The definition of 'valuation is questionable, under these circumstances': Expert

Omar Aguilar, CIO of Passive Equity and Multi-Asset Strategies at Charles Schwab Investment Management, joins Yahoo Finance’s The First Trade with Brian Sozzi and Jared Blikre to discuss what's moving the markets on Wednesday.

Video Transcript

BRIAN SOZZI: All right, for more insight into these markets, we have with us Omar Aguilar, CIO of passive equity and multi-asset strategies at Charles Schwab Investment Management. Omar, good to see you this morning here. Are you putting more money to work every time there is incrementally more positive news on the vaccine front?

OMAR AGUILAR: Thanks. Thank you. Good morning. Yeah, well, we don't necessarily go by trying to time the market. You know, we always believe that taking an approach where you can invest for the long run is probably the best thing that goes into investing for clients.

What we have seen so far is we have days like today, when we have very encouraging news regarding the solution or potential vaccine for the health crisis. There will be other days where we actually see the opposite, that the number of cases continue to increase and, therefore, the market is having this tug of war between the positive news that we get out of a potential solution for the health crises and then the ongoing news about the potential issues regarding the economy.

So because of that volatility that we've seen in the market, it is very hard. And we don't necessarily advise for people to try to time the market or try to put money to work, you know, at any particular period.

BRIAN SOZZI: Are you paying any close attention to valuations? This market continues to prove or say vocally, you know what? We don't care about valuations. As long as we get more insight in a potential COVID vaccine, we're willing to pay more to own future growth.

OMAR AGUILAR: Well, that's a great question. Well, you know, we do take a look at valuation. We always care about what is the relative value of any particular investments we actually make here at Schwab.

You know, that being said, the definition of valuation under these circumstances is very questionable. It is very hard to actually go by historical standards because you're right. In many cases, you know, the current pricing of stocks tend to reflect what the future earnings may be.

And most of the value that you can actually seen in companies today, it is really more reflecting the potential in earnings recovery 2021 as opposed what the results might be today. It is very interesting just to see that today in the second quarter we're going to see the worst possible earnings quarter that we have seen since the financial crisis.

And yet we see days like today when the market is significantly higher. And a lot of that is because people are, obviously, in very comfortable thinking that, with the Fed and with the central banks providing liquidity, that takes the path for the potential recovery earnings next year.

INES FERRE: Omar, Ines here. What do you make of these bank earnings that have been announced so far? Goldman had a blowout quarter. But we still have the banks with large provisions that they've set aside for credit losses. So are they telling us something about the economy going forward?

OMAR AGUILAR: Well, you know, the level of earnings that we have seen so far, it's only 7% of the companies that have reported. Obviously, just because of the schedule, usually financials go first. But what that tells you a lot is that companies have actually seen and will exceed expectations.

Out of the 7% of the companies that have reported thus far, 60% of those have actually beat their own expectations. Again, granted that is negative in terms of their earnings growth because, as I said, this is the worst quarter in earnings that we have seen since the Financial Crisis. We have actually seen-- we'll see more of that going forward.

I think the discussion goes into, what is the forward outlook of the companies going into 2021 and how they're dealing with the current pandemic? The bankruptcies, the corporate leverage, the provisions for saving for potential issues in credit, it is clearly something that we need to continue to monitor. And we pay a lot of attention mostly because, as I described these before, you know, this started as a health crisis that translated into economic recession.

But thus far, we do not have a financial crisis. In fact, financial institutions are pretty solid. And the credit market continues to be in pretty good shape. But it is, obviously, something that we need to watch more closely.

BRIAN SOZZI: Omar, will investors ultimately regret ignoring some of these warnings we've gotten in the early innings of earnings season? JP Morgan, Wells Fargo, even to a lesser extent, Goldman Sachs-- I have to hop on the earnings call after this-- but these executives are telling investors, things in the second half are not only uncertain, they might actually get worse.

OMAR AGUILAR: Well, you know, and that's definitely-- I wouldn't be surprised if we hear that from every single industry that reports earnings. And I would not be surprised if, obviously, the majority of people come very open to just realize that these are unprecedented conditions that we have never seen before. And therefore, their estimations of the potential hit to earnings is still unknown.

And that's the reason, you know, when you ask the question earlier about valuation, it's even harder for our own companies to try to forecast their own earnings growth projections for next year, mostly because, you know, the labor costs, you know, the ability for them to just understand what consumer demand might be. Depending on the industry, a lot of that will actually be very [INAUDIBLE]. And I think, you know, what we'll hear from CEOs and CFOs is just that, honestly to say, you know, we really don't know what may look like. But you know, it is not looking pretty until we get a good reopening of the economy and we can see a little bit of a pickup in consumer demand.

- And Omar, past these earnings, looking forward into election season, are the markets taking into consideration whether it be a Joe Biden win or whether it be a Trump re-election?

OMAR AGUILAR: Not yet. I think this is a little bit of-- you know, the challenges that we see going ahead into the fall and to the election, is we're just at the beginning of the election cycle. And the market's still not paying full attention to what those things will be. Obviously, after the conventions happen, that's usually when the market starts to pick up on more specific information regarding what may happen in each one of the elections.

That only creates more volatility and more uncertainty. Our hope is that at least we will get a better sense of where are the economic conditions are by then so that natural volatility of elections will probably be less than what is projected at the moment.

BRIAN SOZZI: I will leave it there. Omar Aguilar, CIO of Passive Equity and Multi-asset Strategies at Charles Schwab, Investment Management. Good to see you this morning. We'll talk to you soon.