PNC Financial’s Amanda Agati warns investors the market is in a fragile place on the eve of earnings season due to high valuations and serious risks related to the Covid pandemic.
“I’m not exactly convinced that the first quarter earnings season will really be that wonderful,” the company’s chief investment officer told CNBC’s “Trading Nation” on Monday. “The market has absolutely set a very high bar.”
According to Refinitiv, the S&P 500 is likely to have the strongest earnings growth since the third quarter of 2018. Earnings growth is forecast to increase 24% year over year in the first quarter.
“We’ve seen a lot of these value stocks, a lot of the lower quality names that have rallied pretty much in anticipation of earnings season. While we think the high bar is likely achievable, we’re not really convinced we’re going to be the oversized ones See the beat rate we’ve seen over the past few quarters, “said Agati. “This is really what we need at these valuation levels to drive this market rally.”
Agati, who manages a fortune of $ 170 billion, believes most of the good news is priced in the market.
“We really believe that unfortunately Q1 earnings season here can be more of a ‘buy the rumor, sell the news’ until we can get a really meaningful and broad-based acceleration in underlying fundamentals,” said Agati.
But she believes this will be problematic because of the pandemic.
“Covid is very much in the driver’s seat, despite all the progress we’ve seen so far this year in terms of reopening and slow but steadier progress in vaccine distribution and use,” Agati said. “The reality is that we are still facing fairly significant waves of Covid in many parts of the world.”
Agati also highlights new risks related to the long-term effectiveness of the coronavirus vaccines.
“Lately, this is data coming in from medical journals that may have to consider a booster shot after six months of vaccination,” she added. “They think about when the vaccinations started in December. By the middle of the year it starts to get into the narrative again.”
With the unclear environment and stretched valuations of US stocks, Agati urges investors to look overseas for the best results.
“Without a doubt, we continue to believe that emerging markets are the brightest star in the equity class universe,” said Agati. “Emerging markets have the strongest background for earnings growth not only this year but also in 2022. … They did not fall nearly as far as the rest of the developed world in 2020.”
CNBC’s Robert Hum contributed to this report.
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