Big Banks have reported fourth-quarter earnings and now Big Tech is up to bat. GLOBALT Investments Senior Portfolio Manager Keith Buchanan explains his sentiment on earnings and market outlooks

"What [would] unlock the potential for the market to see through that earnings potential and that growth that we're underway right now," Buchanan explains, "is that the Federal Reserve didn't push back on the dovishness, the anticipation of a dovish Fed throughout 2024, and the Fed perhaps taking their foot off of the brake let the markets see back through to earnings and what's driving stocks on a fundamental basis."

Buchanan also comments on the Fed's interest rate cut timeline and current valuations.

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- We were just talking earnings, Keith. We're in peak earnings season now. We heard from the big banks.

We got big tech on deck here, Keith. I'm just interested to get your take on this earnings season. What you've heard so far?

KEITH BUCHANAN: Absolutely. And thank you for having me. We start off the earnings season with the banks that left some to be desired. But we're fundamentalist in our shop.

We think the equity still trade. And risk assets in general still trade on earnings and earnings potential. Coming into out of the earnings session of 2022 and 2023, we really expect that 12% growth that's expected over 2024 and 2025 to really shine through the equity prices at 18 times where we were trading last fall.

Coming into this earnings season, we're at 21 times after the recent rally. So, now, the low-hanging fruit has been harvested. And we're looking at what could potentially push the market further.

Would unlock the potential for the market to see through that earnings potential and that growth that we're underway right now is that the Federal reserve didn't push back on the dovishness the anticipation of a dovish Fed throughout the course of 2024. And the Fed perhaps taking their foot off of the brake. Let the market see back through to earnings and what's driving stocks on a fundamental basis.

For that to continue, we feel like that just continues needs to be pushed back. But the earnings growth in that profile is still intact. We think it's a real tailwind for markets at this point.

- So, Keith, just to put a fine point on this. So, in other words, there was this narrative that the Fed was going to maybe cut 6 times this year. And a lot of strategists that we were talking were saying, they're not going to cut 6 times, and they're not going to start in March.

And the market's going to be disappointed when that realization hits. You're saying the realization was tempered cushioned by the fact that earnings are turning out to be better than estimated?

KEITH BUCHANAN: Actually, the expectation has been tempered from six cuts to now five cuts. But still, let's remember the dot plot put three cuts as the Fed's base case. So it's still a gap between 5 and 3 that has to converge at some point.

But how we look at the equity markets is the overhanging real negative sentiment was overwhelmingly because of inflation and the Federal Reserve's reaction mechanism. If that has started to go more so in the rearview mirror, that gives the marketplace more room to appreciate the earnings environment which we feel like is extraordinarily buoyant coming out of the past 5/4.

- So we're talking earnings, we're talking Fed, Keith. I'm also interested after rally we've seen. How does valuation look to you here?

KEITH BUCHANAN: We looked a lot more attractive three months ago 18 times. 22 times is not as attractive from a long-term historical perspective as 18 times is. But, look, if the market is pricing in the growth of earnings growth of cash flow, a lot of that depends on tech which is why the next week is incredibly important to fulfill this optimism that's baked into bottom up expectations for the SP 500 to generate 12% earnings growth.

So we're really excited about the potential for that market to really anticipate that in a more material way without the clouds of the Federal reserve monetary policy kind of overhang in the marketplace.