The S&P 500 is hovering near record highs, but with tariffs looming and geopolitical tensions some investors are wondering if this rally can last. Art Hogan, Chief Market Strategist at B. Riley Financial, joined TheStreet to break down what’s driving the market rally, where he’s putting money to work, and what to watch in this week’s jobs report.

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Full Video Transcript Below:

CAROLINE WOODS: So Art, the S&P 500 is at or near record highs. Are you a believer or skeptic of this rally?

ART HOGAN: I’m certainly a believer. I think the reason we got here is pretty intuitive. We started this year in markets and were quite defensive at that. In general, people wanted to get out of risk assets. They were selling things like technology, communication services and consumer discretionary. And buying things that were very defensive, like utilities, and health and consumer staples. And that was all because the front end of this new administration’s policy rollout was really the tough medicine, if you will. We had immigration and closed borders and we rolled out a very chaotic trade war. And that really encompassed. Investors attention all the way through to the beginning of the second quarter. Once we got past this April 2nd liberation day and got over the hump of some worst case scenario predictions on tariffs. Investors are starting to get a little more comfortable that some of the good policies might flow through. And what does that mean. Certainly tariffs not as high as we thought they would be back in April. Second but other things like passing a bill through Congress to continue the corporate tax rate that we have. And the other is the possibility of less regulation. And some of those things, the taxes and the less regulation would serve as an offset to obviously higher prices because of tariffs and slower GDP growth because of less immigration and and a shrinking labor force. So to me, I think we’ve kind of crossed over the rubicon on some of the worst case scenarios. And now market participants can start looking at things and saying, well, lower corporate taxes is probably good. The Fed cutting rates at the end of the year. Probably a good thing. And certainly we’ll start to feel the effects of less regulation. We’re starting to see that in some of the big banks already. 

CAROLINE WOODS: But is that all priced in with the S&P 500 at record highs. Is this as good as it gets or can the market ultimately move higher?

ART HOGAN: You know it’s interesting. Every time a market comes to an all time high after having spent some time selling off, people get concerned that this is as good as it gets. And if we didn’t have all time highs with the S&P 500 would be back where it was when I started working at 800. So, you know, this is not as good as it gets. I think we’ve got some good news in front of us, not the least of which is we’re likely increasing everybody’s productivity because of artificial intelligence. We’re likely seeing a lot of smart investment going on in data center and infrastructure build out. And that’s why the industrials are one of the best performing sectors. I think that’s very healthy. We’ll likely see more publicly traded companies than we have right now. So if we went back 15 years, there was 8,000 publicly traded companies. Right now, there’s only 4,400. So the fact that we’re seeing IPOs come to market and having a warm reception, I think is a positive. But I think the most important positive is earnings are growing and estimates are actually going up. Last week, FactSet showed that S&P 500 estimates for this quarters quarterly earnings reporting season just went up. So beginning of the year second quarter earnings look like they might be about 14% year over year. For the second quarter. That went down as low as 7.5% We’re back up to 10% now. So that’s a good sign. Earnings are heading in the right direction. And a lot of excitement around artificial intelligence is certainly going to continue to be a tailwind here. 

CAROLINE WOODS: On that note though, are the impact of tariffs has yet to really make a dent on corporate earnings or even on inflation. Do you expect that to change in the second half of the year?

ART HOGAN: I do, yeah. We’re going to start to see some data reflect that. Now data is going to be kind of messy because we had a huge pull forward by both companies and by individuals in the first quarter where, you know, you went out and bought a new refrigerator in March. You’re not going to buy another one in July. So multiply that by hundreds of millions of decisions that are made by both companies and consumers, and we’ll see a slowdown in purchases of goods that’s going to offset some of that initial impact of higher goods pricing. We’re starting to see that in the CPI and the PCE’s. But I think when we walk through that, when meaning, you know, the stores run out of that pre-tariff inventory and you actually need that new refrigerator. Again, those purchases are going to reflect higher prices. And that’s certainly going to show up the offset to those higher goods pricing is some of the other components of the CPI basket, and energy is of those components. So so far, we’ve seen a balance here where yes, goods pricing is starting to go up. This is the first time we’ve seen it go up in a couple of years post pandemic. But you’re seeing energy prices being an offset. Some of the other parts of the basket, like owner’s equivalent rent or basically housing and shelter costs have come down and likely will continue to come down. So we’re going to see inflation, but it’s going to be mostly goods price. And then perhaps we’ll see an offset to that in things like energy and shelter. 

