The S&P 500 (^GSPC) and the Nasdaq (^IXIC) are aiming for record highs ahead of the Fourth of July holiday. Horizon Investments head of portfolio strategy Zach Hill joins Market Domination to analyze the state of the market and how investors should think about their portfolios.

"We do think that inflation is largely under control. And at the same time, the economy is showing that it's more resilient to higher interest rates," Hill explains. He highlights how critical second quarter earnings will be given the narrow performance of the S&P 500. "We're going to get top-line good earnings growth of about 9% year over year on a consensus basis. And so, broadly speaking, that's healthy for the overall market. It should be healthy, too, for not just the top of the market but the rest of the market," he states.

Hill will specifically look at margins and continued AI enthusiasm during the upcoming earnings season. On the margins front, he explains that "companies that can maintain their margins and pricing power are going to be rewarded by the market, and companies that can't, what we'll see is underperformance." He adds that the stocks that have been driving the market are focused on AI, and the trend keeps contributing to earnings beats.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video Transcript

P 500 NASDAQ aiming for another record close as investors are digesting a fresh batch of economic data plus comments from Fed chair, Jerome Powell and await.

Of course, the latest Federal Reserve minutes joining us now is Zach Hill Horizon Investments, head of Portfoli strategy, Zach.

It is good to see you.

So, you know, uh Shana Shana was hinting there, you know, we saw some, they had some weaker than expected economic activity uh and data zack this morning labor market uh us services activity.

WW what did you make of that data Zach, what do you think Jay Powell makes of it?

Yeah.

Well, Josh, well, thanks for having me and happy early fourth of July.

So we definitely got a little bit of a weak data print today, especially that ISM services number uh came in fairly light.

Although, you know, just looking at the last few uh releases of that number, they have been quite volatile, you know, surprise to the upside really considerably last month.

And so, you know, this downside surprise, I think we need to take in a broader context there, you know, really for us, I think we're, we're looking to Friday's Jobs Report, um you know, continued strength in the labor market is really key to our view that, um you know, the consumer is in better shape than a lot of people think.

And we think that's, that's good for risk appetite, especially when, as we, as we heard from chair yesterday, um you know, he wants to cut rates, um and he's just waiting for the, for the right data to do so.

And so he, he nodded to progress on the inflation front.

And so if we continue to see that, you know, throughout the summer, we do expect to see the fed, um you know, lowering rates marginally sometime in the back half of the year.

Zach.

Do you expect the disinflation trend to stay intact?

You know, I think we're gonna be bumpy.

Um You know, it's, I think it's, it's just, it's, we don't understand as much about inflation as, as I think, you know, we, we did, we thought we did in the 20 tens period.

Um but broadly speaking, if I look at like the bigger trend, um yeah, I mean, we're, we're not gonna go back to what we saw in 2022 or early 2023.

I mean, uh whether we settle out at 2.0 or 2.3 or 2.4 you know, that that's um in our view, really rounding errors in the, in the bigger broader picture, you know, we do think that inflation is largely under control.

Uh And at the same time, the economy is showing that it's more resilient to higher interest rates.

And so, you know, while the fed is going to cut and, and the fed is going to cut at some point soon, um you know, in a bigger, in the grand scheme of things, it's not as, really as big of a deal as we would have thought in this last cycle just because, you know, the economy is just, is just running hotter than it has.

Um, really since the, the global financial crisis and Zach, you know, earning season coming up pretty quick here.

What do you expect?

Um, you know, the market, Zach, I mean, we're, we're gonna be running into this earnings season running pretty hot here.

Yeah, I mean, this earnings season is an important one.

you know, especially given how narrow, uh, the performance of the S and P 500 has been, you know, really over the last month, month and a half.

Um, so a couple of things that we're, we're really paying attention to, you know, one, we're gonna get top line good earnings growth about 9% year over year on a consensus basis.

And so, but broadly speaking, that's healthy for the overall market.

It should be healthy, um, too, for, not just the top of the market but, but the rest of the market, I think what we're really going to be looking, um you know, into really, really closely is two things.

One is margins um with inflation clearly slowing down on a trend basis.

Uh companies that can maintain their margins and pricing power and be rewarded by the market and companies that can't, uh we will see, you know, underperformance.

And so that's one thing that we're gonna be focusing on.

And the other thing that we're gonna be focusing on is just continued enthusiasm around the A I theme.

You know, we have a, uh, a handful of stocks at the top of the index that have been driving us for quite some time.

Uh, and they are quite expensive.

Um, you know, looked at on, on many uh kind of measures across time.

And so for us, it's, it's important for, for the top of the market and the A I related names to continue that beat and raise phenomenon that we have seen, you know, really over the last five or six quarters.

And so those are the two things that we're gonna be looking for as earning season starts next Friday, Zach.

What about a broadening though of participation?

Are you expecting a greater balance when it comes to earnings growth beyond those tech names?

Yeah, I mean, this is the, you know, the other thing I think that investors are going to be grappling with throughout this year is that, um, the, the growth advantage at the top of the market has enjoyed on the average stock in the S and P 500 is set to narrow throughout this year.

And some of that's just, you know, base effects.

Um And some of that is the fact that, you know, we were in AAA slowdown in kind of, you know, the manufacturing part of the economy, which is the, the, you know, broader, more average S and P 500 is more geared towards that as opposed to the tech names at the top of the index.

And so, you know, that that growth spread is going to be contracting throughout the year.

And so how investors uh handle that is something that we're gonna be watching uh quite aggressively but, but broadening out for broadening out's sake, um We've never really subscribed to that thesis.

I mean, you need to have the macro environment and the fundamental environment aligned uh to have a, a kind of a broadening out price action.

And so, you know, as we sit here today, we don't think that's gonna happen, but that's certainly something that we'll be updating, you know, over the coming weeks.

All right, Zach Hill of Horizon Investment.

Thanks so much for hopping on with us today.

Thank you.