Small Returns for Small Caps

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July 30 (Bloomberg) -- Morgan Stanley Chief U.S. Strategist Adam Parker previews today's markets and discusses his investment ideas with Betty Liu on Bloomberg Television's “In The Loop.” (Source: Bloomberg)

-- i want to bring in adam partner -- adam parker.

What is worrying you?

We are getting a little more balance.

The fed is tapering their asset purchases.

You head into a time of year where you typically get the most -- people come back from a summer and relies the number is too high when they start going to conferences -- people come back from the summer and realize that the number is too high when they start going to conferences.

Did the gdp number give you pause?

I want to revise all the things i did wrong in the last 10 years, maybe change my 2012 price target.

[laughter] wouldn't that be a nice luxury?

I think the economy is improving.

I think earnings are growing.

They are growing and improving at a less rapid rate than consensus expects.

That's the needle we have to thread here.

How much is due to buybacks?

You mentioned buybacks as not being rewarded as frequently.

Take a look right now.

According to strategic three church partners -- strategys research partners -- the share count has gone down for a lot of these companies.

I'm not sure what they are looking at.

We look at the net of companies that are diluting.

You have about $350 billion taken out of the system this year on a base of about $17 trillion, about 2%. we have 5.5% to 6% of operating surnames growth.

-- operating and earnings growth.

You need to believe and dream that the economy is going to accelerate and improve and that the fed will remain accommodative at the same time.

That is tricky.

We are still optimistic, but not as full force as we were 18 months ago.

Optimistic, but a bit more realistic.

A balance.

You were interested in small-cap stocks.

Here is where you get a chance to revise.

If you were in small-cap stocks, you lose.

This year, they are terrible.

The only ones that are red on the screen.

We changed some things around in the second-half preview.

Now we will upgrade and go for growth, upgrade and go for small-cap.

The margins expand more.

The growth is faster.

As m&a picks up, i think that -- it is hard to write on paper when m&a accelerates, i don't want to be in small-cap.

We think now is the time to go for the trade.

How suppressed have you been -- i don't know about you guys, but how surprised have you been that the market has shrugged at all the news in the bigger world?

Sanctions in russia, the argentine crisis, israel and hamas.

The world is a super risky place, geopolitical risk is huge.

I focus on what could introduce volatility into the earnings estimates.

I have eight e-mails in my inbox, please give me the u.s. equities that have high exposure to russia.

The answer is very few of them.

The odds that it would impact earnings in the near-term is very low.

That is a knee-jerk reaction by investors.

What could make you afraid earnings are going to decline?

The s&p never goes down by 10% or more in less you are afraid -- more unless you are afraid of earnings decline.

Nobody's expecting anything from the fed today, but when do you price that in to your r isk?

I think it's likely to happen in the near term.

If rates go up, it would probably impact your 2019, 2020,or 20 -- 2019, 2020, or 2021 earnings more than your 2015. given that the fed is moving towards normalizing interest rates, why do you like financials so much?

We just downgraded financials for our second-half preview.

There are mounting concerns about the financials, less reserve releases, more regulatory risk, may be slowing housing a little bit, and more margin pressure if the 10 year -- 10-year goes lower.

What's the regulatory risk you are worried about?

I think it is all the stuff that you know about and talk about all day long.

Isn't that price didn't already?

I'm a little worried that it intensifies into the midterm election.

I think the number one focus is the 10 year interest rate -- 10-year interest rate.

It is hard for companies to borrow and capitalize on the spread.

I think it makes sense to be underweight financials.

There are some opportunities.

They are cheap.

What are the catalysts for the next six months?

If you have a six-month horizon -- i think it will take time for multiples to expand there.

Nice to see you.

Thanks so much for stopping by.

Adam parker, equity strategist at morgan stanley.

Mike mckee, our economics

This text has been automatically generated. It may not be 100% accurate.

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