Transcript:Caroline WoodsJoining me now is Sonali Basak, chief investment strategist at ICapital Sonali. Great to have you back. So good to have you.
Sonali BasakYeah, it’s good to be here. Thanks for having me today.
Caroline WoodsWell happy Friday. The S&P 500 only about you know, it’s down about 1% today. Only about 1.5% away from record high Sonali. But this rally has really been driven by a pretty narrow group of AI related stocks. How healthy is this market underneath the surface?
Sonali BasakVery good question. That is one of the bigger things that does concern us, the lack of breath in the market, the fact that you’re seeing such concentrated trades. The other thing that concerns us a little bit is not just that you’re seeing just those kind of eye focused names of late that had gotten a huge bid. But the fact that we think that some of this is really momentum driven, it is, a little bit speculative.
Sonali BasakRemember, there are a lot of names out there that are tied to double, triple levered ETFs. You know, while there were a lot of animal spirits in the last month or two, let’s say. We do think that some of that air is going to be popped out of the balloon. Now, what we mean by that is not that we can’t trade higher from here.
Sonali BasakWe do think that things could get a little volatile, because we do think that some chips will be taken off the table. You certainly saw some of that this week when it came to some of those hardware names in the broader market. But with that said, we do think that pullbacks could start to create some opportunities here. And when you look at the broader market, we urge investors to really look at areas like financials, like industrials, areas of the market that may not have kept up with some of these areas that have just rallied so hard in the last month or two.
Caroline WoodsOkay. So let’s break that down in terms of that air coming out of the balloon. How big of a pullback do you think we could see.
Sonali BasakWe don’t think it needs to be extreme really. We just think that this year is going to be a volatile one. And it’s for a few reasons remember. One really interesting dynamic is you saw a lot of retail investors really dive into the market after tax day. We had a very robust set of refunds that have met many individual pockets.
Sonali BasakAnd so we have seen that turnaround, right. People have had money on the sidelines sustained. But we were seeing, as you see do a lot of the macro data. We are seeing savings rates start to decline as well. People are feeling the pinch of inflation continuously. Just kind of given how high oil prices and other types of pricing has stayed high for so long.
Sonali BasakYou think these prices, you think housing prices, you think mortgage rates. There are a lot of areas of the economy that are still seeing some meaningful price pressure that could impact the ability for people to use that additional spend. The second half of the year could be volatile. There’s some market structure reasons for that. To remember the first part of the year, you had the fed really supporting the Treasury market with a fair bit of liquidity, buying short term debt.
Sonali BasakSo we just think that the second half of the year, some of the forces between tax refunds and the Federal Reserve that provided liquidity for the first part of the year are starting to see those tailwinds start to fade in the second half. And for us, what that means is a more volatile market. So maybe not a major correction or a dried out.
Sonali BasakI don’t really see the reason to believe that yet. We don’t think that sentiment is so negative. But we do expect volatility.
Caroline WoodsOkay. So the S&P 500 is currently up about 10% year to date if you round up. So we’re now looking at a third straight year of double digit gains for stocks. Do you think by year’s end will still be in that double digit percentage gains for stocks or do you think will be lower?
Sonali BasakYou know, interesting question. We could be, in the double digits. That’s not really our base case right now. We are still thinking the high single digits. Perhaps. But, you know, if it’s 11% or 9%, I don’t know that it matters so much and that we’ve seen a really tremendous run up in equity markets the last few years.
Sonali BasakAnd certainly the macro environment is complex right now. Now, if you look at Wall Street consensus estimates, we just came off a tremendous earnings season. And the expectations are for earnings to be a little more compressed than what we saw in the most recent quarter. So will we still have that same earnings tailwind. That is my question. Because if we do we can continue to see robust growth in the equity markets.
Sonali BasakI think also that’s something is underappreciated. Is that in a market like this where, inflation is a little elevated here, you do have a scenario in which equities look good relative to other asset classes. Bond investors don’t love inflation, and equities tend to perform generally better in periods of moderate to high inflation. So we do think that equities, generally speaking have a meaningful lift though.
Sonali BasakWe would also add that diversifying here still makes sense. Just given that we haven’t seen those tremendous run ups like we had been talking about before. Outside of the I related trade.
Caroline WoodsAnd we’ll talk about preparing our portfolios for potential volatility and potentially a pullback. But before we get to that, I also want to mention we have the May jobs report that came in much better than expected. Stocks are under pressure today at least at this morning. But does a strong labor market help this rally or does it actually complicate things for the fed and for the stock market.
