Analysts are raising targets for the S&P 500 as artificial intelligence hype pushes tech stocks even higher. Threadneedle Strategies Founder Anne Berry Joins His Yahoo Finance Live to Assess AI Growth Drivers, World Bank Predictions for Emerging Markets, and the State of Commercial Real Estate as Mortgage Rates Remain High To do.
video transcript
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Akiko Fujita: Well, the S&P 500 has far outperformed expectations so far this year. Mostly led by a few big names. The rise prompted analysts to raise their year-end target for the index. BMO Capital’s Brian Belsky raises the target to 4,550, while authenticist Keith Lerner raises it to 4,500. Today, Threadneedle founder Anne Berry shares her outlook on the market.
And I’m looking at where the S&P 500 is currently at, hovering around its 9-month high.
Anne Berry: yes.
Akiko Fujita: Does it all make sense?
Anne Berry: It makes no sense to me. And to tell the truth, I was a total skeptic of the S&P. We used to have conversations like this. You would have thought it would be flat from summer through the end of 2022. And you would have thought it was flat from the end of last year to today. So this outperformance was not what I expected at all.
– What do you think this means given the current state of affairs? Possible recession. Because yes, there are a lot of people raising the S&P’s year-end price target. But Deutsche Bank is sticking to its demands, saying it still expects the recession to continue. So where do you want to go?
Anne Berry: Well, Goldman also came out and said the recession probability would drop from 35% to 25%. And this is where the recession continues to escape us. And while it feels like all the criticism being directed at Jay Powell is that he’s doing the wrong thing about bringing inflation down, in the end, he’s actually embarrassing us. Entering recession territory, which I think may prove we can keep inflation under control without letting the economy down. Also, I didn’t expect it to come.
Akiko Fujita: So, can we be in a better position towards the end of the year? So all the talk about soft or hard landings certainly feels like things are starting to ease a bit.
Anne Berry: Indeed, the situation seems to be easing in terms of input cost inflation. It feels like it gives us a more realistic outlook for revenue based on consumer demand. The market appears to have recovered as many large companies released bad news about their earnings outlook for the rest of the year.
So, with a few exceptions, AI is a bit of bubble territory at the moment, but it feels like one of them, but expectations are much more reasonable for the rest of the ecosystem. It seems like until it leveled out a bit.
– And in terms of the winners here, do you think we’ll see broader participation? A lot of the leadership gains are because a lot of the gains we’ve seen since the beginning of the year are AI-related names.
Anne Berry: yes.
– At least most of them. Do you think we’ll start to see that it could spread further?
Anne Berry: Well, today we will see it. Looking at today’s market, returning to Akiko’s question, do you understand what’s going on in the market right now? Consumer discretion is plunging today. Today, everything from travel to apparel to traditional retail seems to be green again.
But perhaps there is a moratorium on interest rate decisions to be announced next week, and there seems to be hope that this will help ease the burden on consumers. Perhaps that is part of the driving force. But I think so. Concerned about the concentration of euphoria found in some tech-related names.
Akiko Fujita: yes. So let’s talk about that. Because we were talking about the possibility of a bubble. is not it? So it looks like investors are getting greedy for something —
Anne Berry: everything.
Akiko Fujita: –It shows optimism. And AI is a hot topic right now.
Anne Berry: yes. Here’s why I think it’s different from other bubble terms we’ve seen in the last few years when it comes to AI. NFT is one of them. Meta’s – The metaverse is something else.
AI has been around for a long time, and it’s a reality. And it’s not just the consumer products that have captured our imagination, but there are real applications, and he has real B2B applications, and that’s what I think makes AI different. I think what investors are trying to do is find problems with AI. That’s why we’re watching his Nvidia effort.
But when I think about where the winners will be, I think they will be the companies leveraging the massive datasets that drive AI innovation and application quality. So I think the winners of these big tech companies like Google —
Akiko Fujita: Microsoft, talk about the alphabet.
Anne Berry: –Microsoft, they have the data. I think scale wins here, and scale wins.
