this seasonal weakness? Because right now it just seems like a market that even despite, some pretty substantial headwinds at times, including higher oil, not the case today, obviously, on this hope for a resolution.

Caroline WoodsIt just doesn’t want to go lower.

Sam StovallNo, it certainly doesn’t. You’re probably not old enough to remember an old Milwaukee beer tagline, which is, it just doesn’t get any better than this. And that’s in some ways how investors might be feeling today. And if that is the case, well, then, you know, if everybody is optimistic, who’s left to buy? So I would not be surprised if we did end up seeing some weakness take place in this traditionally weak May through October period, but I would use it more as a buying opportunity.

Sam StovallSo in a sense, a reason to buy rather than to bail.

Caroline WoodsI don’t remember the tagline, but I’ll use it as my question. Do you think that it does get better than this? Because last time we were on, you gave a 7400 price target on the S&P 500, and we’re at 7335 right now. So that would imply that it doesn’t get all that much better. So do you stand by 7400 or are you making adjustments here.

Sam StovallWell, we are making an adjustment. We made an adjustment just recently to, 7730 on the S&P 500. Now that is a 12 month target. So what I focus on essentially is looking at those groups in the S&P, looking at technicals, fundamentals, etc.. So that would imply a year end target of 7575. So looking at a full year price, meaning 2026 price gain, that’s still moderate at about 7%.

Sam StovallBut also looking at a pretty strong 12 month price target.

Caroline WoodsIf we’re there by year end, what got us there, Sam?

Sam StovallWell, I think what got us there is that we had, the earnings growth remain fairly strong. That we did not see a lot of follow through in terms of inflation moving into the, the headline area. And as a result, the fed was not forced to raise interest rates. So, I think the conditions that we’re experiencing right now, strong earnings, solid employment picture, and a at least a a flat fed, glide path, is what will help us to move forward, especially if we continue to see the earnings, that have been growing year to date.

Caroline WoodsAnd if we’re not there, 75, 75 by year end, what went wrong?

Sam StovallWell, what went wrong probably is that, maybe the, estimates had to be revised lower because possibly the Strait of Hormuz was closed for even longer. Oil prices did sort of seep their way into inflation numbers on both the headline and a core basis. So I would basically say that while I still expect the market to be in a bull mode, I would say that, if we don’t end up with this, 75, 75 target for the year end, then it’s really a bull market, but with a lowercase b, where we simply readjusted our, trajectory for this bull market to a little lower angle.

Caroline WoodsYou mentioned oil. Oil is down sharply today, as I said, on these hopes for a resolution between the U.S. and Iran. It’s down about 7%, but still trading at $95 a barrel. So still up more than 60% year to date. At what level or for how long does oil actually become a problem for stocks? Because it’s clearly not at 96 or $95 a barrel.

Sam StovallWell, there an old rule of thumb that for every $10 increase in the price of oil on a prolonged basis, it takes away anywhere from 10 to 20 basis points of real GDP. So right now the expectations are for full year GDP to be up about 2.2% or so. And so the question is how long will oil prices remain elevated by.

Sam StovallHow much will they then eat into this estimate. And will it be the consumer that really, you know, pays the price, if you will, at the pump as well as in terms of product increases? Because of the, packaging, because of transportation, etc.. So it really is a question of how long will oil prices remain elevated.

Sam StovallAnd I think as we’re seeing today, with the markets bounce, even on a hint, that some resolution will come to pass that investors do believe that this will be more of a short lived, inconvenience.

Caroline WoodsOkay, you let’s wrap things up by talking about positioning. You talked a bit about the May to October period, but if I’m an investor watching this, what should I be doing right now?

Sam StovallWell, what should be doing right now, I think, is pretty much sitting on your hands if your emotions are starting to bother you. Then I would say, you know, make sure that you do nothing, because there could be an awful lot of volatility along the way. You certainly don’t want to be chasing, the market at this point, by saying, you know, darn, I missed it.

Sam StovallAnd, I don’t want to have a fear of missing out anymore. We do think, however, that, the momentum lies, as I said, with the economically sensitive areas of, industrials, we think also communication services and tech for a longer term. So we’re not short term traders, but more longer term investors. And those are the areas that we would take advantage of whatever price weakness there might be.

Caroline WoodsOkay. So before we get to this or that, let’s do a quick 62nd portfolio. It’s a new segment that we’ve been doing. Just quick calls here Sam. Ready.

Sam StovallOkay.

Caroline WoodsOne area you one area you’d overweight right now.

Sam StovallOverweight right now would be technology, because of the strong earnings growth. And believe it or not, valuations that are currently trading at a discount to its five year average forward PE.

