Dave Sekera on Tentative Fed Rate Hike, Sticking with AI Leaders & SPCX Contrarian Take

SPEAKER_1 (0:00)

Thanks so much, Sam, joining me now in studio, Dave Sekera, the Chief US Market Strategist over at Morningstar. Dave, we were already chatting away there off camera while Sam was doing her market update.

Just about the Fed's path forward, and Kevin Warsh, and you were saying that with the market now, I was just refreshing the CME FedWatch to a word about a 95% chance for a hike. I mean, you were saying off camera, he basically has to hike, he doesn't have a choice now that the market has put us where it has.

Dave Sekera (0:27)

Exactly. I mean, I can't see how we could do anything other than that. So I think it's just going to be, everyone's going to listen to every word that he has to say, how dovish do they think he is, how hawkish do they think he's going to be at this point, and everyone's going to be focused then on the October meeting and if we've got another hike coming then or not. Actually, I think what's more interesting, if you look at the FedWatch tool, I think there's now a pretty decent probability of even a third hike at the December meeting. Last I saw that was like almost a 30% probability.

So again, you don't want to fight the Fed. We've got monetary tightening coming and that's just one of those macro dynamic factors that I wrote about in the beginning of September in our market outlook. Just talking about while even though we think the market is undervalued here, I think there's a lot of volatility. I still think that there's probably more risks of the downside for the rest of this month and even into the beginning of October because there are so many macro dynamics which are really just getting uglier and uglier since we wrote about them.

SPEAKER_1 (1:22)

Yeah, it is. It's a 30%. I'm just like 30.6%.

You were spot on there. But right now, I'm looking at this 95% chance of a hike. I mean, as you look at it, we were also talking about in the break, how much everyone is waiting to hear from Kevin Warsh. But you said you're just expecting a whole lot of nothing. I mean, we already know from him, he doesn't want to tell us anything. He doesn't want to forecast. I've had so many conversations about if we'll get information if this is part of a broader cycle or a hiking cycle. And yes, it looks like we're perhaps starting to price that in. But what is the reality that we actually get any information about that tomorrow?

Dave Sekera (1:59)

I've never really been that big of a fed watcher. Personally, I leave that for the economist to parse through all of that. So I'm really looking for what the implications are for valuations overall. And just thinking about our valuations are telling us, the market right now is about 10 percent undervalued. As a reminder, we do a bottoms up analysis. We cover over 700 stocks that trade on US exchanges. And we look to see where they're trading compared to our intrinsic valuations. And that's how we get to the market currently being 10 percent undervalued. I know a lot of other strategists do more of a top-down approach.

But in this case, it's really interesting that while the market is undervalued, and that's usually about the point where I start thinking now might be a good time to start maybe moving into an overweight, not ready to go there yet. It's really two reasons. So one, almost all of the discount there, all of that undervaluation is really captured by seven mega cap stocks. So again, it's Nvidia, Broadcom, Tesla, Amazon, Meta, Microsoft, Alphabet. If I took those out of our calculation, the rest of the market is actually pretty close to being fairly valued right now. So there's always individual stocks here and there that are undervalued. But again, I think it's very concentrated just in those names based on our outlooks. I think it's interesting too when you look at the valuations of so many of those stocks, especially like a Broadcom, the market is willing to give these companies the benefit of the doubt for the 2027 outlook and guidance and earnings growth. But then when you look at the valuations for like 2028 and you see how much of a multiple step down there is from 2027 multiples to 2028, market's really not giving any of them any credit for growth beyond 2027 So I think that's probably one of the biggest differentials in the marketplace today between our outlook versus what's currently being priced in.

SPEAKER_1 (3:45)

So as we look at that, we've got outside of these MegaCap AI names, we've got a mostly fairly valued marketplace overall. Does that mean that with your slightly different view, you are looking for opportunity outside of the AI trade or you're still seeing some upside the market's just not accounting for in these MegaCap names?