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To support these valuations, we need to see a 'follow-through' in earnings expectations: Strategist

Chief Global Investment Strategist at Charles Schwab Jeffrey Kleintop joins Yahoo Finance's Kristin Myers to discuss the latest market action amid the coronavirus pandemic.

Video Transcript

KRISTIN MYERS: --Sachs, as I had mentioned, out with a good earnings report today. They actually had beat on the both top and bottom lines. That stock right now up just over 1%, so paring some of the gains they had a little bit earlier today.

When you're looking at today, right now, energy, industrials, and financials are all leading today. Tech starting to flip into the green right now. Microsoft still in the red. However, Apple and Facebook-- Facebook a little bit flat right now, but Apple now in the green, up about 3/10 of a percentage point.

And on the coronavirus front, as I just mentioned, Moderna coming out some positive news when it comes to that vaccine. But they're not the only ones. AstraZeneca also announcing that they would be having some good news to share with us on the vaccine front as early potentially as tomorrow. That would be Thursday.

Current case count right now nearing 3.5 million, which means we leapfrogged past that 3.4 million number. If you guys remember yesterday, it was just under 3.4 million. Now steadily approaching that 3.5 million number. New York state, sad news here, has now surpassed 25,000 deaths due to COVID-19. And in Oklahoma, Governor Kevin Stitt says that he has actually tested positive for coronavirus.

Now, as I mentioned, markets had been popping a little bit more earlier today on that positive vaccine news out from Moderna and AstraZeneca. Goldman Sachs, also as I mentioned, out with some positive earnings. So for more on what we're seeing in the markets today, we're joined now by Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab. Thanks for joining us, Jeff.

JEFFREY KLEINTOP: Thanks for having me on.

KRISTIN MYERS: So in a recent blog that I had been reading, you had written, quote, in these uncertain times, it may be comforting to know that the markets are making some sense. So where are markets making sense in your mind? And where does the confusion still remain?

JEFFREY KLEINTOP: Well, you know, one of the things that's important is the biggest driver for stocks over the long term are earnings. But even in the near term, stocks and the direction of earnings estimates should be lining up. And although we are seeing a bit of an uptick here in the last month or so in earnings estimates, the actual level, the number, it's a guess at this point.

But the fact that we're seeing more analysts raise the-- raise their numbers for companies then cut them is important. And that's something the stock market has been tracking really all year. As analysts were cutting estimates, stocks were falling. And now as we're seeing a larger and larger number of companies seeing upward estimates, stocks have been tracking that.

And that's really important. As we go through the earnings season here, I think we're going to see more of this. You're going to hear more of these results, exceeding expectations. About 80% of companies in the S&P 500 that have reported so far-- I know it's early-- but they have exceeded expectations.

And what we've seen in recent business surveys around the world-- Australia, France, Germany, the US-- is an uptick in business leader confidence. And that may translate into better guidance and the continuation of this trend of upward earnings estimates. So that's a positive for the markets.

Where I'm seeing a disconnect, just to jump to that, is in the expectations for dividends. The financial sector is a great example. We got some results this morning. We'll get more this week.

Analysts are more optimistic on the return of dividends later this year, both for US and international financial services companies. Not true in the markets. If we look at dividend futures, markets are still expecting those dividends to basically remain at the levels they are now post-COVID all through next year.

So there's a potential there for an upward revision to dividend expectations, which could provide further upside to the financial sector, one of the areas leading today.

KRISTIN MYERS: So Jeffrey, I want to ask you about that guidance point, especially as we're looking out a little bit further into Q3, Q4, and even into 2021. As you're mentioning, analysts really downbeat on this quarter when it comes to earnings. Do you see a revision in the future, more optimism there, raising the bar that some of these companies are going to have to beat in future earning-- future earnings reports for coming quarters?

JEFFREY KLEINTOP: Yeah, it's true that the bar may go up a little bit here. And companies-- yeah, it's a little bit harder. But look, the market's hardly raised that bar. We've seen such a rebound in the stock market. We need to see that follow through in terms of earnings expectations to support these valuations.

Yeah, down the road, third quarter, fourth quarter, companies are going to come up on those hurdles that may be a bit higher. And they're going to have to clear them. And so that could be a challenge down the road and lead to more of-- maybe more volatility in the markets later this year.

But for now, to support this upside move, we continue to see these upward revisions. So in the near term, that's good news. It does create a higher hurdle down the road.

KRISTIN MYERS: So on the vaccine front, as I had been mentioning, we got some positive news out from Moderna, AstraZeneca. We've heard a lot of positive news from Gilead, BioNTech, Regeneron. The list kind of seems to be going on.

And I feel like we're in this environment that we were in before when it came to the US-China trade deal. It almost feels as if we are in this binary moment, a will they, won't they when it comes to the vaccine. So, I mean, how do investors manage on just trading on whether we are going to get a vaccine or we are not going to be getting a vaccine?

JEFFREY KLEINTOP: Right, there will certainly be a big difference. A vaccine is an important accelerator of economic activity. So it's understandable the market's reacting in such a bifurcated way, I mean, especially where the number of cases continue to climb, like in the US and in Brazil and in India.

It would also be a welcome relief for lagging industries, like the airlines and hotels and restaurants. We're still seeing pretty soft things like weekend box office revenue. Even though movie theaters are now open in much of Europe and Asia, even where the virus has been defeated, like Japan or Korea or France, people aren't really returning to movie theaters or flying on airplanes, for example. So a vaccine could see a sharper service sector recovery and really lift the stocks in some of those areas.

But the good news is a recovery is still underway, even without a vaccine. And this is what investors should focus on. Business surveys, as I mentioned, in the past week in France, in Germany, Australia, other places, do reflect the V-shaped recovery in at least business leader confidence. And that's important as we look to the future for the labor market, which is so critical to our consumer-driven economy.

KRISTIN MYERS: So I want to ask you about tech right now. As I mentioned, tech wasn't doing so well today, although we have now seen some bigger FAANG stocks flipping into the green. Now anyone that read the Yahoo Finance Morning Brief-- I want to give a shout out there to Myles Udland and Sam Ro-- they were talking about investor worries about betting big on tech.

So I'm wondering, Jeffrey, in your mind, how much risk is there in the high weighting of tech stocks right now? And in the brief, I kind of want to quote here that they noted a net 42% of investors are overweight technology stocks, the highest of any sector.

JEFFREY KLEINTOP: It's easy to let your portfolio drift into that position. I do think that's a risk. We are not overweight the technology sector. We were for many, many, many years. And we have taken that down.

We're now overweight financials. Here's an area where probably most investors are underweight in their portfolio. After many years of disappointing performance, we think there's a rotation taking place from growth to value. And we're seeing this show up even in day like today, where again, financials are outperforming the tech sector and they have for the last couple of months.

This is not just a theme in the near term. We think it will unfold through this entire economic cycle. So it's important for investors to get ahead of this and rebalance their portfolios back to a more balanced representation across growth sectors, like tech, and value ones, like financials.

KRISTIN MYERS: All right, we'll have to leave that there. Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, thanks for today.