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- [00:00]
Host
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- [00:29]
Liz Ann Saunders
Bloomberg Audio Studios Podcasts Radio News all right.
- [00:35]
Host
Let'S get right to our next guest because this leads us in perfectly to Liz Ann Saunders, chief investment strategist 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 2026?
- [00:51]
Liz Ann Saunders
Yeah, and good morning to you both. Happy holidays. Obviously, the cut was not a surprise. They 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 or explicitly Powell is supporting that we can hear from lots of V. And I think it's a reminder that the C in FOMC is committee, not chair. So I think from the standpoint of that amount of uncertainty with regard to Fed independence, I think dissents and a wider array of views is a positive.
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Co-host
Yeah. And speaking of new voices, Liz, and we're going to get a new Fed chair. We know this in May. So how do you, how are you thinking about interest, the interest rate landscape in 2026? Are we going to get more, do you think, than that one cut that Powell was talking about this week?
- [02:04]
Liz Ann Saunders
Tell me what the data is going to be and I could give you an easier way to I mean when you're a data dependent Fed and then you had the, 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 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 the labor market. But I think the labor market is what's driving the bus right now.
- [02:57]
Host
Liz Ann, from an earnings 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 vis a vis street expectations. Is the current earnings environment enough to support this market here, do you think?
- [03:13]
Liz Ann Saunders
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. You know, over the last six months, only 17% of the S&P's constituents have outperformed the index itself over the past month. That's up to 54%. And I think it's the differential in earnings growth profile. So if you look at any typical AI mega cap cohort mag 7, 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, you know, the rest of the market called the, you know, the, the other 493. 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 2026.
- [04:24]
Co-host
So, Liz, and we talk a lot about valuations and valuations being pretty frothy, but where is there the bargain buy for investors in equities in the new year?
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Liz Ann Saunders
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 indexers are doing. The cap weighted indexes S and p is up 38% from the early April closing low on April 8. But the average member within the S and P is had a maximum drawdown of 19% just since April 8. The Nasdaq's up 55% just since April8, but the average member within the Nasdaq has had a 40% maximum drawdown. So with all this churn and 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. So it's very garpy in terms of the factors we think you want to focus on.
- [05:32]
Host
Liz, in from a factor perspective, is there anything that screens particularly well for you these days?
- [05:39]
Liz Ann Saunders
Growth oriented factors are doing very well and I think that is particularly important when you go down the cap spectrum. So if you look at the Russell 2000 and you break it out between its profitable and non profitable components, the non profitable components are outperforming the profitable components by more than double on a year to date basis. And it's even more extreme if you just go Back to the April 8th closing low, I would absolutely fade that lower quality unprofitable cohort within the Russell 2000 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 earnings season. So it's a combination of both value and growth factors.
- [06:40]
Host
Liz Ann, thanks so much for joining us. Liz Ann Saunders, she's chief investment strategist at Charles Schwab.
- [06:45]
Co-host
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