Corporate profits

Bank of America Investment Strategist

Marci McGregor, Managing Director of Bank of America Merrill Lynch and Senior Investment Strategist, joins Yahoo Finance Live to discuss the state of the stock market and what lies ahead over the next two years.

Video transcript

ALEXIS CHRISTOFOROUS: I want to learn more about the markets and reach out to Marci McGregor, Managing Director and Senior Investment Strategist at Bank of America Merrill Lynch. Marci, thank you very much for being with us. So I know you think this market will grow in 2022. What do you think will get us there? What will be some of the key drivers?

MARCI MCGREGOR: Thanks for inviting me, Alexis. You know, when I step back and look at the big picture of this market, I still think it’s all about corporate earnings. You know, I know a lot of my peers are worried that peak earnings growth is behind us. But I think peak revenue isn’t even a 2022 story. We’re seeing strong consumer demand, a strong US economy. And I think we’re going to have a Capex cycle in 2022. And I think that’s all positive for corporate earnings. And that underpins this market, in my opinion.

ALEXIS CHRISTOFOROUS: So how are you currently positioning US portfolios at Bank of America Merrill Lynch? Are you overweight in stocks? And if so, where?

MARCI MCGREGOR: Yes, so we are overweight equities versus fixed income. And that’s a pretty easy call for us. But when you sort of go down to that lower level, it’s a preference for US stocks over the rest of the world. And it’s both large and small caps. But we are really positioning ourselves for cyclicals to lead this market higher.

So think about energy, finance, industrial materials. I wouldn’t give up on technology, would I? Because innovation is not going to stop. But I think we’re going to see that market rotation resume and continue as we look to 2022. And it’s going to be cyclicals and value that lead the way on the equity side.

ALEXIS CHRISTOFOROUS: Well, what about some of the possible headwinds here, like higher inflation, like the Federal Reserve raising interest rates? And if we continue to see these supply chain issues, many industry players say they may see them well into 2022, along with these labor shortages. How do you build the portfolio around all these concerns, Marci?

MARCI MCGREGOR: You know, and I agree that these supply chain issues are likely to persist. The same goes for labor shortages as the New Year approaches. All of this is ultimately driven by an increase in demand. I think we are entering a new regime. In the old world, you had an economy with abundant supply, and demand was struggling to keep up, and inflation was under control.

I think in the new regime that we’re looking forward to, it’s going to be a world where demand outstrips supply, and you have to position yourself for higher inflation. The good news is one of the key takeaways I think from third quarter earnings, you know, the operating leverage and the pricing power that companies are seeing just outweighs the input costs and the higher wages which I think are likely to persist.

So right now it’s still positive inflation dynamics. I just don’t see him shrinking because he’s really driven by demand. And we both know there’s still a lot of money left. And with rising wages, I think that’s another support for the consumer.

ALEXIS CHRISTOFOROUS: You know, how much the virus is costing – which continues to be, of course, the backdrop to everything we do. How much is the coronavirus playing into the market and playing into growth expectations going forward?

MARCI MCGREGOR: Yeah, that’s a fantastic question. And I think what we’ve seen since the start of this pandemic is that each subsequent wave of the virus seems to have a smaller and smaller impact on the economy and the markets. Now, without a doubt, the delta variant caused a significant moderation in growth in the third quarter. I think what we’re seeing now is the decline of the delta here in the United States, at least, almost this mini economic reopening. Consumers are becoming increasingly mobile. Expenses have increased significantly. I think that leads to strong growth in the fourth quarter. But we must continue to recognize that the virus is a risk.

That said, I think the positive developments on treatments can really move us forward, and again continue to allow the virus to have a smaller and smaller impact on markets and the economy. But right now, I think it’s a mini reopening story, as we look to the fourth quarter of the new year.

ALEXIS CHRISTOFOROUS: And what about expectations – I mean, we’re still in earnings season. But what are your expectations for corporate earnings in the fourth quarter and early next year? You know, I wonder if these supply chain issues and labor shortages are going to start compressing the margins of American companies more significantly.

MARCI MCGREGOR: So, you know, it’s interesting because we still see very strong margins in the third quarter. You know I know it depends on who you talk to whether we see a spike, especially transportation, a bottleneck right now because Christmas demand has been brought forward almost a month full. As we spend the holidays, I think it will subside. But as we discussed, I think many of these supply chain issues will persist.

I think it goes back to the significant operating leverage that we’ve seen build up in a number of industries because the 2020 cost reduction throughout the crisis was structural on the business side. I think the biggest story of 2022 from the business side is how much money they have. And I think it will be Capex. It will also be dividends and perhaps, to a lesser extent, share buybacks.

But I think you’re going to see that money put to use. And I think that’s going to be the important story for investors to pay attention to, even if it’s about bottlenecks and wage issues. The pressure will therefore remain on wages. I think they will continue until 2022, but American businesses are resilient. And I’m still not sure we give them enough credit for that.

ALEXIS CHRISTOFOROUS: All right, Marci McGregor, we’re going to have to leave it at that, Managing Director and Senior Investment Strategist at Bank of America Merrill Lynch. Thanks for your time today.