Transcript:Caroline Woods Joining me now is Keith Lerner, chief investment officerat Truist , Keith thanks so much for being here.
Keith Lerner Hey, Caroline. Great to be with you.
Caroline Woods Keith. Stocks have shown remarkable resilience this year,despite plenty of reasons for investors to be cautious. What is themarket getting rate right now?
Keith Lerner Yeah. Well the first thing I would say is if you ask me,the number one reason why this market’s up this year, it’s actuallythree reasons profits profits, profits. And I think, you know, if wethink about this bull market cycle. Every bull market has a dominanttheme. The bull market cycle this time as I and tech. But you knowwhat’s really amazing is as I look at the market today I look at the S&P500.
Keith Lerner We have forward earnings estimates at fresh all time highs.But we’re also seeing fresh all time highs and forward earning estimatesfor the mid caps and for small caps as well. So it’s a it’s really I betbest described as an earnings boom right now which with which I thinkthe market is getting right.
Caroline Woods You know for months investors were worried that thismarket was too dependent on a handful of mega cap tech names. Do youthink we’re finally seeing proof that this bull market is broadening outin a healthy way?
Keith Lerner Yeah, I’ll give you an interesting stat based on that. Youknow, that question that comes up right now, the Max seven is actuallynegative for the year, while the broader tech, sector is up and the S&Pis up, you know, close to double digits. So I would say, you know, basedon that alone, we have seen some broadening beyond technology.
Keith Lerner And more recently what we’re seeing is is a rotation wellbeyond tech. In fact, on a short term basis, the S&P is nowoutperforming the S&P 500 over the last month or so. And during thisbull market, we’ve seen about 50, I would say about, this is the fifth,what I would call rotation trade that we’ve seen.
Keith Lerner And history suggests that this likely has for it to go,even though we still like the market cap S&P over time.
Caroline Woods So if it’s the fifth rotation of the bull market, dothese kind of rotations extend bull markets or is that a signal thatwe’re getting late in the cycle.
Keith Lerner No I think that’s a healthy sign. You know in some ways wethink about coming off the lows and you think about the technologysector, which we still like. That is eye and tech is the defining themeof this bull market. But off the low is in March, it rose about 47%. Andwhen we look at this, relative to the trend that got way extended abovethe trend and it outperformed any other sector by about 30 percentagepoints.
Keith Lerner So after that rubber band got very stretched, the questionbecomes this money leave the market or does it go somewhere else? Inthis case, what we’re seeing is that it’s rotating to other areas. Tome, that’s a healthy sign of a bull market. I think ultimately moneywill come back to tech. But just like we had a consolidation after itgot extended last year, I think it’s due for a rest.
Keith Lerner And I think it’s a good sign that money is going into someof these other areas that had lagged.
Caroline Woods So talk to us about the next sources of leadership. Iftech sort of takes a breather, where is the baton getting passed to?
Keith Lerner Yeah, at least on a short term basis. I think more broadly,I think, you know, you’re seeing somebody equate S&P outperform. And bythe way we have looked at those for previous cycles. They tend to lastabout three months as far as the the rotation cycles. So we’re onlyabout a month into this. So I think it likely has somewhat further togo.
Keith Lerner But then also the way we’ve really been playing it though,is, is through small caps. In our annual theme, we talked about, youknow, keeping a core intact, which we still think is the right thing todo today because we suspect that we were going to have some of theseshort rotations, and they’re really hard to time pairing that with smallcaps.
Keith Lerner And if you look at small caps right now we’re makingabsolute price highs. We’re making fresh relative price highs. What’salso employing is it’s not just, you know, sentiment. The earnings forsmall caps have actually been inflecting higher as well. And if you havea stronger economy, that all all bodes well for continuation of thattrade.
Caroline Woods If we take a look at the sector breakdown for the S&P500, though. So thinking a little bit bigger than mid-cap, some smallcaps, you know tech and energy industrials still leading on a year todate basis. Not necessarily the case this month for energy consumerdiscretionary health care of financials. At the bottom of the list therein terms of year to date performance, where should investors be thinkingabout the next opportunities there?
Caroline Woods Do they keep investing in what’s working or is it time toshift into other areas?
