Transcript:
Caroline Woods:
My next guest says the market is rotating, not topping out. Victoria Fernandez is chief market strategist at Smart Global Investments and joins us now. Victoria, so good to have you. Great to have you back.
Victoria Fernandez:
Pleasure to be here.
Caroline Woods:
So Victoria, what tells you this is a healthy rotation and not the market fizzling out. What are you watching that gives you confidence?
Victoria Fernandez:
There’s a couple elements that are telling us this one the financial sector. So typically if you have people pulling out of the market and there’s concerns, you don’t see the financial sector doing well. And we’ve actually seen an uptrend in financials. More of those names making 20 day highs. More of the names in the sector with above their 200 day moving average.
Victoria Fernandez:
So that’s telling us that there’s some positivity, some tailwinds to the market. Another element is credit spreads. We know that downturns or recessions a lot of times they’re really triggered by credit events. When we look at credit spreads right now we actually see them tightening. We’re not seeing tremendous widening maybe on very low quality lower scale of high yield like Triple C’s.
Victoria Fernandez:
You’re seeing widening there, but certainly not in the investment grade component. So again it tells us investors are confident in corporations and earnings and profit margins. So these are elements that say money is working within the system. It’s not pulling out and sitting on the sidelines.
Caroline Woods:
What’s the biggest mistake investors make when they hear the word rotation.
Victoria Fernandez:
Well, I think people automatically assume you need to just completely sell out of one sector and move completely into another. And we don’t want to do that. We don’t do that for our clients. We hope other people are doing that in their portfolios. You want to do small moves, right? You want to trim some areas. You want to find other areas and start dipping your toe in the water in those segments that are having up trends that are showing positivity on the technical side.
Victoria Fernandez:
So rotation does not mean the sky is falling. It just means we’re finding new places to put money to work. And don’t be afraid to take a bow. Take some money off the table where you’ve had some gains and find some other places to put money to work.
Caroline Woods:
So talk to us about those new places, what you want to take from where you want to put it. Because if money isn’t leaving the market, where is it actually going?
Victoria Fernandez:
Right. So obviously we have seen semis. We’ve seen hyperscalers really with these parabolic moves over the last few weeks. And so you can start to trim those names. You’ve got to come out of some of those areas and look at maybe healthcare, look at financials. Since the peak that we saw on semis about two weeks ago. Those are your best performing sectors.
Victoria Fernandez:
Healthcare and financials followed closely, believe it or not by staples and industrials. So these are four areas that we think have some opportunity. Again it doesn’t mean you just go and can buy anything in those sectors. But you can find names that are trending very well and have support within those areas of the market. And we think there’s some runway there for them.
Caroline Woods:
So trim profits from some of the big tech winners or actually no longer be exposed to those those tech winners.
Victoria Fernandez:
I think you have to have some exposure. We can’t just completely eliminate these areas of the market because, I mean, as we can see from day to day, there is a, a tremendous kind of headwind that you can get, from being really high one day to really pulling back the next day and then back up the following day.
Victoria Fernandez:
So trim, lessen your exposure there and go into other areas that would not sell out completely.
Caroline Woods:
So when you say things like healthcare and financials and moving money out of technology, that to me sounds like a more defensive portfolio. So is that setting up for, potentially more risks down the road?
Victoria Fernandez:
No, I think there’s some flags out there that maybe people are ignoring. And we’ve seen over the last few months, not just geopolitical, but we look at other elements within, the consumer. Right. We’ve seen how they’ve started to pull back. We’ve seen savings come down. We’ve seen consumer debt move higher. There’s elements that tell us perhaps things are going to slow down a little bit.
Victoria Fernandez:
And if they are, I don’t think it’s a bad thing to maybe put a little more defensive component in your portfolio. Again, you’re not coming out of those growth year names completely, but you are adding a little bit of buffer in your portfolio. So as there’s volatility, which we expect there will be as we go through the rest of this midterm election year, your portfolio can be well positioned for that.
