Breaking down what investors should do with their holdings in FAANG stocks

Comerica Wealth Management CIO John Lynch joined Yahoo Finance Live to break down if investors have had enough of the FAANG stocks or if investors should still invest in them.

Video Transcript

[MUSIC PLAYING]

ADAM SHAPIRO: All right, there is roughly 15 minutes to the closing bell. Dow is still up about 390 points, S&P 500 up about 40 points. And NASDAQ is up about 108 points.

Let's keep talking about what's going on with your money, and we're going to do that with John Lynch. He is Comerica Wealth Management CIO. Thank you for joining us. And I'm going to be short-sighted here, near-term focus-- are we FAANGed out? Enough with the FAANG stocks or should we still consider them?

JOHN LYNCH: It would appear that was the case just going into last week and starting this week, because we had so many flows going into the cyclical space. It looked like everyone was tired out of them. But it would appear this week with increased, unfortunately, bad news about the variant, the slow distribution of the vaccines, we started to see a bit more of a bid for FAANG yet again. And certainly earnings have come in favorable for the majority of them.

SEANA SMITH: John, how are you suggesting investors be positioned, then, right now?

JOHN LYNCH: Yeah, I still think we need to lean cyclically. I do think we'll see a recovery. I'm very concerned about the valuations that we experienced in the FAANG or the big tech, if you will, move that we saw that last year. I think the market finished last year maybe 5% or 6% overvalued, as I would calculate it. And looking at the S&P right now, we're only a couple of percentage points where I think we'd be fairly valued.

So it's really going to come down to earnings. And I think you're going to see the better earnings as reopening takes hold, if you will, in the second quarter. I think you're going to see the cyclical companies deliver better earnings.

ADAM SHAPIRO: I am curious, for a passive investor, and I am one of those folks who just does an index fund and keeps my eyes shut, S&P 500, for instance, we're already seeing, though, in at least the first week of their earnings reports, we saw overperformance or outperformance on earnings reports. And at the end of the year, what I'm asking you is am I expecting to see true growth in the S&P? Because it sounds like you're saying that's essentially going to be flat.

JOHN LYNCH: Well, I need to see earnings before I raise my estimates, if you will. I really want to make sure that-- I don't want just the price to drive growth, right? It's got to be earnings. I always tell our investors we want the P to-- the E to support the P in the P/E ratio. And I think that's so terribly important.

And last year, price got ahead of earnings. Price got ahead of the economy. And it's conceivable this year that you see the economy outperform the market, if you will, from a momentum standpoint. And it'll really be important then for earnings to deliver.

So to the degree that we're a little below consensus, what I've been most impressed with thus far in the fourth quarter, similar to what we experienced in the third quarter, is that companies are displaying tremendous operating leverage. And tremendous is not a word a chief investment officer is opposed to throw around quite a bit. However, what we've seen is that coming out of such a cyclical pullback like we experienced last year, you have productivity growth. You have businesses that have cut costs.

You have earnings that are being discounted next to zero. So that is a big boost. And I think you're going to see the better opportunity, as I mentioned earlier, in the cyclical side of things.

SEANA SMITH: John, how about the inflation debate? We heard from Fed chair Jay Powell yesterday. He's clearly not concerned about it. But what do you think the market is anticipating?

JOHN LYNCH: Right, well, it's fascinating, right, when the Fed chair is so much more clear with projections. And I just think we have to watch the market. It's very curious that the 10-year got up to what, 119, 120.

And then curiously, when the Biden administration's economic package came out and the plans came out, the market kind of turned. We saw a little less cyclical leadership, right, and we saw the Treasury curve actually flatten slightly. So to the degree that we have that cyclical rebound, I think it'll be important that the market needs to send a message on interest rates that inflation probably won't be as bad as people fear.

I think you're going to see a transient spike when you have year-over-year comparisons, like we'll be experiencing. But nonetheless, inflation is all about wages. And we just learned today that claims were down slightly. So that's something to be pleased about. But there are still 18 million people on some form of state or federal unemployment assistance. So I think it's going to be very difficult to have a sustainable inflation threat without the participation of wages.

ADAM SHAPIRO: We had Jay Powell just yesterday talking about disinflation and the real unemployment rate being around 10%. John Lynch is Comerica's Wealth Management CIO. Thank you for being here to give us some insight on what could be coming our way for the--

JOHN LYNCH: Thank you.

ADAM SHAPIRO: --rest of 2021. Coming up, Reddit revenge as the Wall Street Bets crowd pushes shares of GameStop and AMC to new highs, also squeezing old-school shorts who got caught in the stampede. We have the latest right after this.