Inflation, delta risks sparking an ‘inflection point’ for stocks

Long-time market bull Phil Orlando is gearing up for a tough stretch as Wall Street has reached a critical “turning point”.

Federated Hermes’ chief equity markets strategist blames risk dynamics. Orlando not only sees unexpectedly high inflation and the Covid-19 Delta variant as glaring problems, he is also worried about the uncertainty in monetary and fiscal policy.

“We are entering a historically turbulent season, and we have a number of things that come together at the same time,” he told CNBC’s “Trading Nation” on Monday. “We have this rising inflation. We have questions about what the Federal Reserve is going to do about policy. We have this debt ceiling issue that comes up later this week.”

It seems Wall Street doesn’t share his concerns. On Monday, the S&P 500, Nasdaq and Dow closed at all-time highs. Record activity comes a day before the Federal Reserve gets ready for its monetary policy session.

Orlando, who has $ 625 billion under management, suggests investors will get a wake-up call soon.

“The stock market has done incredibly well. It has literally doubled since hitting the bottom of the pandemic lows a year ago in March, ”noted Orlando, who warns that ratings are frothy.

The S&P 500 is up 18% so far this year. According to Orlando, the index is noticeably vulnerable to a 5% to 8% decline over the next two months. His S&P 500 year-end target is 4,500. The index closed at 4,422.30 on Monday.

“We are less than 100 points away from our annual target,” he said. “In our view, there could be some volatility, or some stall, as the market consolidates around all of these concerns and issues.”

Since Orlando says the underlying economic and market fundamentals are quite strong, he would use weakness as a buying opportunity. His preferred market group is domestic large-cap stocks with an emphasis on financial, energy and consumer discretionary.

“It was these cyclical stocks that we thought were dead in the spring of 2020,” Orlando said. “It [the recession] ended last April, and now the market has to catch up to price in those very strong sales and profit increases that we are seeing. “

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