Keith Lerner So the way we’re thinking about this now is even though wethink tech’s due for a rest, we think Money Ultimate comes back becausewe historically have looked at bull market cycles where there’s the 90swhen tech was the leadership, or it was like the 2000 when we hadindustrials and emerging markets leadership. That leadership tends topersist towards the end, notwithstanding these kind of resting periods.
Keith Lerner So if techs and I think one of those resting periods now, Ithink other areas are likely to outperform near-term oil, probablythings like financials. We just upgraded financials about a week and ahalf ago. Industrials are acting better as well. So I think those aretwo areas that we think, at least on a short term basis, are likely,likely to see some of those flows from from tech.
Caroline Woods What are you avoiding at this point?
Keith Lerner At this point, we’re still a little bit more cautious onsome of the consumer play. Specifically, consumer staples is somethingwe downgraded more recently. If you have an economy that’s stillresilient, and then you still have this kind of two speed economy. Youknow, we’re seeing for consumer staples earnings somewhat weak. We’reseeing relative price trends somewhat weak as well.
Keith Lerner So you know that’s a key area that we’re avoiding. And eventhough I say the economy’s know so much strong the Board of Consumerdiscretionary sector is much more mixed. So we’re not seeing as manyopportunities, in those two sectors that are really, you know, being hitby this two speed economy that, that we all talk about often.
Caroline Woods And thinking about if tech does take a breather, whatdoes that mean for the S&P 500 performance from here? Because we know, ahandful of those names are responsible for a lot of its move. So is thisan S&P 500. We know that the Russell is already outperforming the S&P
- But overall for those investors who are, you know, maybe justexposed to the S&P 500, can they expect more gains from here or couldthey expect a consolidation.
Keith Lerner Yeah. So I think I would probably answer that both I thinkin the near-term more of a consolidation, maybe a little bit of abumpier path near term because as you mentioned, I just think, you know,when you’ve had, you know, such strong gains in a short period of,outperformance, it’s normal to expect a bit of a, of a consolidation.
Keith Lerner And, you know, historically, markets are typically twosteps forward, one step back with tech. You went three steps forwardwithout any type of step back. So I think it would be, you know,perfectly normal. And I would also say the earnings trends for tech arestill by far the strongest. But to your point, such a show top heavy,even though you’re seeing this on the line rotation, you know you’relikely going to see that some of those gains below the surface.
Keith Lerner And because tech is almost 40% of the S&P, and that’sbefore we even take into account communication services, I think it’smore likely of a return somewhere a resting period before, you know,before it takes the baton back. But again, below the surface, people arepicking individual stocks, doing sectors. I think there’s still a lot ofopportunity. And as I as you just mentioned, I small caps are at freshhighs, I think will be a beneficiary of some of that rotation as well.
Caroline Woods So if an investor doesn’t have exposure to small capsjust yet, is it too late to get in or is there still value there?
Keith Lerner You know, we still see value there. You have to yeah. Thinkabout things in context and zoom out like small caps. Up until recently,you know, the relative price of small caps was the lowest in about 20years to large caps. So we just think there’s more to go here. And Iwould also say it’s also in some ways, even though small caps arethought about being economically sensitive as investors look beyond bigcap tech.
Keith Lerner But maybe surprising for people is small cap tech is is isis is doing quite well. In fact, small cap tech is up almost 50% thisyear. So why is that? Well, I think as you have these trillion dollarcompanies and money moves out and looks at the picks and shovels ofthis, I bill, they’re looking beyond the.
Keith Lerner So in some ways small caps benefit from the economyimproving some more exposure to financials industrials. But also it doeshave this kind of higher beta technology sector. As part of the as bythe euro index.
Caroline Woods You know, some investors might look at record highs andassume that stocks must be expensive. Are they? And I guess which areasof the market are expensive right now and where is there still value.
Keith Lerner Yeah. You know, it’s interesting when stocks make new highspeople get there’s a lot of anxiety. And you know I came into thebusiness in the 90s. New highs was a good thing. And you went through acouple crisis as far as the tech bubble, the financial crisis. Andpeople get nervous in new eyes when we test out, I guess, to the firstpoint where we test out new highs.
