Stocks' 'path for least resistance' is up right now: CIO

Yahoo Finance’s Brian Sozzi and Julie Hyman discuss the market action and outlook with Stephanie Lang, Homrich Berg CIO.

Video Transcript

JULIE HYMAN: Let's talk more about the broad markets, though, right now. Stephanie Lang is joining us. She is the CFA and the CIO at Homrich Berg, joining us from Atlanta, Georgia. Stephanie, thank you so much for being here.

You know, when you look at this situation like this-- looks-- what looks like now to be a blow up of this family office, you know, these kinds of things don't seem to happen too often. But when they do, they certainly unsettle investors. Are you concerned about any kind of wider ripple effect here, or do you think it's going to be contained?

STEPHANIE LANG: You know, at this point, I think it's going to be contained. It looks like this was a highly-levered hedge fund that took these concentrated bets. What you see is, you know, big excesses on the upside. They stay highly levered, and then it came crashing down. And they sort of had the perfect storm with the internet companies in China as well as CBS Viacom.

And so if you look at these stocks, they had a meteoric rise and then you saw it falling right back down, and the leverage really just exacerbated all of that. So I think, at this point, it looks to be contained. You know, the concern is there-- is there a broader-- with different banks, could this be a contagion? But at this point, I think it is kind of an isolated incident.

BRIAN SOZZI: But Stephanie, isn't there the other concern here? I imagine you're a fundamental analyst, you're looking at the fundamentals of companies-- sales and earnings. But isn't the one thing here with this situation that the market, in many sectors, is just simply overvalued?

STEPHANIE LANG: There's no doubt about it. I mean, we-- we're now heading into the second year of this cyclical bull market. We had the one-year anniversary last week. The market was up 75% in the last year, and so you've seen a lot of valuations really go to these very high levels. And so looking forward, it's really going to be-- the market's going to be looking at earnings going forward and not the

Multiple expansion because things have gotten expensive. But overall, we think there is a very strong macro backdrop that will be supportive of stocks going forward. There's going to be some fits and starts, and we think it won't be a straight line, like last year. But overall, we think the path of least resistance for stocks is up, at this point.

BRIAN SOZZI: What sectors are you staying away from on valuation concerns?

STEPHANIE LANG: Well, I think there are some excesses. You know, I covered tech stocks back in the '90s. And when valuations seem too good to be true, they really are. And so a lot of these FANG stocks really got ahead of themselves in the tech sector.

I mean, you look at excesses like Tesla, and you think, you know, this has to be the perfect storm, this has to be the next Amazon. And I think if you look at some of these multiples and some of these-- you know, you call them meme stocks or all the piling in, it really is going to come unraveled at some point. So I would say, you know, the tech, specifically, the FANG, the Teslas out there-- if the fundamentals don't support the stock, eventually, you're going to see a correction. And that's what we're seeing now with a lot of these names.

JULIE HYMAN: And so, you know, Brian was, just a few minutes ago, talking about the outlook for corporate profits for this quarter that we're about to get reported, the first quarter. Do you think then-- well, you're talking about one area where there's potentially some room for downside. Where do you think there's the most room for upside, where the valuations maybe haven't accounted for the full earnings power?

STEPHANIE LANG: Yeah, and I think one of the areas that, really, valuations have kind of stayed in check-- and, actually, you might be getting a buying opportunity today with some of these names-- is the financial sector. A lot of the areas have taken off the cyclical areas, but financials have a couple of things going for you. Number one, you're supposed to see strong earnings this year, over 24% earnings growth. Financials is also an area where if you look at kind of the revenue pre-pandemic, it hasn't reached its peak. And then you also have the strong, steepening yield curve. And that really just is going to help pile to the earnings for this year.

And then lastly, you kind of look at the value-growth story. And if you look at valuations between value and growth, it's still one standard deviation cheap versus a 10-year average. And so financials kind of underpin that value story. So also, you know, financials have been so unloved for so long, and now you're really starting to see some good momentum there. So we like the technical aspect that's really also supporting the financial sector.

BRIAN SOZZI: Are you concerned, though, Stephanie, that the financials, whether it-- look at Goldman Sachs, Morgan Stanley, even at Deutsche Bank all reportedly involved in these Bill Wong trades. Are you concerned that the banks are going back to their risk-taking ways of 2007, 2008?

STEPHANIE LANG: You know, that is a concern. But as Goldman mentioned that-- this shouldn't be material to their earnings. I do think there could be some regulation impact on the swap market. It is a concern that too much risk has gotten on the balance sheets. However, you know, just because of all the regulation that's occurred-- and the banks have gotten so much healthier. And if you look at the announcement last week, they were just allowed to continue their buyback and dividends.

So I think they are healthy. I think that there will be some big scrutiny in the financial sector, especially with regards to what happened with the swap market. So-- but overall, I think the weakness can really be looked at as a buying opportunity. And if you look at kind of the broader economic backdrop, it should be supportive for these sectors.

JULIE HYMAN: Stephanie, nice to meet you. Thanks for coming on. Stephanie Lang, CFA and CIO at Homrich Berg. Great stuff, thank you.