Caroline Woods:
What are some of the biggest flags you’re seeing in this market right now? I’m assuming you mean red flags.
Victoria Fernandez:
Yes. Well there are some red flags out there. Again, consumer debt is one of the ones that we’re concerned about and savings rates falling. That is a big concern for us. Confidence is also another one because we know that how people feel and their confidence in the markets bleeds through. We’re also concerned about inflation. I know inflation expectations have come down a little bit as gasoline prices have come down, but I don’t think we’re out of the woods yet.
Victoria Fernandez:
I really think that we’re going to see sticky inflation. We saw inflation start to go up and trend higher even before the Iran war began. And so now that hopefully is we’re coming out of that geopolitical issue. We’re still, I think, going to see some of that. And I think we need to be very careful and not expect that’s just going to fall automatically.
Victoria Fernandez:
And with that, if that’s the case, that means we have a fed that’s either going to be on pause for longer than many people expect or perhaps even put a rate hike in maybe early next year.
Caroline Woods:
We’ll dig into positioning a little bit more in just a second. But first, what would make you more risk on and what would make you start taking advantage of some of these sell offs that we’ve been seeing in things like semiconductors?
Victoria Fernandez:
Yeah, I think really it’s going to come down to earnings obviously bank start earnings next week. They kind of kick it off for the second quarter. Expectations are so high for these tech companies I mean you see Samsung right knocked it out of the park. And yet the stock was down six 7%. So I think if we can get through earnings season and these tech companies truly do outperform expectations, then it maybe gives you a little more confidence to go back into these names.
Victoria Fernandez:
But I think we have to see that play out first. I’d rather be a little late to the party than jump in too quickly and be in trouble.
Caroline Woods:
If you do trim some of those winners, how do you know that you’re simply rebalancing rather than making the mistake of selling too early?
Victoria Fernandez:
I mean, you don’t, but we don’t know for sure if you’re selling too early or not. You know, hindsight is 2020, but for us, it’s more a matter of if we have made some gains, if we are happy with how a stock has performed, we’re okay with taking a little bit off the table. You can leave some there, let it run if that’s what happens.
Victoria Fernandez:
And and, you know, take advantage of the upside that might still be there in the stock. But you did take some money. You took your gains and you’re using them for a different purpose. And we think that’s okay. As long as you are doing little pieces at a time, making big moves puts you in a much, riskier position.
Victoria Fernandez:
But smaller moves makes a lot of sense for most clients.
Caroline Woods:
Okay. And you brought some of your top stock picks, which we’ll get to. But first, thinking more broadly, if someone owns an S&P 500index fund, are they already benefiting from the rotation that you’re talking about into health care and financials, or do they need to now think differently?
Victoria Fernandez:
Well, obviously the index has such a large weighting intact and we see it continue to grow that I would think you would want to go ahead and maybe pull some of that and put it more specifically in other sectors. There’s nothing wrong with being in an S&P index fund. You know, we have index funds ourselves, mutual funds across smart.
Victoria Fernandez:
But I do think if you want to be a little more active than what you’re doing, you can take advantage of some of the rotation you’re seeing in general, pull a little bit of money out of there and go to specific sectors.
Caroline Woods:
Okay. So let’s talk about some of the names you’re actually buying here. Funny enough, we’ve been talking about trimming profits on tech. And your first pick is actually a tech stock. Although not a lot of profits to trim on this one. Adobe. It is up on the month, but down significantly year to date. You’re buying it. While many investors worry that I will actually hurt software companies.
Caroline Woods:
So why does the market have that particular story wrong?
Victoria Fernandez:
Yeah, it’s interesting here. And again, yes, software has taken a huge hit because of the concerns around AI. What we think Adobe is doing is they’re actually saying, that’s great, bring AI in. We’re going to partner up with AI in order to make the client experience even better. We’re going to use AI to improve what we do to make our capabilities stronger, to offer more things to our clients.
Victoria Fernandez:
So if they can capitalize on that, if they can make that transition from just being a software provider to coupling and providing even a better experience, then I think Adobe comes out a winner here. So I would put a little bit of a position here. Perhaps there’s this upside that we think will come to fruition and you’ll be able to participate in that.
