Show Transcript
With the U.S. economy showing signs of resiliency, investors are having to digest growing uncertainty about the Fed’s policy path. Anna Castro, Managing Director and Head of Retail Asset Allocation at TD Asset Management, says what’s important isn’t the timing of a rate cut, but that you remain invested.
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* [AUDIO LOGO]
* Well, what a difference a few inflation reports make. Recent readings of US consumer and producer prices showed inflation still remaining somewhat sticky, and that's raising questions about whether even a June rate cut by the Fed may be looking less likely. My next guest says what's important isn't the timing of the potential cut, but whether you remain invested. Anna Castro is Senior Portfolio Manager and Head of Retail Asset Allocation at TD Asset Management. She joins me now. Nice to have you here.
* Thank you. Nice to be here.
* You've got some great charts. We love charts, so thank you for bringing them in so we can look at them. But let's just start with, I feel as though market watchers tend to be a little obsessed about the inflation numbers and the Fed timing. Maybe just before we say that's not important, just what has been happening?
* So you've had some stickier inflation prints, especially in the US. And we've always believed that the path to the 2% of the Federal Reserve target is going to be bumpy at this stage, the last mile, so to speak. And so it's funny, because I often get asked, Which month are we going to have the first Fed cut? But what's really more important is that we're at peak-- give signal we're at peak rates. And it's more about the magnitude and speed in the coming 12 to 18 months of what the long-term level of rates would be.
* OK, so just again, the timing doesn't matter. We have to watch what actually happens once they start and what can happen after that.
* Especially since because inflation, in general, has-- while it's still elevated, has moderated its pace. So it's no longer rising or high single digits. And the other thing that makes them feel more confident about waiting or being patient is that the labor market is showing some slowing. But generally, it's still solid and healthy.
* Interesting.
* It's a good spot to wait.
* OK. Now you're saying that instead of focusing on the timing on rates and such, let's focus on what companies are doing and how the earnings are looking. We'll get to the chart. I know you're going to bring it out, but it's a good-looking chart. But tell me what you're seeing.
* So the shift now is less about worries about inflation, but more on the growth outlook. And so economic growth is driven by how governments, corporations, and individuals spend. So in this case, individuals, we know, are generally healthier than they were before in terms of their balance sheet. And they are employed. So what really matters at this point is looking at how corporations' health would be.
* And in general, profitable corporations will continue to be able to spend their CapEx, can continue to pay existing workers, hire more workers, pay their debt, and finance and grow. And that's why it's important to look at the corporate earnings.
* Well let's look at them. Let's bring up the chart, because it has this lovely little trough that comes up. And you can see that they've bottomed, and it looks like it's starting to come back up.
* Yeah, so using the proxy as the largest publicly-traded US equity US companies, we have this S&P 500 earnings growth per share. And the blue line shows that in general, the expected earnings growth has actually bottomed sometime late last year. And moving forward, the expectation is that it will be growing by about 10%.
* And more importantly is the orange line that you see there, that the actual, or reported EPS growth is that it's above the blue line. So the companies reporting have actually been better than expected or beating that.
* That means good PR in the company's point. They're coming in better than people expected. Let me ask you, because you have another chart in here I think that shows something interesting. Because so much of what's been happening with the markets right now is people are like, it's AI, AI, and there's so much happening. But there's a broadening that seems to be happening at the same time.
* Yes, exactly. And so what we have here in this chart is really the earnings revision. So one year out, What is the view? How are analysts and the company management are indicating how their expectations for their earnings growth would be. So yes, what you've seen here is the orange line information technology compared to the gray line has really been the source of earnings growth revisions in the past few months.
* But what you're seeing as well is on the blue line, and we highlighted here the consumer discretionary, financial, and industrials. These are a little bit more cyclically-exposed companies and rate-sensitive. And you're seeing an inflection point. They're doing better, and that means that company management is getting more comfortable about the rate outlook, the economic growth outlook, the inflation risk that they're seeing. And they're starting to have an improvement in how they see earnings growth would be.
* And that's a good thing, because that also indicates that a proof that we're s-- there are always winners and losers. What we have here are broad indices, but there's many cycles within each sector. And what you're seeing is that the quality companies that have strong balance sheet, strong management teams, resilient business models, are able to thrive in this environment even if we're-- have inflation higher than expected or, in this case, interest rates staying higher for longer.
* I guess this all comes down to, which is in your wheelhouse, this is about active management. This is about finding those companies that can thrive in this environment. But I think it's still an optimistic conversation.
* Yes, because what I'm trying to highlight, it's not about one asset class or one sector industry alone. There is a value for having a diversified portfolio. And yes, there will always be noise. There'll be something. You could have an inflation surprise, geopolitics, or some print that will make you worry about the economy.
* But now it's not just about the macro, but also the micro. Because you have all these themes underlying, and it's so important to have a team to be able to scour the universe for all these different exposures that can benefit your portfolio, whether it's equity, fixed income, or real estate, infrastructure, or currencies. And this is a way where even if there's volatility in the near term, this could also lead to buying opportunities in the long term to set you up for success.
