'Earnings season is quite surprising on the upside': BlackRock's Chedid

BlackRock Head of Investment Strategy for iShares EMEA Karim Chedid joins Yahoo Finance Live to discuss the latest market action amid earnings season.

Video Transcript

EMILY MCCORMICK: The three major indexes are extending losses this morning. We're seeing the NASDAQ leading the way to the downside, down about 2.6% now. Also seeing the S&P 500 and Dow off 1.5% and 1% respectively. This is coming even as we've seen a massive past couple of weeks of earnings beats across the S&P 500 companies. Heading into this week, 86% of component companies reported a positive earnings surprise for the first quarter. That would be the highest beat rate since at least 2008, according to FactSet data.

Here to discuss this and much more on the markets, we have Karim Chedid, head of investment strategy for iShares EMEA at BlackRock. Karim, it's great to have you on. And in this environment where earnings are really beating estimates across the board, what's really stood out to you? And where are you seeing opportunities now for investors?

KARIM CHEDID: Yes, thank you. I think the earnings season is quite surprising on the upside. Even though we entered the season with a pretty high bar to clear for stocks, because expectations were already pretty possible, going-- pretty positive, going into this season. And even though analysts upgraded their expectations further, these-- this high bar is being cleared. The results are even higher than expectations across the board. And especially what stood out is the performance of cyclical sectors. Cyclicals are really leading the pack here in terms of their earnings results.

The other observation I would make is that stocks aren't being rewarded for their beats as much as usual. They're being rewarded less than historical averages. So, high bar. It's being cleared, but not rewarded as much as perhaps expected.

ZACK GUZMAN: Karim, I mean, when we look at the sell-off today, I got to ask you about that because it's accelerating here, the worst sell-off we've seen for the NASDAQ since March, now off more than 2 and 1/2%. And when we look at that, I wonder how much of it may have been triggered from Treasury Secretary Janet Yellen's comments about interest rates potentially needing to somewhat rise to make sure the economy doesn't overheat. Of course, the Fed's been patient. That's been the image they've been presenting to the market.

But if we are seeing tech stocks continue to sell off, strange to not see the 10-year necessarily rising off the comments here. But when you make the calculations here and just see growth getting hit again, is that expected each time we're going to talk about rates and the fear about the Fed raising rates, that we're going to see a big sell-off in tech and that trend should continue for the rest of the year?

KARIM CHEDID: I actually noticed the same observation you just made this afternoon around the stability around 10-year yields, despite the tech-driven sell-off, NASDAQ underperforming S&P this afternoon for, example. But I think the points that you raised are really, really important to look at. On the one hand, we've got the Fed, who is being very patient. We heard the Fed last week and the week before that.

They're being very patient with their approach. And they so far haven't really acknowledged beyond dropping the word "considerable" in front of risks in the latest meeting, they haven't really acknowledged the pace of economic restart, which we could say is surpassing market expectations, and have been very patient and have been sticking to the approach of being patient, both around rates and also around keeping the same pace of QE.

But the risk that we are running here is that the market starts to do it for them, in a sense. So the risk that we're running here is that as the economic restart continues at a very strong pace and data comes in and really surprises on the upside, as we have been seeing-- and of course, the next signpost is the non-farm payrolls this Friday-- the market starts to adjust expectations.

And yes, here, the tech sector is perhaps a bit more sensitive to the rate volatility that you mentioned. But it's important not to lose sight of the fundamental picture here, which is that despite the rally that we had seen in tech and in 2020 and parts of this year, and despite higher valuations, fundamentals in tech are very, very positive. There's a lot of cash on balance sheets. Earnings are really strong, shooting the lights out. And so tech today is very different to the-- during the tech bubble, for example. And earnings are really coming through. So fundamentally, we still like tech. And it's still well positioned.

EMILY MCCORMICK: Karim, I also want to ask you about inflation, since that's something investors have been watching so closely. And Bank of America had just released a note, saying that mentions of inflation are now up nearly 800% year over year when it comes to companies' earnings reports and calls. But record net margins suggest inflation has been manageable so far. Do you think these cost pressures are going to start weighing on companies in the back half of the year?

KARIM CHEDID: A couple of things here. Inflation is-- it has been surprising on the upside. And there's base effects at play here. Of course, after what we saw in 2020, the starting point is quite low. And there's base effects at play. And we could see this inflation surge continue in the near term. However, that's-- inflation expectations have already moved quite a bit thus far. And so we could start to see that pace moderate a little bit. And in fact, we've moderated our view on inflation [INAUDIBLE] bonds in that light around-- moderate our view-- our positive view on dips in the light of how far inflation expectations move.

To your question around cost pressures for companies, I think one thing that we need to throw into the mix here is that the household, the consumer is in good shape. Savings have gone up over the past year. And the consumers-- the consumer-- the average consumer has a bit of cash to spare, which means that companies probably have more leeway to pass on the higher input costs to the consumer than they otherwise would have in the past. And that matters for merchants.

ZACK GUZMAN: All right, Karim Chedid, BlackRock head of investment strategy for iShares EMEA, appreciate you coming on here to chat with us today.