The NASDAQ (^IXIC) hit a new intraday record, surpassing a previous 2021 high of 16,212.23 points. The recent rally in the market has been fueled by tech giants such as Nvidia (NVDA). While investors are excited by these movements, many are considering the possibly volatile market impact of the Federal Reserve's next policy decision. Apollo Global's chief economist Torsten Sløk wrote in an email on Friday that he believes the Federal Reserve will not cut rates in 2024, surprising Wall Street investors.

Piper Sandler Chief Investment Strategist Michael Kantrowitz joins Yahoo Finance to discuss market movements in the wake of Sløk's remark.

Kantrowitz also explains how he thinks the rally will transition: "I think AI is a big part of obviously what's lifted, especially a bunch of large stocks very visible to the investment community, like the Mag 7. But when you look at leadership across the market, the stories are greater than that. There's pockets of even small caps where the indices have gone nowhere for two years, where there's pockets of earnings where they've been stronger, in industrials, for example, or areas of that market that have stronger balance sheets or higher profitability that have done quite well. I think there's a bit too much focus on AI, and I think there's a lot more going on underneath the surface of the equity market that can keep things afloat, as long as we don't either see a big spike in the unemployment rate or big spike in inflation expectations. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- So maybe you can help us out here, right? Because we do have the market perception of the fed's cutting getting pushed back. We have Torsten Slok of Apollo today saying maybe it won't happen this year at all. Why is it aren't these types of perceptions more problematic for stocks?

MICHAEL KANTROWITZ: Well-- hi. I think part of it is that people think the fed is still done. And I think Powell has been pretty clear on that since December 13th of last year. So I think the reaction function to higher rates year to date hasn't been as detrimental. And I think ultimately, the areas of the market that continue to do well are the areas where earnings estimates continue to increase, namely large-cap growth stocks. So the combination of being a little less worried currently about the fed having to raise rates or not-- perhaps not cut rates has changed.

Certainly I think it was a little ridiculous that the market expected seven rate cuts at the beginning of this year. So we've kind of normalized that. And current rate expectations are pretty close to where the dot plot is. So I think the market's kind of realigned for more of the current reality.

And I think going forward, we'll continue to see a lot of data dependency. But we think the fed has to cut rates later this year because I think a lot of the upcoming refinancing issues for the US government, commercial real estate, some of the regional bank issues that continue to weigh on that space, and corporate credit could become a bigger issue than inflation remaining sticky later, you know, into 2025.

- To what extent has the AI-driven rally played into your view, your more bullish view than some of the calls that we've been talking about? And I'm asking because I'm curious about whether or not if the fed ends up not cutting this year like Torsten is anticipating, does that start to weigh on this idea that it's all about AI and we can continue to ride that wave?

MICHAEL KANTROWITZ: You know, I'm not-- I think AI is a big part of, obviously, what's lifted, especially a bunch of large stocks very visible to the investment community like the Mag Seven. But when you look at leadership across the market, I think the story is far greater than that. There's pockets of even small caps, the-- where the indices have gone nowhere for two years, where there's pockets where earnings have been stronger in industrials, for example, or areas of that market that have stronger balance sheets or higher profitability that have done quite well.

So I think there's a bit too much focus on AI. And I think there's a lot more going on underneath the surface of the equity market that can keep things afloat as long as we don't either see a big spike in the unemployment rate or a big spike in inflation expectations.

- Michael, if you-- as we mentioned, you just raised your-- recently raised your year end target for the S&P 500 to 50-- 250. That's still not that far above where we have-- where we are already, right, with the rally that we've seen. I think it's a little more than 2% above current levels. But what would need to continue to sort of go right in order to continue to see that kind of a relatively modest rally through the end of the year?

MICHAEL KANTROWITZ: Yeah, well, I think if we-- you know, I think we're kind of in this tug of war where if the economy slows a little bit-- like today, we got soft manufacturing data back in contraction, though the good news and why the market's up, I think, largely today is because that data, both weakened and inflation expectations-- or prices paid declined, softened.

And the equity market is so overly bond yield focused today. And softer macro data will be, I think, bullish for equities if it's bullish for bonds to a point. And I think that point where it becomes a problem is farther away, whether it's at claims at 275,000 or 300,000 on initial claims or the unemployment rate, you know, at least above 4%.

So I think right now, some soft macro news is going to be actually how we carry the weight of the multiples slightly higher from here. And I think this-- the market rally is going to go from AI themed to bond yield themed.

- Well, let's talk about that bond rally that we've been seeing. It seems like the stock market clearly has not been shaken by the bond rally. And that's typically the kind of dynamic that we see between the two. Should equities be caring more about what's going on in the Treasury space?

MICHAEL KANTROWITZ: Well, they are, absolutely. In fact, small cap stocks have never been this positively correlated with bonds or bond prices. So I think take your-- the TLT ETF and the Russell 2000. That data goes back to the beginning of the Russell in 1978.

So they've never had such a strong correlation. And of course, that's because a lot of bank-- regional bank stocks that have interest rate issues. You've got commercial real estate exposure that plays into that. You've got a lot of zombie companies in the small cap space.

So if you think about all the problems I'm guessing you talk about with your guests and people on Wall Street investors are speaking about, fiscal deficits, commercial real estate, or refinancing, that is a--

- And are preparing an IPO--

MICHAEL KANTROWITZ: --sorry--

- --this month--

MICHAEL KANTROWITZ: --lower rates can start to heal some of those concerns in the near term. So I think there's kind of a bit of bad news as good news more of that ahead of us. And that's why I'm actually more bullish on the market. It's not because I'm super bullish on the economy. It's actually because I expect to see softer macro data over the next six to nine months, not contracting, not terrible. But I think that's going to lead to a bond rally and an equity rally.

- And then finally, let's talk a little bit more specifically how to play that view. You like what you're calling QUARP, Quality at A Reasonable Price, a little bit of a twist on the old GARP, Growth at A Reasonable Price. So what does quality mean to you?

MICHAEL KANTROWITZ: It means companies that are highly profitable. It means companies that have realized earnings growth. Means companies that have high quality or free cash flow-- high free cash flow yield. So, you know, last year, we were big bulls on-- in terms of positioning on quality growth and profitability at any price. Whereas this year, we think investors are going to be more valuation discerning.

So I think avoiding some of the really expensive stocks makes sense but not necessarily avoiding all the stocks that have been doing well if they've got continuing fundamental momentum. So quality at a reasonable price makes a lot of sense to. Us and the scenario where that doesn't outperform is either if we get an immense bond rally without a recession, which I think is kind of low odds; or a broad-based sharp earnings re-acceleration, which without the fed cutting rates imminently is also, I think, a low-odd scenario.

So I think being too bullish or too bearish in terms of positioning doesn't make a lot of sense this year. And kind of focusing on where companies have that better fundamentals make sense and overlaying that with some bond sensitivity, if you will. So we do think yields will be lower as the year progresses, and the fed will need to cut. And so we do want to expose to that. But we don't want to necessarily just recommend nor can we all just buy regional banks and homebuilders or commercial real estate.