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Jeremy Siegel: Q4 Earnings Estimates Are Too High

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University of Pennsylvania finance professor Jeremy Siegel joins “Fast Money Halftime Report” via phone to discuss the direction of the market as the Fed signals a rate cut at the end of July.

Q4 Earnings Estimates Are Too High, Says Finance Professor Jeremy Siegel

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All right so you've heard the commentary I hope. What do you think happens to stocks now that Powell said what he did over the last couple of days.

Yeah I mean I like it. I would love to see 50. Doesn't look like 50. Now with some of these firm inflation readings I think we should have a Fed funds rate around 170. I'm really uncomfortable when the 10 year is so much below Fed funds but certainly the direction is right the momentum was is there. I you know we I heard a mention of 17 times earnings actually when I look at earnings. I put a conservative spin on it. I think fourth quarter earnings estimates on the S&P are too high.

I think we're really 19 now. But could we go to 2022. Yeah.

But that that puts you in a little kind of a precarious situation. I'd feel better if they have transportations we're hitting highs I feel better Russell 2000 which is still 10 percent below last year's high. But nonetheless I mean a little inflation is definitely good for the market and might slow the Fed a little bit. But yeah I mean the short term trends and technicals look good to me.

I say overshoot possibility what do you say.

I think possible. Yeah I mean listen I mean almost that's the history of the market right. I mean we we we get optimistic and and we get too optimistic and then we get a correction from there. So I might tell you fair market value is a value but you know we could be 10 15 percent above it before we get there at the end.

But I think fair market value does give us another 5 percent 6 percent this year but we may go up 10 12 before you know we sell off a bit fourth quarter. I think some of the gains might be challenged and we're going to get in the next two weeks.

Second half I think we're going to meet second quarter but second half I think might be a little bit more cautious than some people are anticipating.

What about the notion that earnings get a pass because of Powell.

Well low interest rates are great. I mean that does mean higher P E. I mean often said that I think 18 to 20 is maybe the new normal not 15 anymore which is you know 19th century early 20th century. I mean when you have interest rates near zero and and so low I mean that should mean higher capitalization rate both from the theory and in empirical work. So you know 18 to 20 is if that's the new normal 19 is where we are now on a conservative basis we're not overvalued.

Professor Jim Leventhal I was a student of yours 22 years ago and there's a few things that you taught me one of one of you was aged better by the way I it's not the guy. Hang on. You've got a whole show to go here. Professor one of the things that you taught me is thinking about big secular trends of where buying in financial assets is going to come from an example of which was back then you were saying look for the middle of middle income class in emerging markets to start buying stocks in that context thinking about what we hear a lot about today Modern Monetary Theory which is basically we're going to run the printing presses and what you're talking about with low interest rates which we all see as well is that possibly what gives this expansion in this bull market its next big leg is the idea that the government is going to spend because deficits don't matter. Interest rates don't matter and that that spending will cycle through an economic expansion and a continued bull market.

Well you know you know you always have to be cautious to say deficits don't matter. But the truth is the reality is there's an insatiable appetite for Treasuries around the world. We're pumping out a below a trillion treasuries every year and through our deficit and they get snatched up right away. I mean actually U.S. Treasuries are the go to hedge asset you know against financial risk and everything else. So you know and if the Dow is down 1000 points treasuries are up 3 people like that and that's going to keep those interest rates low on those Treasuries. It doesn't mean we can run unlimited deficits all down the road but it means there's an enormous appetite right now that I don't see waning. So I think you're right. I think we're going to be in a low interest rate world for many years to come.

Well so you say five to six percent more maybe this year you could get a combined 10 to 12 percent more. Overall I think this is what you said. Can you get that with the so-called defensive sectors that have been doing quite well continuing to do so or you need to have money coming out of those areas. The bond proxies and other things you know which is kind of sectors I'm talking about going into more cyclical areas of the market.

Well you know what this lower interest rates we you know we might see a return to more value stocks more dividend paying stocks. You know people are hungry for yield you want to keep on squeezing into these high yield you know potentially risky investments when there's a lot of dividend paying stocks are paying 3 4 percent.

Growth and potential inflation hedges built in. I think that rotation people say yeah you know I need that income.

I don't want to stretch in the fixed income model.

I rather get for the dividends on. A lot of those are defensive issues. I mean what we call the traditional values so we haven't seen that rotation yet. I'm sort of surprised once the pivot occurred policy pivot in December. I thought we might begin to see it but the second half of this year really we might begin to begin to see that that flow.

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