Wall Street awaits Wednesday's Consumer Price Index (CPI) print for the month of May, which will provide key economic data ahead of the Federal Reserve's June interest rate decision. Bank of America Director and US & Canada Equity Strategist Ohsung Kwon joins Wealth! to discuss how to best position your portfolio ahead amid the current inflationary environment.

"After the blowout jobs report that we saw on Friday [June 7], the no landing debate, we believe, that is back on the table, and we don't think that's necessarily bearish for equities," Kwon says. He explains that equities can withstand higher rates as their growth continues to remain resilient. He adds, "The risk to equities is still skewed to the upside... If CPI were to soften on Wednesday, that's basically the best-case scenario for equities."

While many investors are focused on monthly inflation data, Kwon encourages them to "look at the bigger picture" and see how inflation overall is coming down. He explains that "as long as inflation doesn't reaccelerate, and growth is still strong, I think equities can work to the upside." He points to financials as an opportunity as banks are well capitalized and have strong fundamentals. He adds that if the Fed is done hiking rates, it will alleviate the deposit pressure issue facing banks.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Melanie Riehl

Video Transcript

After Friday's jobs report blew past expectations while the unemployment rate ticked up, another round of economic data is on deck for investors to digest and that includes the Fed's interest rate decision and remarks around the path of monetary policy on Wednesday here with more on how to best position your portfolio ahead of this big week.

We have Oon Kwon Bank of America director and us and Canada Equity strategist.

Thank you for joining me this morning.

So I I saw that in your latest note, you say uh a no landing scenario is back on the table.

What does this mean for your portfolio if you're trying to really sort of gauge where the FED is headed from here?

Yes, thanks for having me today.

And obviously after the blowout jobs report that we saw on Friday, the no lending debate, we believe that is back on the table and we don't think that's necessarily bearish for equities.

I mean, so far this year, up until I wanna say a month ago, that's been the macro environment for equities that you know, the risk of re acceleration was pretty high.

The macro data continued to uh surprise to the upside.

Yet, equities continue to travel along rates were rising but equities can withstand higher rates.

As long as you know, growth is staying strong.

Uh as long as growth is staying strong, I think inflation, higher inflation and higher rates can, can be withstand uh by, by equities.

And of course, we are going to get CP IP P I data and consumer sentiment also throughout this week as well.

What does this mean if you're a, if you're an investor and you're watching this data, perhaps, you know, given what we saw against that backdrop of the strong of the strong jobs market there.

How should you be positioning yourself?

What should you be focusing on when you head into this week?

I think the risk to equities is still skewed to the offside.

Uh The reason why I say that is because the worst case scenario of a weak just report plus hotter CP I that has been avoided after the NFP.

Yes.

Uh last week, if the, if CP I were to soften on Wednesday, that's basically the, the best case scenario for equities.

It's basically risk gone, growth is strong, but inflation is coming down.

That's basically the maculate disinflation that we saw last year and we all know what happened to equities last year.

So I think, you know, investors might want to position for the potential upside inequities.

Uh And I think that's really the paint trade.

I think the paint trade is still to the upside, especially in cyclicals.

And if inflation comes down from here, despite strong, you know, strong growth in the economy that really positions well, for a cyclical upside inequities and for people who perhaps might be tempted to have a knee jerk reaction.

If they do see another report that's really off uh what predictions are showing there.

What sort of time horizon should people be looking at to really get a real sense of the inflation picture?

Something that we know is something that the fed does.

They don't just go by one set of data.

What sort of time horizon should people be looking at?

Yeah, I mean, it really feels like the market is focused on CP I print on a month to month basis.

Um But, you know, you got to look at the bigger picture, you got to zoom out and look at the trend of inflation and so far it's been coming down, it's, you know, we, we sort of stalled after that big disinflation that we saw last year, but we're not accelerating right now.

And as long as inflation doesn't re accelerate and growth is still strong, I think equities can work uh to the upside.

And if macro data were too slow going forward, you know, that's essentially what we saw over the past couple of weeks that, you know, Macro data started to surprise to the downside if that's the case.

And, and I'm not talking about growth falling off the cliff.

It's just simply normalizing to trend growth levels that should also result in inflation coming down at least a little bit.

I mean inflation at the end of the day is supply versus demand, supply side is still, you know, it has gotten a lot better.

It's more about demand going forward.

And if demand were to moderate basically to, you know, to the trend growth of normalizing to the trend growth of all, then that should result in inflation coming down as well.

And that's essentially the the bull case scenario of self lending that everyone wanted to see heading into this area as well as the Fed.

So I think there are many ways that equities can win.

So let's talk sectors that you like the look of in this environment where where is a good place to position yourself?

I think financials looks very interesting.

I mean, it's very beaten down.

Um And positioning, you know, is everyone hates financials after what, what happened last year.

Um But you know, these banks are very well capitalized.

Uh fundamentals are very strong and if growth is strong and corporate profits are accelerating to the upside, I think the macro environment is still pretty favorable for financials and if the Fed is done uh done hiking, uh then then that should, you know, alleviate some of the deposit pressure that the financials has seen so far.

Uh But the back end of curve is likely going to remain elevated going forward.

I think that's the secular force in the market.

And if that's the case, that's essentially pricing power for financial.

So I think I like financials.

I like energy as well.

Uh I like commodities overall and for people who are wondering if they've missed the boat on the tech rally.

Is it too late at this point when you look at where prices are?

I hate to say, but I think so.

I mean, tech has rallied so much.

Uh positioning is very crowded.

Valuations are pretty expensive and that's been sort of the consensus trade over the past year and a half or so.

And if you think about what really drove tech performance over the past, you know, two plus years, I think it's really about earnings.

I don't think it's necessarily about the macro environment because heading into 2022 everyone was worried about the hiking cycle and how higher rates are going to play uh on long duration equities.

And essentially, that's what we saw in 2022 that, you know, tech underperformed massively versus the S and P 500.

But if that were to be the case, if race were really the big driver, then tech should have underperformed last year as well as this year.

Obviously, that that wasn't the case.

I think it was really about earnings.

Tech earnings underperformed the entire year in 2022 and it bottomed in around March of last year and essentially outperform in terms of earnings since then.

And that's essentially what happened for the stock performance as well going forward.

What's interesting is that tech earnings growth is likely to decelerate, especially the Mac Seven.

whereas non tech stocks are expected to see accelerating earnings growth going forward.

So we think that you could get cheaper growth in non tech sectors, more cyclicals, more commodities and value oriented sectors of the market.

So it's certainly time to shift that focus from the the shiny objects that they have in tech.

I appreciate you taking the time to join us this morning, Oung Kwon Bank of America director and us and Canada Equity strategist.

Thank you so much.

Thank you.