Sonali BasakWell, today clearly it’s complicated, right. Because you do see those expectations for a rate hike starting to bake into the market. Now we don’t believe that the fed necessarily has to hike rates this year. But certainly if they do, that will be a challenging story for the equity market, particularly some of the smaller cap stocks. You think about the Russell 2000 and the bid that it got this year.
Sonali BasakWill that become compromised if we see interest rates remain high or higher from here? Now, again, remember the other thing that’s challenging about high interest rates is we were just talking about how mortgage rates remain elevated. If we see a rate hike, you would certainly see, even higher mortgage rates. Right. The ten year yield would also likely trade higher on the heels of that or the ten year trade lower, and the yields would be higher.
Sonali BasakSo we do think that this creates a complicated dynamic. Now with that said, we have been saying since October, November of last year that the labor market had been stabilizing. We have been saying all year long that a lot of the worries around the job market and I have been overblown. There is a real chance here that I could go a very long way, actually, in terms of not just supporting growth at a lot of companies, but also making sure that, that the employment situation and the GDP situation, across the United States remains robust.
Sonali BasakRemember, a lot of the reason we’re seeing growth is business spend. And we are, I think, interestingly enough, seeing companies spend or trying to spend a little less money on I right now rather than, more money without seeing the ROI.
Caroline WoodsWell, and we’re also starting to see some investors take profits in I related names. If you take a look at the the weekly performance, Intel is obviously up huge this year but down 8% this week. And we have Broadcom down significantly. We have obviously some of the Meg seven down. Is that just normal consolidation or or is there something bigger changing beneath the surface.
Sonali BasakYou know I think Caroline you know there’s more than anybody that what people tend to do is chase rallies. And we remind people constantly try to buy low, sell high or buy low and hold. Right. Because right now what you’re seeing is a lot of people getting into a lot of trades kind of late in the game. And really those opportunities of sell offs create meaningful opportunities to look at the stock again and say, where is the price to earnings ratio now on this?
Sonali BasakWhat does that look like historically? Which is why I pointed out to sectors outside of I, because you are still seeing very historically high multiples within certain sectors and certainly within certain names within those sectors. So if you look at the Philadelphia Semiconductor Index, what’s been interesting all year is that there’s a lot of names that have seen, you know, not double digit percentage increases, the triple digit percentage increases.
Sonali BasakSo more than doubling or even tripling in some cases, whereas Nvidia actually hasn’t risen that much this year because of concerns around competitive pressures. So actually we just urge investors to not look at a stock that’s run up two, 300% and say, let’s keep chasing, especially because people are starting to cough out. Retail allocations are still near record highs right now.
Sonali BasakBut look at the things that are actually undervalued. This is the perfect moment to do that, because so many of those names have been left to the side.
Caroline WoodsSo you mentioned financials. You mentioned industrials. Dig into what we should be doing, to prepare our portfolios a bit more, where you’re finding value and how we should prepare for this volatility. That could be ahead.
Sonali BasakSure. I think the one big challenge investors have had is diversification. How do you diversify away from this eye trade, because there are so many parts of the economy that I trade hits. One thing I say is think about financials. Financials right now are trading kind of in line with where consumers, consumer focused stocks have been headed.
Sonali BasakReally weak sentiment there. We’re a little worried about the consumer sector just because we don’t quite know yet how it’s going to shake out given how much inflation is now elevated. But financials have other things that play to the I related story. All of these IPOs, all of these mergers and acquisitions, all of the spend you’re seeing behind data centers, all of the bond market activity.
Sonali BasakI think just this week, Google went out to raise $80 billion in a single fundraise. That’s more than the market cap of some of the financial companies that are in the market today. How amazing is that? And so remember, a lot of these financial companies are either providing that debt or raising the money for these companies. So it’s a little inconceivable to me that a lot of these financial names would be benefiting from the same thing that the technology sector is.
Sonali BasakThose financial companies are not getting that same love from investors, because investors seem to be so concerned about the consumer that they’re missing the other areas that these banks and other types of financial companies are winning out from, from this boom that we’re seeing.