Caroline Woods:
So this is about Adobe being an AI winner, not just cheap.
Victoria Fernandez:
Exactly. And you never want to just buy a stock because it’s cheap, right. That usually is not a winning solution. But if you see upside and you see a management team that looks like it has a winning solution to use AI and improve itself, then I think you have an opportunity.
Caroline Woods:
You also like ASML, but it’s already up about 60% year to date, over 100% over the past one year. Why do you think investors aren’t too late to ASML?
Victoria Fernandez:
Yeah. You know it’s an interesting dynamic because you’re basically looking at a monopoly. When it comes to lithography machines, I mean, you have to have their machines in order to make chips. You can’t do it without them. And they’re the only company that’s making them. And so they’re backlogged. It is a multi year backlog. You look at earnings expectations for ASML mid 20s in 2026 for this year.
Victoria Fernandez:
Mid 30% growth in 2027. So they have this great expectations going forward. They have this backlog. They have a monopoly on the machines. And then in addition to that think of service and maintenance and parts and all of the things that go along with these machines. There is just, I think, a very long runway for ASML to provide positive returns for your portfolio.
Caroline Woods:
So that’s one of those buy it and hold it for years kind of stocks.
Victoria Fernandez:
At least for a little while. We’re not going to be in there trading it every day. I think they have a very long runway. You can buy that stock, hold it in your portfolio and I think you’ll be pleased with what it does.
Caroline Woods:
Okay. You also say it’s time to sell or at least take profits in Bloom Energy after a huge run. What’s changed there?
Victoria Fernandez:
Well, it’s exactly what you’re saying up almost 250% year to date. And again this is an I play right. They make fuel cells for data center. So obviously the I component the build out of all the data centers has really pushed the stock higher really price to perfection. And it was added into the Russell 1000 not too long ago.
Victoria Fernandez:
We know typically stocks pull back a little bit after they’ve been added to one of the benchmark indexes. So we just think this is one of those areas that we talked about already. Take some gains off the table. It’s done well. You can leave some there for any continued run up in the stock, but it’s a great source of funds that you can then implement in other areas.
Caroline Woods:
So if you sell bloom, where do you put that money to stay invested in the AI story?
Victoria Fernandez:
Well, I think some of the names that we talked about, if you want to stay in ASML, is probably one of your better ones. Again, Adobe is a little bit trickier, but we do think there’s opportunity there. But we talked a little bit earlier about those other sectors health care finance. I would actually put some of that money to work in those areas.
Caroline Woods:
All right. Setting up your next pick nicely. That’s Gilead healthcare hasn’t gotten nearly as much attention as I of course. So talk to us about why you like Gilead from here.
Victoria Fernandez:
Yeah. This is a stock that we not only like the fundamentals, we like what the company does. Right. They really have, a huge give back component to the global, community. And they are leaders in HIV. We know that. And there’s a very high barrier to entry there. But what we’ve liked is they’ve really expanded their pipeline.
Victoria Fernandez:
They’ve done some acquisitions. So now they’re broadening out into oncology and to liver disease. They have very strong free cash flow, very strong return on equities for their shareholders. And their profit margins are strong. I mean you’re up 2,030% on your profit margins. This is a company that you can put in your portfolio and hold. As the healthcare sector is trending up, it should be a winner for you.
Caroline Woods:
Okay. And then there’s Lloyds Banking Group. Why buy a UK bank right now instead of sticking with some of the big U.S. banks?
Victoria Fernandez:
Most people have exposure to the big banks here. I mean, we saw Bank of America breakout. We’ve seen Morgan Stanley breakout. But banks globally are very strong right now. You look at Lloyds I mean this is a premier banking both retail and commercial. In the UK we know that gilts are moving a little bit higher on the longer end of the curve for them.