– And let’s talk about what is happening internationally abroad. The World Bank expects global growth to slow to its lowest level since 2008.
Anne Berry: yes.
– The organization now expects growth to slow to 2.1% in 2023, but there is still plenty of investor excitement abroad. Here we are outperforming many international markets by a wide margin. Where do you see the greatest opportunity right now?
Anne Berry: Well, I’m still bullish on the domestic economy. And I think the US is uniquely positioned to continue what I call wise growth compared to Europe and Asia. I have a feeling it won’t be very robust against macro conditions. No more restarts. Some countries are still reopening.
However, I just want to talk about the outlook for the World Bank. 70% of the downward revisions are concentrated in emerging markets. And that’s where I get back to strength, and that’s where I get back to stability in the United States.
Akiko Fujita: But from an investment point of view, what about places like Europe? In a way, the assessment is correct and things are not as bad as expected.
And when you hear names like Japan, it’s a little different in terms of the stories investors are chasing. It is about corporate reform. It means change is happening. How does he see these two markets?
Anne Berry: Well, I think Japan is very interesting. The whole of Japan is filled with excitement that we have not seen in the last 10 years. You point out, it’s about corporate reform, and it’s about demographic change at the same time.
I think Europe is still in a very difficult position. We must not forget the fact that war is still going on on the borders of Europe. Ukraine still has big problems.
There are still supply chain issues, food security, energy security concerns, but nobody is talking about it now because it’s been a great spring and a great summer. If we enter the winter season again and it is not resolved, if there is no peace in Ukraine and if there is some resolution over European energy sources, I think this will be a very temporary relief. I don’t think this issue has been resolved.
– And one of the big risks potentially looming here in the United States is what’s going on in the commercial real estate market.
Anne Berry: yes,
– We’ve talked a lot about the 1.2 trillion commercial mortgages coming due soon. How Big — Let’s start with a rough slate here. Consider the threat this poses to the US market.
Anne Berry: Well, on an absolute scale, it’s kind of funny to say this. $1.5 trillion is a lot of money. But with America’s grand credit scheme, the numbers aren’t surprising. But it shows that I think it’s not always said enough. That’s right, there’s this problem in commercial real estate, there’s this problem in business credit. It was issued in the last five years for commercial and earlier for large companies.
These loans were issued in very different interest rate environments. And interest rates were expected to remain low for a long period of time. And these credits were issued on the assumption that the cash flow of these businesses would grow.
No one expected so much cash to be expended to pay off such a high debt. So, whether it’s commercial, consumer or enterprise, there’s going to be a maturity war over the next 36 months and people will have to take on a very high debt relative to their ability to serve. think.
Akiko Fujita: What does that mean for businesses, specifically, when interest rates rise and debt payments are coming to an end? What do you see?
Anne Berry: Well, I think we see more on the private side than on the public side. So it means companies need to lower their leverage a bit and backers need to inject more capital.
Or you can see that the terms of this debt are so. Therefore, whether it is a next-generation commercial loan or a next-generation corporate loan, it will have stricter covenants. It will be much easier for lenders to seize these underlying assets. So I think this term is going to be a bit of a game changer for any borrower over the next few years.
– And is there anything we can do right now to avoid some of the risks this presents?
Anne Berry: I don’t think so at the moment. And that’s what I find very interesting about the market, and it’s been consistent in that regard. The market didn’t listen. There is an expression that when someone shows themselves to you, believe them. The Fed is very clear that our inflation target is 2% and we will continue to raise interest rates until we reach 2%, yet we remain optimistic about this.
So, I think one of the things that needs to be done is to anchor the realism, the realism. The Fed intends to continue policy until inflation hits its target. By the way, the goal remains the same. Europe has consistently and adequately addressed this issue. The United States will continue to do the same.
As a result, underwriting needs to reflect the fact that interest rates will stay high for a little longer.
Akiko Fujita: Ann Berry, as always, I’m glad you got some insight.
Anne Berry: Thank you for inviting me.
Akiko Fujita: Anne Berry, founder of Threadneedle.