Caroline WoodsOne area you’d avoid.

Sam StovallI would continue to avoid, health care, even though it is an area that traditionally has done fairly well, in the, May through October period of midterm election years. The momentum is just not there at this point. And I would hate to attempt to catch a falling knife.

Caroline WoodsBest risk reward trade today.

Sam StovallThat’s risk reward trade today. Well, I would have to go back again to the, technology area, because as I had mentioned, technology is doing very well. In terms of our price basis, it’s trading at a 10% discount to its average five year PE ratio, and is flat with its ten year average forward PE ratio, and with earnings growth expectations, remaining fairly strong, expected to be up by more than 45% this year, 25% next year.

Sam StovallI would stick with tech.

Caroline WoodsThe biggest risk to this rally just quickly.

Sam StovallBiggest risk of this rally is that we do not get an agreement on oil, and that we do have the fighting, the bombing start up again. And that pushes out, the impact from higher oil prices.

Caroline WoodsAnd one mistake. Investors make it all time highs.

Sam StovallIt thinking that, it just won’t get any better than this. All time highs tend to get additional all time highs. We’re at number 14 if today closes up. And essentially, all, new all time highs are positive except for the last one.

Caroline WoodsAll right, let’s transition right into our rapid fire game of this or that. You’ve played with us before. Are you ready, Sam?

Sam StovallOkay.

Caroline WoodsHere we go. May set up more room to run or do for a pullback.

Sam StovallMore room to run the market. Typically, gains an average of 2% in the May after a very strong April.

Caroline WoodsSo selling May smart strategy or avoided.

Sam StovallA strategy to be aware of but use it, as a reason to buy, not bail.

Caroline WoodsHealthy rally or market getting ahead of itself.

Sam StovallA healthy rally. That might be getting a little bit stretched if we continue to see very strong gains in the near term. But we can experience corrections in both time and price. So maybe we end up moving sideways for a while, allowing earnings to catch up.

Caroline WoodsBy any dip or wait for a deep pullback.

Sam StovallDepends on the individual stock that you’re looking at. I would tend to say that, we’re looking more toward, modest declines. Would be helpful. Don’t wait for the big one to take place because you probably end up being scared away anyway.

Caroline WoodsStay diversified or lean into your highest convictions.

Sam StovallWell, you’re asking that question of somebody who wears both a belt and suspenders. So I would say stick to your long term diversified approach.

Caroline WoodsDefensive positioning or stay aggressive.

Sam StovallDepends on the investor, their tolerance, their long term horizon, etc.. I again would say that, focus on where the growth is. And right now it’s in the aggressive side of the equation.

Caroline WoodsU.S. or international.

Sam StovallI would stick with the U.S., because certainly there’s greater economic growth here in the US. And the question really is whether, the dollar will remain strong. And if that is the case, then you’ll get a better bang for your buck, here at home.

Caroline WoodsValue or growth from here?

Sam StovallGrowth, I would say, simply because value, which is where you would find consumer staples, healthcare, etc., is not doing as well right now. And the momentum points to the growth area.

Caroline WoodsLarge caps or small caps?

Sam StovallSmall caps have been doing, very well, up 17% so far this year versus a sub 10% gain or the S&P 500 plus. If you look to valuations with small caps they are still trading, believe it or not, at a 28% discount to the average five year relative PE ratio.

Caroline WoodsConsumer staples or health care.

Sam StovallWell the old saying is when the going gets tough the tough go eating, smoking and drinking. And then you have to go to the doctor to pay for it. I would tend to say that the area that is more attractive right now would be health care. It is trading at a 15% discount to its five year average relative PE, whereas consumer staples is essentially flat.

Caroline WoodsBigger market driver oil prices or fed policy?

Sam StovallI think that the, the fed policy is probably, more prescient right now in terms of what investor expectations are. If we continue with elevated oil prices for a bit, that would be less of a concern that if the fed, hinted that they would actually start raising rates.

Caroline WoodsAnd just to recap, S&P 500 price target by year end.

Sam StovallYear end target of 75 75 for the S&P 500.

Caroline WoodsAnd 12 month S&P 500 price target.

Sam Stovall7730 is our 12 month target.

Caroline WoodsAnd finally, just one word to describe how you’re feeling about the market.

Sam StovallOne word. Optimistic.

Caroline WoodsSam Stovall chief investment strategist, CFRA. Always a pleasure and always appreciate your old adages. Thanks so much, Sam.

Sam StovallThanks for having me. Good to talk to you again, Caroline.

Caroline WoodsIf you enjoyed this street talk, don’t miss our full interview with Dan Niles. He breaks down the tech winners that will be higher by your end.