Stock market ‘not giving any due respect’ to earnings beats, strategist says

Evercore ISI Chief Equity, Derivatives, & Quantitative Strategist Julian Emanuel joins Yahoo Finance Live to discuss the market outlook, Big Tech stocks, and cryptocurrency

Video Transcript

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- Anywhere you look right now, it appears to be risk off sentiment. The NASDAQ is down 12% year to date. The S&P 500 could fall below the 200-day moving average today. And the sell-off in Netflix persists after a 24% plunge on Friday. Let's dive into the market action with Evercore ISI chief equity derivatives and quantitative strategist Julian Emanuel. Julian, always good to see you here. What is going on out there in the pre-market? What are you hearing?

JULIAN EMANUEL: Well, look. I think the first thing we have to do, Brian, is sort of step back and think about how rare 2021 was. In a typical year, you get at least one, perhaps as much as multiple 10% corrections. And if you look at the S&P year to date, you're down a little over 7%. Obviously, that looks to build at the opening.

But when you think about what we were have on our plate, whether it's the Fed that's clearly talking hawkishly, geopolitical tension that has ratcheted up seemingly quite significantly in the last 72 hours, and, frankly, reactions to earnings announcements that for the most part have been OK, but the market just not giving any due respect to companies that beat. You put that all together, and it's not a surprise that we're flat footed and defensive into this meeting on Wednesday, the FOMC, that really is a volatility event in and of itself.

- And speaking of volatility events, Julian, as I mentioned earlier, we are seeing VIX futures come down even while current VIX is quite elevated. And so, what does that tell us? What would be a sign to you of sort of selling exhaustion or selling peak? Or do you think we're not going to get it until after the meeting?

JULIAN EMANUEL: When the market is trading like this, Julie, to try and pinpoint exactly when it's going to come is really a very difficult undertaking, particularly when you look at the last few days. You go back to Thursday, you essentially had almost a 2% rally in the index to be followed by a 2% collapse and then a further 2% collapse the next day. So it's very difficult to gauge this. Our inclination would be that if you get any further fear, we're looking at the cash VIX at 35, that's the time where as a patient buyer of dips, which is what investors should be, is where you want to start adding to your positions.

- Julian, is it really that bad out there? To see Netflix down 24% in a session, Roku down 33% year to date, is the next six to eight months that bad for big tech that warrants these really large downdrafts in some household name tech stocks?

JULIAN EMANUEL: We don't necessarily think that it is. But you have to remember is that the valuations of some of these companies became very, very extended, both relative to the last year and relative to the longer-term history of these types of names. And now all of a sudden we're in an environment where the Fed is going to be hiking at the short end. In all likelihood, the fact that inflation has been as persistent as it has been is going to keep the long end of yields moving higher. And all of that works against high multiple stocks.

Now, do all of these stocks tend to be grouped together? They do at the moment. But what we learned last week was that if you miss on growth expectations in an economy where we think you could get GDP growth north of 4%, there will be absolutely no mercy whatsoever for your stock. And I think that's what we saw when the FAANGs started reporting at the end of last week.

- Are we watching a bubble burst in big cap tech?

JULIAN EMANUEL: I don't think so. This is not the same as 2000 simply because the valuations were not quite as extended in any shape or form, particularly in the leaders. What we've seen actually in a lot of ways, though, is the market rationally discounting profitless tech. Those stocks have been in a bear market for almost an entire year now. The question is, is that going to stabilize at some point? And rightly so, given where the Fed is in terms of monetary policy. What we've seen in the last few weeks is the spillover into names that we know are going to have good earnings when they report this week. It's just that the price reactions have been lacking, to say the least.

- Yeah. I think that's definitely an understatement. So, Julian, you mentioned people should be coming in-- I think the phrase you used is they should be cautiously buying on the dips. Where should they be buying? Should they buy the market overall? Should they be buying tech? Where should people be nibbling right now?

JULIAN EMANUEL: So we think that the environment has changed. And part of the change in the environment has caused this dislocation, the undue pressure on tech. If you think of the combination of an above trend economic growth, higher interest rates, and persistently high inflation, which again is obviously feeding into where the Fed stance is moving, all of those militate for having a value bias. Financials, industrials, we also like health care, energy has obviously been a good sector. You have to be prepared for volatility in a sector that volatile. But the value type stocks that really have not worked for almost a decade, to be frank, those are where we think the opportunities are going to lie in the year ahead.

- Well, Julian, there's another thing that I don't think anybody considers to be value, perhaps. But it's fallen more than almost anything else. I'm talking about crypto, of course. And so I wonder what your thinking is on that asset class right now because of the heavy selling that we've seen. And I think amongst the things that are different in this crypto cycle is the sort of institutional interest in it. And so I don't know how that changes the dynamics on the way down and then maybe eventually on the way up.

JULIAN EMANUEL: So for us, if you go back, we have been fans of crypto. To own it, and particularly when you've had this kind of pullback, you have to believe in the use case. You have to believe in the asset diversification case. I think the use case with the proliferation of NFTs and more trans-activeness in general is starting to prove itself. These things take time. We also have to realize that it's very, very typical for crypto to have 50% pullbacks prior to the next major leg of the rally. And if you look at it basically going back to almost a year at this point is that you've ranged between-- call it $28,000 in the low on Bitcoin to upwards of $65,000 on the high.

Our view is, is that, as the capital markets digest a more hostile Fed, and as the winners and the losers in crypto begin to sort themselves out, as they should in a rational market, as we've seen happen to profitless tech over the last number of months, you're going to have a period of sideways indigestion between those two ranges, low to high. And then ultimately at some point later in the year, or perhaps 2023, we think you start the next leg higher based on the use case for crypto and the blockchain, of course.

- Always appreciate your levelheaded analysis. Julian Emanuel, Evercore ISI chief equity derivatives and quantitative strategist. Good to see you. Have a good week.