CAROLINE WOODS: Yet we still don’t actually know what those tariff rates are going to be. So with that July 9th deadline approaching, also, there’s the August deadline approaching. How do you expect markets to react, especially if we don’t actually get any clear answers if we kind of kick the bucket down the road?

ART HOGAN: Yeah I get the sense that both of those self-imposed deadlines likely don’t matter necessarily. So I think the consensus view is that a lot of the rest of the world is going to look like the trade agreement that was put together with the UK, basically 10% reciprocal tariffs. We’re going to have some carve outs around the edges for different sectors like they did with automobiles, the slightly higher on steel and aluminum. And if that’s the template that we just assume is going to happen with the rest of the world, then likely will be the case if there’s some slippage past the July 9th self-imposed deadline. I think that’s probably OK. The same is likely true for this big, beautiful bill. If it doesn’t get to the president’s desk by July 4th, that’s likely. OK they’ve got till the middle of August, to your point, to raise the debt ceiling. So we don’t have to close the government down. 

And you and I know we see this all the time, and it’s, you know, we tend to wait till the 11th hour to get something accomplished, but it feels as though the momentum is strong enough to get this across the goal line before we get to any important deadlines there. So I don’t know that those are necessarily going to be the bumps in the road. We feel in July. I think it’s going to be to your earlier questions about when do we start actually feeling that data show up. And I think where that shows up is in things like the labor market, which is starting to show some softening, right? So in the first quarter, we averaged creating about 165,000 jobs a month. We just had the last non-farm payroll number was about 140,000. And the estimates for the next one is about 114,000. So we’re clearly creating fewer jobs. And the big question is how many jobs does this economy need to create to keep unemployment full. Well, last year that answer was probably somewhere between 150 and 200,000 jobs with the growth of our labor. But now that we have much less immigration, that number is probably somewhere between 100 150,000 jobs. So my concern would be when we get that jobs report, where we only create 50 or 75,000 jobs, that people start to get concerned that this slowing or this, this cooling of the labor market is going to turn into something more abrupt that could actually push us into some negative GDP growth. 

CAROLINE WOODS: What is your expectation for this Thursday’s jobs report?

ART HOGAN: Yeah, we get a Thursday jobs report because of the holiday on Friday. So imagine having to do all that math every month. But you know, the month of July is only going to be four days old. And you have to calculate how many people got jobs in the month of June. So whatever happens, whatever comes out, expect the revisions to be large, right? It’s there’s, you know, 162 million people that work. We have to figure out how many of those changed on a monthly basis. I suspect we’re going to be somewhere around consensus. So that’s, you know, call it 114,000. So I think, you know, hundreds to 120 is probably the acceptable range. Anything hotter than that was probably going to be good news. But we start dipping below 100,000. If we were to get a print that was like 85 or 90,000 jobs being created, I think that’s going to turn some heads, and that’s when you’re going to start to hear people talking about, shouldn’t the Fed be cutting rates here. Isn’t one of their mandates full employment. That won’t be enough evidence for the Fed, but that’s what they’re watching closely. They need to see that unemployment rate is ticking up. They will defend that before they defend their inflation target, because they’ll believe that tariff pricing is going to be a one time price increase and not ongoing inflation. So Yeah, that’s something we’re watching very closely. We see if we see a low number on that report on Thursday that’s going to really wake up the club. 

CAROLINE WOODS: Well the unemployment rate is expected to tick slightly higher to 4.3% from 4.2%, What would that number need to look like for a July rate cut to be in play?

ART HOGAN: 4.4% would definitely do it and that would be outside. It that would be statistically outside of the norm in terms of a one month increase. And it’s not impossible. So if you look at the weekly jobless claims and it’s, you know, we’ve for the first quarter they averaged between call it 205 and 210,000 weekly jobless claims. So that’s new people coming on and getting unemployment for the first time. That has gone up to between 235 and 245,000. So that’s a significant increase at some point in time that’s going to show up in both the non farm payroll number that JOLTS report and certainly that unemployment rate. So if we saw a tick up to 4.4% I think that would move the chances of the Fed cutting at the July meeting from what right now stands at about a 25% chance to north of 50% chance, we already have heard from three of the voters that they’re ready to go in July. So I think you get a sloppy report on Thursday. You likely see the Fed shifting gears a bit and making it a 50/50 proposition. 

