'The key to the path forward for banks is what happens with this credit cycle,': Strategist

PNC Financial Services' Managing Director and Chief Investment Strategist Amanda Agati, CFA, joined Yahoo Finance Live to break down her thoughts on U.S. banks and what investors should look for in the market.

Video Transcript

SEANA SMITH: And we want to continue this market conversation. For that, we want to bring in Amanda Agati. She's the managing director and chief investment strategist at PNC Financial Services. Amanda, Jared was just going through some of the winners and the laggards in the market today. But we have quadruple witching. We have rebalancing here at the close, so certainly a lot of activity in today's market. What do you make of today's moves?

AMANDA AGATI: I'm not particularly fazed by what's happening today. I think it's just much more of a continuation of the trend that we've really seen all year. You know, this market has rallied to near all-time highs. Valuations have bounced to really elevated levels. It's not a stretch to say valuations are indeed stretched. And so, I think this is a market that's really, at this point, kind of searching for direction. It's really asking kind of, what have you done for me lately?

And so we've gotten a lot of fiscal stimulus. I think a lot of the good news around that has been priced in. And so, absent kind of that next big thing that the market's looking for in terms of catalysts, I think we end up in kind of a directionless, somewhat choppy market here. So not at all surprised to see this week kind of play out as it has so far.

ADAM SHAPIRO: Amanda, is the next big thing at the end of the month, now that the Federal Reserve has made it official, that the changes will expire to the supplementary leverage ratio that the banks are held to? And for those of us who are just average folk, what will that look like on the 31st and after, regarding our investments?

AMANDA AGATI: Well, I'm certainly not an expert in terms of that policy specifically. What I would say is our view on it is that it's very much just accounting and on paper, that it's not necessarily likely to move the needle in a significant direction, one way or the other. I think the good news is, we are making slow, but progress, towards getting past this pandemic and getting this economy reopened. And so, a lot of the expectations around a pretty meaningful credit default cycle have not come to be.

And so, I think it does make sense to start moving in that direction. At the end of the day, what matters most for the banks is, really, the moves in interest rates and certainly spreads. That is certainly positive, what we've seen so far this year in terms of helping on the net interest margin side. But I think the key to the path forward for banks is what happens with this credit cycle. And there is so much liquidity in the system right now that demand for loans and demand for credit just has not rebounded in a significant way yet. So that would be the key to the path forward, I think, for banks.

SEANA SMITH: Amanda, in terms of stepping back and taking a look at kind of the bigger picture, we have vaccinations. We had that recent $1.9 trillion stimulus bill. Is that all priced into the markets at this point? And if so, then what's going to be the next catalyst?

AMANDA AGATI: Yeah, we do think, unfortunately, that a lot of the good news is very much priced into the market. The market is very fixated on stimulus spending, and as I said earlier, like, what have you done for me lately? And so many of those big catalysts we now have effectively in the rear view mirror here, as the stimulus checks are starting to go out. And so, I think the market is kind of looking for that next big thing.

Of course, selfishly, from a strategy perspective, I would like to see the next big thing be a true acceleration in the underlying fundamentals. You know, we've seen this huge sentiment shift in the markets, really, across the board. And that has really driven meaningful valuation, multiple expansion. But it's sentiment alone, right? We haven't really seen that baton handoff to underlying fundamentals.

And while we are entering a period of very easy comparisons, as we're bouncing off record no, not record low activity, I think we still have quite a ways to go here in terms of getting this fundamental rate acceleration. So that's really the most important catalyst in terms of the path forward in our view. But it would also be nice to see something happen on the infrastructure side. I think that's going to be really tough to get done in the short order, though.

ADAM SHAPIRO: I think you're accurate there, and you're making a lot of this very easy to understand. But what you just said, if the fundamentals do come into line and the markets do go higher, isn't that counter to what the FOMC signaled, as you pointed out, that it's not going to be a 1920s in between time, hey, we got fund, kind of roaring recovery?

AMANDA AGATI: Yeah, I mean, I would love to say that we are definitely in the camp that we're on the verge of a roaring '20s kind of backdrop. But we are just really skeptical of that. And I definitely have gone on record many times as fighting the Fed. This is one moment where, paradoxically, I think we're aligned. I would definitely like to say that I would be one of those folks, you know, the minute we get the all clear signal that I'm going to have two dinners out a night.

But I just don't think any of this is realistic. There is definitely some level of pent-up demand. But is it enough to really accelerate beyond pre-pandemic levels? We're really not in the camp of thinking that. You know, I think there's a lot of misunderstanding around all of the fiscal stimulus programs that have been put in place. We really need to be thinking about that more as fiscal relief, you know, bridging the gap until we get to a post-pandemic world until we can get this economy fully reopened.

And so, it isn't necessarily powerful enough, in our view, to catalyze a multi-year acceleration and growth. The other thing that folks point to a lot is the elevated savings rate. And unfortunately, I think from a demographic standpoint, it's likely to see elevated levels related to that than what we've seen in the past. Sure, there'll be some spending. Sure, there will be a subset of the consumer base that will go right back to pre-pandemic levels.

But I don't think it's quite as easy as flipping a switch and turning this global economy off, like we did last year. And so, I'm a bit skeptical in terms of this roaring '20s backdrop. And then when you marry that with where the market is sitting from an elevated valuation perspective, I think there's a big disconnect there in terms of the path forward.

SEANA SMITH: Amanda Agati, always great to speak with you, chief investment strategist at PNC Financial Services.