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All right, let's get it right to our next guest, because this leads us in perfectly to liz Ane Sanders, chief investment Strategies at Charles Schwab. Liz, what did you take away from the Fed's action this week and particularly as it relates to maybe what they may do in twenty twenty six.
Yeah, and good morning to you both. Happy holidays. Obviously, the cut was not a surprise. I don't tend to buck market expectations, especially when they are particularly dominant in one direction or another. We did expect what could be defined as a hawkish cut where they certainly didn't lay out any promises for the glide path going forward, and that's what happened. And just before I came on, you were talking about increasing dissents on the FED. I agree.
I think that that is a good thing. I think it also helps to temper some of the concerns about independence of the FED and maybe something that either implicitly or explo powerless supporting that we can hear from lots of voices, and I think it's a reminder that the see in FOMC is committee not share so I think from the standpoint of that amount of uncertainty with regard to FED independence, I think the sense and a wider array of views is a positive. Yeah.
And speaking of new voices, Lizen, we're going to get a new FED share. We know this in May. So how do you how are you thinking about the interest rate landscape in twenty twenty six? Are we going to get more? Do you think than that one cut that Powell was talking about this week?
Tell me what the data is going to be, and I could give you a pribume an easier way to I mean, when you're a data dependent FED and then you had the effects of the government shutdown, which means we don't We haven't had any official labor market data since the September release. We don't have GDP data, we don't have National income and Product accounts, corporate profit margins data.
So I think as we start to get the data, I do think that the FED, as it relates to their data dependency, they don't have a blind eye to inflation clearly, but I think the needle mover from a reaction function will continue to be on the labor market. So you could have a scenario where they cut more than the one or two that is priced into expectations. I'm not sure that that's universally a positive thing if it comes because of serious deterioration in a labor market.
But I think the labor market is what's driving the bus right now.
Le Zan. From an earning perspective, we had some really good earnings over the past several quarters here. The third quarter in particular, I think was really surprisingly on the positive side of these v street expectations. Is the current earnings environment enough to support this market here, do you think?
Well? Actually, the trajectory of earnings among different cohorts I think is one of the reasons why we have started to see this broadening out. Over the last six months. Only seventeen percent of the S and p's constituents about perform the index itself over the past month. That's up to fifty four percent, and I think it's the differential
in earnings growth profile. So if you look at any typical AI megacap cohort MAG seven or maybe a slightly broader AI basket, or even if you just hone in on the tech sector, over the last six to seven quarters, you've seen a pretty meaningful deceleration in the pace of earnings growth. Still strong, earnings growth, still better than the rest of the market called the other four hundred and
ninety three. But we're starting to see convergence there because you have the rest of the market seeing an accelerating pace of earnings growth. And I'm always fond of saying better or worse matters more than good or bad, and it's that better in the case of the rest of the market. A little bit worse, though in an absolute sense, still strong. That has been a support for this broadening out, and I think that has legs in twenty twenty six.
So Liza and we talk a lot about valuations and value being pretty frothy, But where is there the bargain buy for investors in equities in the new year.
I don't know that there's any one monolithic place where you can find a bargain buy. I think that there is value to be found, and that has a lot to do with what's been happening under the surface. You know, there's so much focus on just what the indexer is doing. The cap weighted indexes SMP is up thirty eight percent from the early April closing low on April eighth, but the average member within the smp IS had a maximum
draw down of nineteen percent just since April eighth. The NASA's up fifty five percent justince April eight, but the average member within the NASDAQ has had a forty percent maximum draw down. So with all this churn in rotation under the surface, that's where value is being found. I think this is an environment though, where you to bring back an old school acronym where you want to be mindful of value, but you don't want to sacrifice growth.
It's very Garpye in terms of the factors. We think you want to focus on.
Lizen From a factor perspective, is there anything that screens particularly well for you? These days?
Growth oriented factors are doing very well, and I think that is particularly important when you go down the CAF spectrum. So if you look at the Russell two thousand and you break it out between its profitable and non profitable components, the nonprofitable components are outperforming the profitable components by more
than double on a year to day basis. And it's even more extreme if you just go back to the April eighth closing low I would absolutely fade that lower quality unprofitable cohort within the Russell two thousand and lean into the profitability piece where you have better fundamentals and you have had the relative underperformance to the unprofitable. So again you want to look at value components, price to book, price to sales. You want strong balance sheet, high interest coverage.
But you want those positive earnings trends, forward revisions, earnings expectations being exceeded during earning season. So it's a combination of both value and growth factors.
Luziane, thanks so much for joining us. Lazanne Saunders, he's the chief investment strategist at Charles Schwap