Peter Repetto, investment strategist at iCapital, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): GM earnings came out, they beat on the top and bottom line, they raised guidance. What does this say about the auto sector for investors?
PETE REPETTO (PR): I think it’s great news for the auto sector, but I also think it really speaks to the economic activity we’ve been seeing lately where it does feel like this soft landing has actually finally arrived and when we think about what’s driving economic activity, we think, or let’s look to what’s happened in the interest rate complex. So if we think about how, even though yields have recently spiked, yields are still off the highs that we hit in April and we think that this has provided relief to the economy. And you just mentioned a very interest rates sector such as autos. And if you think about what drives auto demand, right? There is auto loans. And if you think about the interest rate complex around that, we’ve actually seen a reset lower in interest rates for auto loans. So that should help spur demand and that’s probably why you heard some of the positive comments from GM (GM). So you know, if that continues down the road, then that should be a positive sign, not only for the US consumer, but also for auto companies more broadly going forward.
AM: Should investors consider putting some money into the auto sector?
PR: We do have a barbell approach of what we think should benefit from the move lower in interest rates, and that would be a combination of cyclical sectors such as financials, specifically regional banks. If you look at some of the loan demand data more broadly for CNI loans as well as commercial and real estate loans, those have actually started to recover as lending conditions have eased. And then also if you look at the big bank earnings over the last few weeks, we did see a pickup in net interest income guidance. So we think that’s helping spur the, at least what we’ve seen with the positive performance and financials. But then if you look at other sectors that should benefit from the move lower in interest rates, that would also include real estate as well as utilities. And the thing that’s interesting about utilities is it’s not just a play on the interest rate complex, we also think there’s a secular theme with AI and just the power demand that’s needed for data centers going forward, where I think projections are calling for a 2x increase in electric demand by 2026.
AM: On Wednesday, Tesla reports earnings. Can you make any predictions about what you might see in there based on what GM reported?
PR: Wednesday is gonna be an interesting day for markets. We think, if you think about what the big driver financial markets are even coming into the year, what a lot of financial market participants were talking about was we’re gonna see this broadening out of earnings growth throughout the year. And what’s interesting is last quarter we actually did see a pretty big pickup in the remaining 493 names versus the ‘Magnificent Seven’. Now, that looks like it’s actually going to reverse this quarter. So if you look at the estimates for year-over-year earnings growth for this quarter, I think the Mag Seven names are expected to grow by 18% year-over-year. That would include names like Tesla (TSLA), whereas basically predicting no growth for the remaining 493 companies. So it does feel like the bar is maybe set a little bit high for these companies. But one thing that’s also interesting to us is if you look at the Citi (C) Economic Surprise Index that actually just moved from negative territory back into positive territory. And if you look at that relationship with earnings revisions, that should actually lead earnings revisions by about a month or so. So that could actually point to upward earnings revision or just upward earnings upgrades going forward. So we think that should help not only the 493 but also you know, some of the Mag Seven companies. And even though you are talking about Tesla, it doesn’t really seem like the AI demand is going anywhere. And obviously the Mag Seven complexes benefited from that.