Keith Lerner And you look at a year later, returns are around average,so not better or worse. So I often say like new highs are a feature of abull market, not a, not a bug. To your point on the, the valuation side,we are which relative to history on different indexes, especially thelarge cap index. But I would also say, like, you know, it’s hard toreally compare today’s market versus the market from, you know, 30 yearsago, because 1990, the S&P 500, tech sector was only about 5%.
Keith Lerner I mentioned earlier, it’s almost 40%. Those companies tendto have higher valuations, just in general, higher profit margins. Andthen when you move away from the the, you know, the tech sector and youlook at small caps and mid caps, they’re around, you know, the averagevaluation for the last 20 years. And then maybe the last point on thisthis year as we look at the S&P as a whole, the entire game this yearhas been all earnings.
Keith Lerner The valuation has actually compressed this year. So thattells you how strong earnings, are. And then to your question aroundwhat’s expensive, what’s not I you know, text around the 25 multiple.It’s come in from 32. I can’t call that cheap. But I don’t think it’soverly grievous either. And given their earnings momentum and as we lookthrough most of the sectors, most of them actually look prettyreasonable.
Keith Lerner I don’t really see much in our work that suggests thingsare are, well, overheated. As far as, as I look at the 11 sectors forthe, the S&P, because a lot of these sectors, whether it’s health care,whether it’s financials, they have lagged somewhat, maybe, you know,industrials, you could argue is somewhat more expensive.
Keith Lerner But that’s also because that’s being looked at more as Iplay relative to history.
Caroline Woods But thinking about what’s actually cheap right now. Youmentioned small caps. Are there any areas that you’re flagging as onsale?
Keith Lerner Yeah, I would say on the margin I would go back to thefinancials being relatively cheap. And if the economy continues to chugalong, which is our base case, they should be able to to do well, youknow, healthcare, we’re more neutral. It’s a cheap sector. We look atsomething that’s cheap and that has earnings momentum.
Keith Lerner So that combination is somewhat lacking at this point. Butthat is a cheap sector. And with energy we’re giving that a little bitmore of a leash. You know energy was the hot sector early this year.Obviously it’s come down a lot as we’ve moved. You know, oil prices havecome down from about $100 down to the mid 70s.
Keith Lerner But now on a short term basis, it’s relatively oversold.And the valuations have come in quite a bit. So we think okay, we’regoing to give us a more room here. That’s one of the cheapest sectors inthe market that we see today.
Caroline Woods It sounds to me like you’re pretty bullish, even thoughyou might be expecting some consolidation in the near term. What’s theone risk investors are under pricing today though.
Keith Lerner Yeah. You know and I would phrase it like when I thinkabout the overall market, our mantra for the last few years is this thisbull market deserves the benefit of the doubt. As a portfolio managerand as a strategist, I’m always worried about the downside risk. Andthings get me wrong. And I would say, I mean, one thing that we’rewatching closely right here is the ten year Treasury yield.
Keith Lerner It’s hovering around 4050. And we started to see that moveup in a meaningful way. I think that would be a risk for the overallmarket. And then obviously we have, you know, a new fed chair with adifferent point of view about how to, move forward. I think that’s goingto provide some more volatility. We’re also in a midterm election year.
Keith Lerner And I will just say, even though we’re positive, we dothink it will be bumpier. Historically, we tend to have about threepullbacks a year of at least 5%. We’ve had one pullback. So I would justyou know I I’d probably say be somewhat balanced in that stay with theprimary trend. Likely to see some bumps whether it’s interest rates themid-term elections or often it’s something that we’re not talking abouttoday.
Keith Lerner I always talk about this carousel of concerns, like who hadIran on their bingo card. As far as one of the main risks for themarkets this year. So I think we have to be prepared for that. But whatwe’re focused on is really going back to the basics is profits, profits,profits. And that’s what we’re going to be following to make sure thoseearnings continue to move up.
Keith Lerner We start to see that change at all. You know I’ll try andwe’ll also change. But so far so good okay.
Caroline Woods All right I think it’s a good time to transition to ourrapid fire game of this or that. Quick questions quick answers. Are youready Keith.
Keith Lerner Way to go.
Caroline Woods Valuations today. Expensive or fair? Fair S&P 500 by yearend. Higher or lower from here.
