Fed rate hikes not a ‘draconian kind of effort,’ strategist says

Oppenheimer Chief Investment Strategist John Stoltzfus joins Yahoo Finance Live to discuss earnings season, the effects of higher interest rates, the economy, job growth, tech stocks, and the outlook for the Fed.

Video Transcript

BRAD SMITH: Welcome back, everyone. Futures this morning pointing towards a mixed open. The NASDAQ in negative territory, just barely there. This is all as investors digest disappointing tech earnings, with macro headwinds taking a toll on some corporate results here, while US GDP came in better than expected, with the US economy posting its first period of positive growth for 2022.

However, things may not be as good as they appear. Joining us now, we've got John Stoltzfus, who is the Oppenheimer chief investment strategist. Perhaps we start on some of the earnings that have come through. From what you've seen, how does that kind tee up the rest of this earnings season for you?

JOHN STOLTZFUS: Well, thanks for having me on the show. Really appreciate it. Always good to be on Yahoo Finance. First off, we'd have to say, things are actually better than expected. When we look at double digit returns in terms of gains in-- across the board-- not across the board, but rather, in terms of what has been reported thus far, with 227 companies out of 500 companies having reported, you've got triple digit earnings growth in energy and double digits in industrials, consumer discretionary, real estate, and utilities.

Now, of course, you've got technology is in the red. You've got financials slightly in the red. And both tech and financials are just slightly in the red thus far. So what we've got to say is, overall, in a mixed bag kind of environment, what would expect, that's what we're getting.

So, you know, I think the effects of higher interest rates beginning to slow the economy, that we have economic growth, as you just heard, in the third quarter. We have a slowing, somewhat, in terms of the involvement of the consumer, but yet resilience exhibited, if not robust. And job growth continues to be remarkably resilient, even as some employers who have overhired begin to do layoffs because they just had panic hiring.

JULIE HYMAN: Hey, John, it's Julie here. I'm trying to figure out, as I look across the tech landscape now, we have some pretty notable busts, right? Meta obviously today on the consumer and advertising side, but some of the other misses as well. I mean, Microsoft Enterprise spending was supposed to be holding up better. Then you have ServiceNow, which did really well. So, like, how are you synthesizing and thinking about the big picture when it comes to technology?

JOHN STOLTZFUS: Well, when it comes to technology, which happens to be one of our favorite sectors, what we're looking at here is, we're looking for, because it's so disfavored, is what we want to look for are the companies that remain profitable, that continue to have good cash flow, and pay some kind of a dividend ideally.

So it's really where, in technology, it's the GARP-ier, or the Growth At a Reasonable Price, area of technology. We always look for babies that get thrown out with the bathwater here when investors are impatient on a quarter to quarter basis in that area. And we continue to like industrials, consumer discretionary, and we also like financials, where we think eventually, we'll get a steepening yield curve on a more traditional basis.

BRIAN SOZZI: John, are investors being headfaked by a report, and others, I would say, like Caterpillar? You know, Julie was talking about in the top of the show where new home sales have come way down. Yet you have Caterpillar really having a strong quarter. Is this as good as it gets?

JOHN STOLTZFUS: Well, you know, I think what it has to do when you look at those, if I recall, the chart you brought up, it showed that there was strength in terms of the areas of energy. In one particular area, I think-- there we go. Thank you for showing it.

BRIAN SOZZI: That's why we're here.

JOHN STOLTZFUS: Resource industries--

BRIAN SOZZI: That's why we're here.

JOHN STOLTZFUS: --and construction. I mean, all of this stuff, it depends on where you're building and what you're building to meet needs. In terms of residential, you're looking at slowing remarkably modest, really, for where interest rates have jumped from the start of the year in terms of mortgage rates.

But still, there is this element of resilience in it because the consumer has more money than anyone would have expected at this point with all these rate hikes. And there's a consistency among businesses to want to have enough employees just in case things pick up.

BRAD SMITH: John, how resilient would those businesses need to be if a recession or a real recession felt, seen through business results, seen through the consumer behavior, doesn't start until mid 2023, as some economists have been expecting, and lasts through, what, 2024?

JOHN STOLTZFUS: Yeah, we just don't see it that darkly. And we are-- while we are strategists-- on my team, we have an economist amongst us, and I've been working with economists. I've been in this business for 39 years. I can't believe it. That is a long time. I didn't start at the age of 12, but still, it's a long time ago.

But my point is, when we look at the economic data, what we do find remarkable is that the resilience that's embedded in it, whether it's related to the consumer, where we have seen somewhat of a positive turnaround, though modest, in the consumer sentiment, and we just recognize the fact that those jobs numbers are not falling drastically. And again, what we do see when we see these layoffs, it tends to be in areas where the employers were panicked hiring coming out of the pandemic. And as a result of that, we can't help but think that that's quite normal.

The economists, who are looking for a recession here, will have to see the NBER change its methodology somewhat because you need to see jobs really fall, and you need to see the consumer really roll over. And that's just not happening this time.

And it likely is because there are elements in this that were structured because of what happened with the economy during the pandemic, all the stimulus, the overstimulation, and now a Federal Reserve that, whilst steepening its-- what the cost of money, it's actually healthy. It's the end of free money. And free money caused speculation. But we don't think it's going to be a draconian kind of effort by the Fed ultimately. We think it won't be a Volcker, but will look more like a Bernanke.

JULIE HYMAN: And John, just quickly then, what are the implications for when the Fed is going to start winding down its current tightening?

JOHN STOLTZFUS: I think we're going to have to wait for that, Julie. I think that it'll happen sometime next year. And we think just what you-- the words you used, we think, are really very important. I think it will be a winding down. I think they will sort of ease on down the road, so to speak, when it comes to slowing the pace of the increases in their benchmark rate. I think we're going to get 75 bips.

I think it's pretty obvious that in November and in December, I almost would be-- I think the market would be pleasantly surprised with 50, but I think it could live with 75. But I think if we get into next year, it's going to begin to trail lower because I think the market just needs to feel that the Fed is having an effect at stemming inflation, not ending it, at this point in the process.

BRIAN SOZZI: John Stoltzfus, Oppenheimer chief investment strategist, always good to see you. We'll talk to you soon.