Victoria Fernandez:
So that difference between where they lend and where they borrow is growing. And that’s positive for banks. So that should be good. For Lloyds. And again financials are just doing well across the board. So we think it’s a good stock to have. And you’re getting a little over a 3% dividend as well. It’s a name we have in our global equity strategy.
Caroline Woods:
Okay Victoria I think this is a great time to transition to our rapid fire rounds. So quick questions quick answers. Are you ready?
Victoria Fernandez:
I’m ready. Let’s go.
Caroline Woods:
We’re going to start with your top five picks. If you could only own one of those names for the next five years, which would it be? ASML which is most likely to double first.
Victoria Fernandez:
Oh goodness. Let’s say, Adobe.
Caroline Woods:
Which is most likely to survive an economic slowdown.
Victoria Fernandez:
Gillian.
Caroline Woods:
All right. Broadening it out. Dow 53,000 nearing the top. We’re just getting started.
Victoria Fernandez:
I’m say nearing the top in the short run.
Caroline Woods:
Short run meaning between now and year end.
Victoria Fernandez:
Yes.
Caroline Woods:
2026 returns single digits or double digits.
Victoria Fernandez:
I know this makes me sound like a party pooper, but I’m going to say single digits. We’ve had some strong runs until now.
Caroline Woods:
Second half winner down Nasdaq.
Victoria Fernandez:
Let’s go with Dow.
Caroline Woods:
S&P here Russell.
Victoria Fernandez:
Russell’s been doing great I’m going to say Russell.
Caroline Woods:
More upside in the U.S. or globally from here.
Victoria Fernandez:
I think we might see some catch up globally has a little.
Caroline Woods:
Bit of rotation healthy or pricing in a slowdown.
Victoria Fernandez:
I think it’s a healthy rotation. Like we said, people are going out of the market. They’re rotating within the market. That should be healthy.
Caroline Woods:
Health care or I. And the second half.
Victoria Fernandez:
Well, I’ve been talking about health care. So I’m going to stick with the girl that I came with. We’re going to say health care.
Caroline Woods:
Health care or financials.
Victoria Fernandez:
That’s a tough one. I probably would go with financials with the the breakouts that we’ve seen as of late.
Caroline Woods:
Meg seven market laggards or leaders taking a breather.
Victoria Fernandez:
They’re going to be laggards for a while. I’m not sure they come back and become leaders per se. They might do a little bit better. But I think they’ll still be laggards as a whole.
Caroline Woods:
Meg seven name you’d buy here.
Victoria Fernandez:
Maybe Amazon. Maybe because I get packages every single day at my house. But I’m going to go with Amazon.
Caroline Woods:
Meg seven name you’d bet against here.
Victoria Fernandez:
Sorry Elon, but I’m going to say Tesla. We just haven’t seen a lot of great news come out of Tesla Space X.
Caroline Woods:
Now that it’s in the Nasdaq add or avoid.
Victoria Fernandez:
We actually are avoiding space X right now. So that’s going to be my my game plan here.
Caroline Woods:
When would you add it.
Victoria Fernandez:
Well we have value screens on our on our funds. And it fails our screens because of grok and some of the issues associated with grok. So and pornography. So we are not we are avoiding it completely right now okay.
Caroline Woods:
Biggest risk to the rally. Just quickly.
Victoria Fernandez:
Consumer pulling back.
Caroline Woods:
Best name to play defense in your portfolio.
Victoria Fernandez:
You know, let’s go with a good staple maybe like a Procter and Gamble.
Caroline Woods:
Consumer losing momentum. We’re rolling over.
Victoria Fernandez:
Losing momentum I never bet against the consumer completely.
Caroline Woods:
And one word to describe how you’re feeling about the market in the second half of the year.
Victoria Fernandez:
Average pitches are cautious.
Caroline Woods:
Okay. Victoria Fernandez, thank you so much. Really appreciate you playing along and for bringing all of your picks.
Victoria Fernandez:
It’s been fun. Thanks so much.
Caroline Woods:
If you enjoyed this street talk, check out our full interview with Darius Dale. He’s completely avoiding the magic seven and explains what investors should be doing before a reset.