Keith Lerner Higher. And that’s supported by when we’ve seen a lot ofthe momentum we’ve seen off the lows recently. Even if you have somegive it back to me. That should be a positive for the for your end.
Caroline Woods How much higher?
Keith Lerner You know, a long time ago I did away with trying to doprice targets, but, I would just say going back to the studies that wedid, after we had these strong gains, they suggest, you know, 5 to 10%upside just based on historical basis. Is is is is this is, potential.
Caroline Woods So 5 to 10% more.
Keith Lerner Correct from where we are today? Just the basic studiesthat we did after having these kind of momentum, thrust that we’ve seensince the March lows.
Caroline Woods Okay, summer set up pause or push to new highs.
Keith Lerner I think we’re more likely to have a more of a summer pause,more of a refresh before making new highs towards the end of the year.
Caroline Woods Bull market, early, middle or late innings.
Keith Lerner I would say it’s more, you know, six, maybe 6 to 7 inningsis our thinking coming into the year. We call it the seventh inningstretch, but we still think this this bull market has the time left.Last thing I’ll just say quickly is the first part of the bull markettends to be the strongest. And then the last part of the bull markettends to be the second strongest.
Keith Lerner So keep that in mind.
Caroline Woods Market leadership, tech or broadening.
Keith Lerner Near-term broadening money eventually I think, rotates backto tech. But I think that’s a later in the year story.
Caroline Woods The biggest beneficiary of that broadening.
Keith Lerner I’ll go back to the thing we’ve talked about today is, issmall caps.
Caroline Woods Small caps or financials from here.
Keith Lerner Oh, that’s a tough one because, for small caps to work, youneed financials, to a certain extent, but I would still stick with smallcaps. I think there’s more leverage to the overall economy.
Caroline Woods More upside energy or industrials.
Keith Lerner Oh, that’s a tough one. What does it mean? Reversion play,which is energy and went to more momentum play industrials. I’ll I’ll gowith with with energy as far as more upside potential given how oversoldit is.
Caroline Woods Better beaten down sector health care or consumerdiscretionary.
Keith Lerner I’d go with health care, even though we call it CharlieBrown, that it tends every time you think it’s gonna get going and itdrops the ball. But, I’ll go with health care.
Caroline Woods Consumer discretionary or consumer staples.
Keith Lerner I would go, we’re both we’re on the way, both sectors. Sothat’s a tough one for me. Can I do a push on that one?
Caroline Woods So neither.
Keith Lerner You know, I’m not we’re not we’re not bullish on eithersector right now.
Caroline Woods I trade healthy leadership for too much concentration.
Keith Lerner I think healthy leadership I think for some peoplesomething that the US should keep in mind. There was a study done byArizona State that showed about 2% of stocks account for almost all ofthe outperformance of stocks over time. So I think it’s, I think it’sbasically just a reflection of the I innovation, bull market that we’rein.
Caroline Woods The biggest second half risk.
Keith Lerner I think it’s race is probably the biggest risk. I think themidterms as well. And, I think oil looks pretty contained, but that’ssomething to keep an eye on as well.
Caroline Woods Rate hikes this year yes or no.
Keith Lerner No we are we’re still in the camp that the the Fed’s goingto stay pat today okay.
Caroline Woods So no rate cuts either market sentiment today complacentor appropriately optimistic.
Keith Lerner On a short term basis. Slightly complacent not at anextreme but the put the call ratios are at a extreme meaning there’sbeen a lot of buying and not a lot of protection. So slightlycomplacent.
Caroline Woods Record highs reason to be cautious or reason to stayinvested.
Keith Lerner Which is to say invest it. That’s what the book suggests.Again, a feature of a bull market, not a bug as long as it’s backed byfundamentals, which this one is, in our view.
Caroline Woods One word to describe how your feeling about the marketfor the rest of 2026.
Keith Lerner When word oh, I was I say given the bull market back to theDow and I don’t know if I’ve one word, but uptrend.
Caroline Woods Keith Lerner Chief Investment Officer at Truist, thankyou so much.
Keith Lerner Thank you.
Caroline Woods If you enjoyed this street talk, check out our fullinterview with Mark Gibbens. He has an 8200 price target for the S&P 500and explains how to position for the next leg higher.