Alix Steel: Deutsche Bank underperforming all European peers as European equities, banks, also underperform U.S. banks. Keith, what bridges that gap, what’s your explanation for that?
Keith Lerner: Well I think the reason for the big underperformance is because the U.S. banks led us into the recession and out of the recession, and we’re still drying off a lot of debt within the European banks. But I will say what’s really interesting when you look at the European banks, while the U.S. banks are at cycle highs, European banks are only back to where they were in 2015.
Since this bull market started, U.S. banks are up 500 percent; European banks are up less than 100. So I think right now, I think what’s going on, we’re trying to find out how do we unlock value for these banks?
David Westin: So you’re a chief market strategist. As you look at it, does that mean there’s upside overall in Europe? Because obviously banking is very important to overall growth, particularly in Europe given the role of banks for corporations.
Lerner: Great point. In Europe the banks, or financials, are about 20 percent of indexes. In the U.S. it’s a little bit less. There’s a lot less technology in Europe. So yes, it is important. We’re bullish on financials broadly, because if ultimately rates will move higher, they’ve stepped back over the last month or two, and that actually from our perspective provides an opportunity.
Steel: And that brings us to earnings season, because we have JP Morgan and Citi reporting on Friday overall, we’re still looking at earnings season to deliver 17 percent profit growth. Do we meet that?
Lerner: I think we do. What’s unusual about this earnings period is during the quarter, earnings revisions have been going up. In fact, since the end of last year, forward estimates for the S&P are up 10 percent. What’s even more interesting as earnings have moved up and the prices have corrected, valuations on the global markets are at two-year lows.
Steel: But what’s interesting is that tech and industrial sector margins are supposed to expand. Tech had seen a lot -- excuse me, other sectors but tech had seen a lot of upgrades. What happens in a trade war, to earnings?
Lerner: Well, listen, we don’t know in totality now. But Iwant to tell you as far as ... Let’s try to put some of these numbers in perspective right now. We’re talking about $100-$150 billion of tariffs and that amounts to much less as far as taxes on those tariffs. If you think about the fiscal stimulus in the pipeline right now, it’s about $800 billion. So we think the fiscal stimulus still dwarfs as far the tariffs. Now, if this continues to escalate, it will be a bigger problem.
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