CAROLINE WOODS: Alright. I’m curious how you’re positioning your portfolio, knowing that the economy is slowing down, knowing that the market is at record highs, but you don’t think this is as good as it gets? And knowing that there’s still a lot of uncertainty out there and some headline risk that could have an impact on the overall market. 

ART HOGAN: Yeah so we’ve got a very diversified barbell approach. And basically what that means is you on one side of that barbell, we really like the things that play into this new administration’s policies as they start getting rolled out. So one of the things that we like is industrials. And that’s all about that sort of build out of telecom and AI and data center, but also repairing the energy grid. And so industrials has been a cornerstone of that. We like the financials because the drag argument really plays well into the financials. I think they sort of sit-in the catbird seat of less regulation being able to lend more money, buy back their shares. Drive M&A activity and certainly see increased dividends. Along with that, we like health care, which has been one of the beat up sectors. On the other side, we like to stay market weight in the I mega-cap technology leaders because I think that there, you know, while they seem expensive on a standard PE basis, there isn’t one of the large cap, large cap technology stocks that doesn’t grow its earnings North of 40% and doesn’t have margins that are South of 70% So when you think about it like that, perhaps the multiples that they have are deserved, and we’re starting to see some new entrants into those mega-cap names. So it’s not just all about hardware like Nvidia  (NVDA) , which we’ve had on our focus list forever, but now software names are becoming very important in this artificial intelligence space. It’s almost as though we’ve shifted from, OK, who’s the best hardware maker like Nvidia, to who are some of the software companies that are going to be the first adopters to actually make money with this. So, you know, obviously companies like Microsoft  (MSFT) and Oracle  (ORCL) play into that. But there’s a whole host of other software companies, so that’s why we kind of bounce it off. We we rebalance that quarterly to make sure we’re not overweight on either side of that barbell. And that’s going to be our approach going into the second half and into next year. 

CAROLINE WOODS: The only issue, though, Art is aside from health care, which has been the weak link this year along with consumer discretionary, industrials is the best performing sector in the S&P 500. Financials is up there. Tech is up there. So you’re still comfortable putting money to work in those areas despite the fact that we’ve already seen this impressive run higher?

ART HOGAN: Yeah I am I think that the reason consumer discretionary is not up there is because it’s got a couple of names in the weighting that bring it down, and Tesla  (TSLA)  is one of them, right. So Tesla is really wiping out the consumer discretionary. If you were able to buy the consumer discretionary X Tesla, you’d be doing better than technology writ large. So to us yes, we think the tip of the iceberg for drag in financials has just started. Industrials is a very long story. It it takes multiple years to rebuild roads and bridges, to fix our electrical grid, and to just complete the data center build outs that just started. And that doesn’t even speak to how much work is being done on semiconductor fabrication and plans for more. So I think the industrials is a very long run game, even with the move they’ve had right now. The industrial PE right now as a sector is below the S&P 500’s PE by 400 basis points. So while it’s outperformed this year. It’s the first time people have woken up to the fact that these guys are actually doing a lot of important work. That is very artificial intelligence adjacent. 

CAROLINE WOODS: What would you say to someone who sees the market really kind of shrugging off some of these risks out there right now, and who’s wondering whether now is a safe time to invest their extra cash?

ART HOGAN: Well, first and foremost, I would say this is a market that didn’t shrug off a lot of things in the first quarter of this year, right? So remember, this is a market that reacted very violently to the downside. That’s important to remember. This market doesn’t just ignore potential dangers, but once there’s clarity in some of those dangers. So, you know, you had a Israel and Iran conflict that lasted a good two weeks, priced into the energy market, and certainly caused concern by General investors. You had a trade war that began and looked like it was going to be a fiasco. And once we got more clarity on that, markets reacted positively. You’ve got markets that are reacting positively to the potential for lower taxes and for less regulation. So this is a market that has a forward pricing mechanism, certainly pays attention to clear and present danger. But once that seems to clear up, looks ahead to the potential for better earnings and better economic growth. And I think that’s what we’re pricing in right now.

CAROLINE WOODS: All right. We’ll leave it there. Art Hogan, always a pleasure. Thank you so much. 

ART HOGAN: So good to see you. Thank you very much for having me.