* [AUDIO LOGO]
* [MUSIC PLAYING]
* Well, what a difference a few inflation reports make. Recent readings of US consumer and producer prices showed inflation still remaining somewhat sticky, and that's raising questions about whether even a June rate cut by the Fed may be looking less likely. My next guest says what's important isn't the timing of the potential cut, but whether you remain invested. Anna Castro is Senior Portfolio Manager and Head of Retail Asset Allocation at TD Asset Management. She joins me now. Nice to have you here.
* Thank you. Nice to be here.
* You've got some great charts. We love charts, so thank you for bringing them in so we can look at them. But let's just start with, I feel as though market watchers tend to be a little obsessed about the inflation numbers and the Fed timing. Maybe just before we say that's not important, just what has been happening?
* So you've had some stickier inflation prints, especially in the US. And we've always believed that the path to the 2% of the Federal Reserve target is going to be bumpy at this stage, the last mile, so to speak. And so it's funny, because I often get asked, Which month are we going to have the first Fed cut? But what's really more important is that we're at peak-- give signal we're at peak rates. And it's more about the magnitude and speed in the coming 12 to 18 months of what the long-term level of rates would be.
* OK, so just again, the timing doesn't matter. We have to watch what actually happens once they start and what can happen after that.
* Especially since because inflation, in general, has-- while it's still elevated, has moderated its pace. So it's no longer rising or high single digits. And the other thing that makes them feel more confident about waiting or being patient is that the labor market is showing some slowing. But generally, it's still solid and healthy.
* Interesting.
* It's a good spot to wait.
* OK. Now you're saying that instead of focusing on the timing on rates and such, let's focus on what companies are doing and how the earnings are looking. We'll get to the chart. I know you're going to bring it out, but it's a good-looking chart. But tell me what you're seeing.
* So the shift now is less about worries about inflation, but more on the growth outlook. And so economic growth is driven by how governments, corporations, and individuals spend. So in this case, individuals, we know, are generally healthier than they were before in terms of their balance sheet. And they are employed. So what really matters at this point is looking at how corporations' health would be.
* And in general, profitable corporations will continue to be able to spend their CapEx, can continue to pay existing workers, hire more workers, pay their debt, and finance and grow. And that's why it's important to look at the corporate earnings.
* Well let's look at them. Let's bring up the chart, because it has this lovely little trough that comes up. And you can see that they've bottomed, and it looks like it's starting to come back up.
* Yeah, so using the proxy as the largest publicly-traded US equity US companies, we have this S&P 500 earnings growth per share. And the blue line shows that in general, the expected earnings growth has actually bottomed sometime late last year. And moving forward, the expectation is that it will be growing by about 10%.
* And more importantly is the orange line that you see there, that the actual, or reported EPS growth is that it's above the blue line. So the companies reporting have actually been better than expected or beating that.
* That means good PR in the company's point. They're coming in better than people expected. Let me ask you, because you have another chart in here I think that shows something interesting. Because so much of what's been happening with the markets right now is people are like, it's AI, AI, and there's so much happening. But there's a broadening that seems to be happening at the same time.
* Yes, exactly. And so what we have here in this chart is really the earnings revision. So one year out, What is the view? How are analysts and the company management are indicating how their expectations for their earnings growth would be. So yes, what you've seen here is the orange line information technology compared to the gray line has really been the source of earnings growth revisions in the past few months.
* But what you're seeing as well is on the blue line, and we highlighted here the consumer discretionary, financial, and industrials. These are a little bit more cyclically-exposed companies and rate-sensitive. And you're seeing an inflection point. They're doing better, and that means that company management is getting more comfortable about the rate outlook, the economic growth outlook, the inflation risk that they're seeing. And they're starting to have an improvement in how they see earnings growth would be.
* And that's a good thing, because that also indicates that a proof that we're s-- there are always winners and losers. What we have here are broad indices, but there's many cycles within each sector. And what you're seeing is that the quality companies that have strong balance sheet, strong management teams, resilient business models, are able to thrive in this environment even if we're-- have inflation higher than expected or, in this case, interest rates staying higher for longer.
* I guess this all comes down to, which is in your wheelhouse, this is about active management. This is about finding those companies that can thrive in this environment. But I think it's still an optimistic conversation.
* Yes, because what I'm trying to highlight, it's not about one asset class or one sector industry alone. There is a value for having a diversified portfolio. And yes, there will always be noise. There'll be something. You could have an inflation surprise, geopolitics, or some print that will make you worry about the economy.
* But now it's not just about the macro, but also the micro. Because you have all these themes underlying, and it's so important to have a team to be able to scour the universe for all these different exposures that can benefit your portfolio, whether it's equity, fixed income, or real estate, infrastructure, or currencies. And this is a way where even if there's volatility in the near term, this could also lead to buying opportunities in the long term to set you up for success.
* [AUDIO LOGO]
* [MUSIC PLAYING]