Caroline WoodsYeah. You mentioned the the upcoming IPOs. We have space and potentially open eye, all potentially coming public. Some investors worry though that money could rotate out of existing stocks to fund those purchases because there’s a lot of FOMO we know in this market. Is that something investors should be concerned about? Do you look at this as a sign of confidence in the market, these these names coming to market at such huge valuations?
Caroline WoodsOr do you see them as a sign of froth?
Sonali BasakLet me try to best explain why that’s happening, because I think it will help explain, why it’s not as scary as a challenge. So we’re looking at what the indexes are doing. Some of them will be including space acts early on. And as we had heard from the S&P, they’re not going to have an index inclusion right away.
Sonali BasakAnd so for the index inclusion, the fact that we’re not seeing it across every index is actually kind of positive for that rotation story. But generally speaking, investors are going to have to rebalance to some degree to to fit space into their portfolios to fit eventually anthropic into their portfolios should anthropic get the same treatment. And so, it’s a little bit structural.
Sonali BasakWith that said, it doesn’t mean people are choosing one stock over the other. One thing, Caroline, that we believe though, is that among the companies that are going public this year, investors will choose. Because right now when you think about I see there are semis, right? There are the leading providers. There are different parts of the software companies.
Sonali BasakThey’re different parts of the food chain. So when these three companies go public, which one is going to command the most dollars in terms of how much investors get in after the fact is going to be really important. Remember also that there are lockouts associated with these IPOs. So I would say the bigger concern, at least from the big money, is not about that rebalancing story money moving from other stocks into space X, OpenAI and anthropic.
Sonali BasakThe bigger concern is what happens when the lockups expire for the existing investors. And how much do those in this existing investors plan to sell?
Caroline WoodsSo best advice for the everyday retail investor who’s listening in right now thinking, if only I got in when Amazon went public, or look what Tesla has done since it went public. And they as they think about taking part in some of these IPOs, what’s your best advice for them?
Sonali BasakYou look back and remember some of the hottest IPOs over the last few decades. And just remember how long they took to pay off. It’s not really about the IPO moment. It’s about the long term trajectory of the company. And this year can be volatile, especially for the earnings cycles that come right after the IPOs, because these companies burn a lot of cash, and they’re probably going to have to go back and raise more money through stocks and bonds.
Sonali BasakSo if you’re getting into these IPOs, it might not be a super easy ride at the beginning, especially if you think it’s going to be the Amazon of the future or the Google of the future. You know, it took years for Uber to get back above its IPO price. So if you really believe in any of these companies and you really believe that they’re going to be the next Amazon, just remember that to get that sort of payoff, it could take a long time.
Sonali BasakAnd in this certain these certain situations even more so because we have never in American history seen companies go public that are this large.
Caroline WoodsOkay. I think this is a great time to pivot to our rapid fire round. We have quick questions. Quick answers. Are you ready Charlie?
Sonali BasakYeah.
Caroline WoodsHere we go. IPO market healthy or frothy? Healthy in space IPO game changer or overhyped.
Sonali BasakGame changer. Definitely a game changer.
Caroline WoodsAI spending opportunity or risk.
Sonali BasakCan I say both. Is that fair?
Caroline WoodsWe’ll give you a both market in the second half. Stronger or bumpier? Bumpier stocks or bonds for the rest of 2026. Stocks highest conviction sector for the rest of 2026. Financials area of the market you’d be most cautious on.
Sonali BasakHardware. I see.
Caroline WoodsThis one trend investors aren’t paying enough attention to that.
Sonali BasakBecause some tokens tend.
Caroline WoodsOne risk that could surprise markets in the second half.
Sonali BasakLast token spend.
Caroline WoodsOne thing investors are too worried about right now.
Sonali BasakA bubble.
Caroline WoodsEye bubble.
Sonali BasakYeah, absolutely. I is here to stay.
Caroline WoodsJobs report market tailwind or fed headache.
Sonali BasakMarket tailwind.
Caroline WoodsMore fed cuts in 2026. Yes or no.
Sonali BasakNo.
Caroline WoodsOne word to describe how you’re feeling about the market for the rest of 2026. Constructive S&P 500 price target by year end.
Sonali BasakWe think fair value is between 75 and 7800. So not far off from where we are here.
Caroline WoodsSonali Basak Chief investment strategist, ICapital. Thank you so much. Really appreciate it.
Sonali BasakThank you.
Caroline WoodsIf you enjoyed this street talk check out our full interview with Tiffany McGhee. She thinks the S&P 500 could go as high as 8200.