Remy Blaire: The U.S. economy is accelerating to 3.4% in the third quarter, but under the hood, it is a tale of two markets.
In New York afternoon trade, we are looking at crude oil trading well above $100 a barrel, and traders are pricing in about a 76% chance of a December Fed rate hike.
At the same time, value stocks are crushing the tech sector.
Meanwhile, corporate earnings are revealing sharp divergences, from a massive EPS beat at Eli Lilly to middle- and upper-income shoppers trading down at retailers.
Well, joining us now to break down where to put capital to work is TJ Klein, Associate Portfolio Manager at Gradient Investments.
TJ, good afternoon. Thank you so much for joining us.
So what a week, what a month it has been.
And I do want to start out by looking at the Russell 1000 Value Index.
So give us a sense of where we are right now. And while growth stocks are barely up 1.5%, are investors finally tired of overpriced tech CapEx and rotating into real cash generators?
TJ Klein: Yeah, I think you're starting to see some of that come into play right now.
Obviously, we've been on a large run since we started really the AI theme back in October of 2022.
So we've been on this run for a while. I still do think there is some runway to this.
I think that the market is just taking profits in a lot of the winners and rotating a little bit to the other sectors and other market caps, which I think is healthy.
That money isn't leaving the market, and it's just rotating within the market there.
Remy Blaire: And of course, TJ, we're keeping a close eye on all asset classes as we head into the final months of 2026.
But right now, we are looking at crude oil prices well above $100 a barrel, and markets are pricing in a 76% chance of a December Fed rate hike.
So do you think elevated commodity prices, as well as what we're seeing in Treasury yields, point to a pullback for the broader market before year-end?
TJ Klein: You know, it's tough at this time, the position that the Fed is in, because it appears that a lot of the inflation right now is being driven by the supply side, which the Fed doesn't really have that much control over.
So that's something that's tough and something that we'll keep an eye on with WTI, you know, over $100 a barrel right now.
And consumers, it's a challenging environment for them with higher rates and oil.
So we'll have to see how the fourth quarter plays out.
But I'm optimistic that we can get inflation to come down a little bit as we lap some more of these one-off items.
Tariffs, the lapping of that, will roll off the page there, and hopefully we can get some flows back through the Strait of Hormuz there and get some oil back on the market and bring down those oil prices a little bit and help the consumer at the margin.
Remy Blaire: And I do want to get your take on one specific name within the healthcare sector.
So despite the volatility we've seen in the broader market this week, the S&P 500 is still up over 12% year to date.
And we're looking at the healthcare sector even higher, with an advance of a little over 18%.
But in terms of Eli Lilly, do you think this is still the best growth stock on the board heading into the new year?
TJ Klein: Yeah, I do.
And as you mentioned earlier, with people rotating out of technology, you look at the sectors that are up today, and they're the defensive sectors.
You've got your healthcare, your staples, your utilities. They're moving up on the day, which, again, as I said earlier, I think is healthy.
That money is staying within the equity market, and it's just rotating, and the market is bifurcating a little bit between winners and losers.
With Eli Lilly specifically, they had a stellar quarter.
Their earnings per share blew out expectations, revenue as well, too.
They raised their full-year guidance for the third time this year, which I thought was very impressive.
As well as their growth is being driven by Mounjaro and Zepbound, which beat Street estimates by 6% and 7%, respectively.
Now, the stock is a bit pricey here at 31 times forward earnings, roughly, which is a premium to the overall market, but it's actually a 16% discount to their five-year average.
And when you consider 40% earnings growth forecasted for both 2026 and 2027, that multiple doesn't look nearly as bad with that size and level of earnings growth.
Remy Blaire: Yeah. And TJ, while I have you here, I do want to zoom in on the consumer discretionary sector, in particular Dollar General.
So given this K-shaped economy and the fact that more shoppers are flooding Dollar General stores to cut costs, do you think this trade-down pattern is actually flashing a warning sign for consumer discretionary stocks or not?
TJ Klein: I think partially. We'll have to see how long this plays out.
And that's one of the questions, is if Dollar General can keep up their momentum going into 2027.
So I think that at the margin and incrementally, you are seeing some of those middle- to higher-income consumers trade down a little bit.
And lower-income consumers continue to be stretched at this time, too, with a larger percentage of their budget being spent on oil relative to the other categories there.
But it's something that I'll be paying attention to going into the fourth quarter here.
Dollar General reported back in late August, and they had an excellent quarter, a double beat.
They raised guidance across revenue, EPS, comps.
And they did note that they did see the trade-down within the middle- to high-income consumers.
So that's something I'll be paying attention to in the fourth quarter here and continuing to see if more people are trading down or if they're just getting more selective with some of their purchases.
Where, you know, some of the things that they can reduce the cost on, they are, but some of the other things that they really enjoy, like, say, travel, they'll continue to spend on travel but maybe cut back in other areas.
So it seems like the consumer is kind of getting bifurcated as well, too, and split up on where can I save some money here, but where do I really want to continue to spend my money because I enjoy those things?
Remy Blaire: Yeah. And finally, before I let you go, one area of the economy that all of us are paying attention to, especially in an environment of higher-for-longer rates, is housing.
But I understand there's a particular name within housing and senior housing that you're paying attention to, and that is Welltower.
So do you think, when it comes to this name in particular, is senior housing still a buy given where bond yields are right now?
TJ Klein: I do think so.
I think that they have very strong demographic tailwinds going behind them.
They reported earlier this week, and it seemed like there was some profit-taking after the report.
They were down, but I think that was because they were up 30% year to date before that.
And we look by the end of the week, and they've roughly regained all their losses post their earnings report.
But they're growing both organically and inorganically.
They've had a lot of gross investment this year, roughly $21 billion.
So there's a lot of things to like about what we're going into, finishing off this year and then going into 2027 as well, too.
Remy Blaire: Well, TJ, I appreciate your time.
We will have to leave it there, but thank you so much for joining us, and have a great weekend.
TJ Klein: Thank you, Remy. Take care.
